Employee Retirement Income Security Act (ERISA) History, Purpose

What Is the Employee Retirement Income Security Act (ERISA)?

The Employee Retirement Income Security Act (ERISA) is a federal law that protects the retirement assets of American workers. The law, which was enacted in 1974, implemented rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. It also covers certain non-retirement accounts, such as employee health plans.

Under the law, plans must regularly inform participants about their features and funding. ERISA is enforced by the Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL).

Understanding the Employee Retirement Income Security Act (ERISA)

ERISA was established by the federal government in 1974 and holds fiduciaries responsible for their actions as they relate to the maintenance of certain employer-sponsored retirement and health plans.

Plans that fall under its mandate include defined-benefit plans and defined-contribution plans, such as 401(k) plans, 403(b) plans, employee stock ownership plans (ESOPs), and profit-sharing plans. ERISA also covers certain private-sector health plans, including health maintenance organization (HMO) plans, flexible spending accounts (FSAs), disability insurance, and life insurance.

Under ERISA, a fiduciary is anyone who exercises discretionary authority or control over a plan’s management or assets, including those who provide investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan. ERISA also addresses fiduciary provisions and bans the misuse of assets through these provisions.

The law also sets minimum standards for participation, vesting, benefit accrual, and funding. The law defines how long a person may be required to work before they're eligible to participate in a plan, accumulate benefits, and have a non-forfeitable right to those benefits. It also establishes detailed funding rules that require retirement plan sponsors to provide adequate funding for the plan.

In addition to keeping participants informed of their rights, ERISA also grants participants the right to sue for benefits and breaches of fiduciary duty. To ensure that participants do not lose their retirement contributions if a defined-benefit pension plan is terminated, ERISA guarantees payment of certain benefits through a federally chartered corporation known as the Pension Benefit Guaranty Corporation (PBGC).

ERISA and Small Businesses

ERISA rules can often be complicated. As such, they may deter some small business owners from setting up retirement accounts for their employees.

There are alternatives that allow these companies to sidestep some of the confusing regulations. For example, small businesses with 100 or fewer employees can use SIMPLE IRAs. This type of tax-deferred retirement savings plan is covered by ERISA and doesn’t have the reporting and administrative burden that qualified retirement plans such as 401(k)s do. SIMPLE IRAs are easier to set up, too.

Employers must follow ERISA rules that dictate which employees are eligible and how a company handles employee contributions, and they are required to clearly spell out details of the plan's features within a summary plan description.

ERISA and Healthcare

ERISA provides protections to workers who participate in various healthcare plans, including mandatory plans, plans that receive employer contributions, and plans that outline how funds are to be administered. Any plans that don't come with these mandates are not covered by the law.

Under the legislation, providers must inform participants of any and all details of their plans, including:

• Coverage eligibility
• Health, accident, unemployment, and other employee plan benefits
• Full disclosure about any associated costs, such as premiums, deductibles, and copays
• Information about networks and how to make claims

The law was amended following the passing of the Affordable Care Act (ACA), which mandated that employers with 50 or more workers offer healthcare coverage, put a cap on out-of-pocket expenses, and eliminate the denial of coverage because of preexisting conditions. Some people are also eligible to remain under their parent's plan until the age of 26.

ERISA Regulation and Standards

As noted above, ERISA is a federal law that is regulated by a division of the DOL known as the Employee Benefits Security Administration (EBSA). This agency provides assistance and education to individual workers, corporations, and plan managers about retirement and healthcare plans.

To ensure compliance with ERISA, plans are required to provide participants with updates and statements. Plan administrators must submit statements to participants for the first quarter during the second quarter, for the second quarter in the third quarter, and so on. Certain notices and forms must also be sent to participants accordingly.

Plans must also make sure they follow plan document terms, provide regular fee disclosures every 12 months, update participants of any changes in the plan in a timely fashion, and make deposits and deferrals on time.

Plan administrators may choose to manage the paperwork on their own. But if it proves to be cumbersome, they may hire a third party to do the work for them. Doing so, however, doesn't absolve the administrator from its fiduciary responsibility to its participants.

History of the Employee Retirement Income Security Act (ERISA)

Over the years, various legislation had been passed concerning the labor and tax aspects of employee pension plans. The culmination of this was ERISA: Its Title I provisions were enacted to address public concern that funds of private pension plans were being mismanaged and abused.

For instance, more than 4,000 workers lost some or all of their pension plan benefits when Studebaker closed its Indiana factory in 1963. These benefits were shuttered because the plan was underfunded. The Teamsters' Central States Pension Fund brought the issue of fiduciary malfeasance related to retirement accounts into the public eye in the 1960s and 70s. The fund had a history of questionable loans to Las Vegas casinos and real estate developments.

These are just two examples that show the irregularities that ERISA proposed to address when it was first enacted. The U.S. House of Representatives passed the law in February 1974 and it was sent to the Senate, where it was approved the following month. ERISA was signed into law by President Gerald Ford on Sept. 2, 1974.

The law increased the responsibility of EBSA and has gone through several changes since it was first enacted. For instance, lawmakers approved amendments to reduce the age limit required by employers for retirement plan participation, as well as expanding the total time a worker is allowed to be away from work before they lose out on their plan's vesting period.

Healthcare legislation also led to changes in ERISA. For example, the COBRA program of 1985 ensured the continuation of health insurance coverage after an individual's employment situation changes.