Employee Retirement Income Security Act (ERISA)
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What Is ERISA?
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute that sets minimum standards for voluntarily established, private sector employee benefit plans. ERISA was enacted to protect workers by ensuring that pension plans would be adequately funded and that vesting requirements would be reasonable.
Employee benefit plans covered by ERISA must meet certain requirements:
- Provide plan information: Participating employees must have access to copies of plan rules, financial information, and documents pertaining to plan management.
- Create a fiduciary responsibility: Plan trustees, administrators, and investment committees are all subject to duties of care and loyalty.
- Provide a grievance and appeals process: ERISA plans must provide a mechanism to request payment of benefits and to appeal benefit denials.
ERISA is a very technical statute that uses a great deal of terminology. Commonly searched terms include:
A vested right is one that is absolute and cannot be taken away. When a benefit, such as a retirement plan, has vested, the employee has a right to those funds. A vesting period is the period of time an employee must have worked for their benefits to become absolute.
One of the main functions of ERISA is to prevent employers from instituting unreasonable vesting periods. Prior to ERISA, it was common for pension plans to vest only upon retirement. Employees could be denied benefits for leaving earlier, regardless of how many years they worked and paid into the pension fund.
Under ERISA, benefits must vest:
- 20% each year, following the first year of employment (100% after six years); or
- 100% after three years
A plan sponsor is the person or entity who establishes and maintains an employee benefit plan. A plan sponsor might be a single employer, employee organization, an association or committee, or a board of trustees.
A plan administrator is the person or entity responsible for overseeing the administrative and operational functions of an employee benefit plan. The plan administrator should be designated in the plan document, but if no plan administrator is designated the plan sponsor is the default administrator.
The plan administrator owes participants a fiduciary responsibility and must manage the plan for the sole benefit of the participants and with the exclusive purpose of providing benefits and paying plan expenses.
Under ERISA, anyone with discretion over the management and assets of an employee benefit plan, or who provides investment advice to plan administrators, is a plan fiduciary and owes duties of care and loyalty to plan participants. Plan fiduciaries:
- Must act prudently
- Must diversify investment to minimize risk of loss
- Must follow the terms of the plan document
- Must avoid conflicts of interest
Plan assets refer to the funds that participants contribute, including amounts withheld from participants’ wages, to the benefit plan. Plan assets must be segregated from the employer’s general assets.
A fidelity bond is a requirement under ERISA intended to protect plan participants in cases of fraud and dishonesty. ERISA requires that any fiduciary, officer, employee, or service provider who handles plan assets be ensured by a surety company for at least 10% of the assets handled, with a minimum bond amount of $1,000 per plan.
ERISA requires all employee benefit plans to have a written plan document, detailing how the plan will operate. The plan document controls:
- What types of benefits the plan offers
- How the plan is funded
- Who is eligible for benefits under the plan
- How benefits decisions are reviewed
- Who has authority to implement the plan
- How the plan is administered internally
- How the plan is amended
- What rights and procedures come into play if the plan is terminated
Summary plan description (SPD)
The Summary Plan Description (SPD) is a summary of the material provisions of the plan document given to plan participant. The SPD tells participants:
- When they can begin to participate
- How benefits are calculated
- When benefits vest
- When and how benefits will be paid
- How to file a claim for benefits.
If the plan is changed the administrator must provide a revised SPD or Summary of Material Modifications (SMM).
Do I Need a Lawyer to Understand ERISA?
ERISA is a fairly complex statute that places many requirements on employee benefit plans. An experienced employment lawyer can help your business establish an employee benefit plan that complies with the requirements of ERISA. If you are an employee participating in a benefit plan through your employer and you have been denied benefits, an employment lawyer can review your case and determine the best course of action.
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Last Modified: 07-22-2014 04:17 PM PDT
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