The Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute that sets minimum standards for private sector employers that choose to offer their employees. ERISA’s provisions protect workers by ensuring that pension plans have adequate funding and reasonable vesting requirements.
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.
If the employee benefit plan does not meet these requirements, ERISA also grants workers the right to sue their employer in federal court.
Is My Retirement Plan Covered by ERISA?
Generally, ERISA applies to most private sector employers that choose to offer some sort of retirement plan to their employees. However, there are some exceptions, such as:
- Most government employers;
- Benefit plans designed solely for complying with workers’ compensation, disability or unemployment laws;
- Unfunded excess benefit plans;
- Plans maintained outside of the U.S. intended to benefit non-resident aliens.
Note: ERISA does not require employers to provide retirement benefits.
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. Generally, employees earn retirement benefits over time. When an employee meets a requirement for a specific benefit, his right to the benefit becomes vested (e.g. earning a pension after working for 20 years).
ERISA prevents employers from creating unreasonable requirements on benefits. 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. According to 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 employee benefit plan. The plan should identify a plan administrator, otherwise, the plan sponsor is also the administrator.
The plan administrator is responsible for paying out benefits and accounting for costs associated with the plan. The administrator is charged with carrying out the plan according to the best interests of its beneficiaries (known as a fiduciary duty). Administrators that fail to meet this responsibility can be subject to liability for breach of fiduciary duty.
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;
- Diversify investment to minimize risk of loss;
- Follow the terms of the plan document;
- Avoid conflicts of interest.
Plan assets refer to the funds that participants contribute to the benefit plan. This includes both personal contributions and wages withheld by the employer. Plan assets are required to be held in trust separate from the employer’s regular funds.
To protect plan participants from potential fraud or dishonesty, ERISA often requires administrators and other fiduciaries to obtain a fidelity bond 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; and
- 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; and
- 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 Consult an Attorney?
ERISA is a complex statute that places many requirements on employee benefit plans. If you are an employer attempting to establish a retirement benefit plan, or an employee that has been denied benefits, an workers compensation lawyer with experience in pensions and benefits can help aid you in navigating ERISA’s numerous provisions and requirements.