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

Stephanie Bolling has over 10 years of experience as a writer covering budgeting, loans, insurance, retirement, and more. In addition to The Balance, her work has appeared in the Tampa Bay Times, The Penny Hoarder, Money Under 30, and LendEDU. She has a bachelor's degree in mass communication and journalism from the University of South Florida.

Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.

The Employee Retirement Income Security Act (ERISA) of 1974 sets minimum standards for employer-sponsored benefit plans within the private sector and federally regulates employee retirement, health, and welfare benefits for millions of Americans.

Definition and Examples of ERISA

ERISA is a comprehensive federal law that protects employees in employer-sponsored health and retirement plans, except those offered by government entities or churches (in general). It requires most private employers that voluntarily offer benefits to comply with federal and state regulations or face penalties.

The act covers retirement benefits including pensions, profit-sharing plans, employer-sponsored individual retirement accounts (IRAs) and 401(k)s; welfare plans like health, dental, disability, and life insurance; health care plans offered through employers; as well as scholarship funds, vacation, and severance pay.

Note

ERISA requires plan sponsors to provide plan participants and beneficiaries with important benefit information, including coverage, costs, and funding. It also holds plan managers and fiduciaries accountable through established rules of conduct and safeguards plan funds from mismanagement and abuse.

In the case of termination, fund mismanagement, or fiduciary wrongdoing, ERISA guarantees payment of benefits through the federally chartered corporation, Pension Benefit Guaranty Corporation (PBGC). It also allows plan participants to sue through a grievance and appeals process to obtain their benefits.

Upon new employment, you receive a new-hire packet with brochures on health and retirement plans offered by the company. ERISA requires employers to provide employees with this information. The packet should include a summary plan description detailing plan options, claim processes, and eligibility requirements. Additionally, plan participants also will receive annual notices and benefit summaries in the mail periodically.

How ERISA Works

ERISA protects employee interests as well as employers. It provides guidance for plan managers, ensures employees receive their benefits, and offers protection for plan contributions and assets.

Note

Businesses aren’t required to offer employee benefits, but they must meet the minimum standards defined within ERISA if they do. Failing to comply could result in disqualification of plans and other penalties.

The standard requirements outlined by ERISA include:

• Disclosure of health and retirement benefit information to employees
• An established claims procedure
• Nondiscriminatory practices based on health or disability
• A uniform vesting schedule
• Reporting plan information with the Department of Labor and IRS
• Making timely contributions
• Fiduciary responsibility to act in the best interest of participants
• Minimum funding requirements
• Plan assets to be held in a trust or insurance contract
• The right to continuation of group health coverage
• An established appeals and grievances process
• The right to sue for benefits for any fiduciary wrongdoing
• Payment guarantee of certain benefits through the PBGC

“ERISA was enacted to protect the interests of participants and beneficiaries by, among other things, creating very high standards for those responsible for administering plans,” Garofolo said. “ERISA also allows participants and beneficiaries to file lawsuits in federal court to protect their rights and benefits and gives broad authority to a government agency to investigate and enforce the statute.”

Oversight

ERISA oversight is divided between the Department of Labor, the Internal Revenue Service (IRS), and the PBGC.

The Department of Labor’s Employee Benefits Security Administration (EBSA) enforces ERISA’s provisions surrounding fiduciary duty and prohibited transactions. The IRS focuses on participation, vesting, and funding issues. The PBGC serves as a fail-safe by insuring minimum guaranteed benefits for some pension plans.

Filing a Grievance

Garofolo explained how ERISA’s governance could play out in the workplace. For example, if an employee becomes disabled and their employer offers a disability plan, they may submit a claim for benefits under the claims procedure required by ERISA.

If that claim is denied, then ERISA mandates that the plan must provide a full and fair review of all denied claims, Garofolo said. If the plan administrator determines that the employee is not entitled to disability benefits, then the administrator must provide the employee with certain information, including the reasons for the denial and the plan provisions that form the basis of the denial.

After the employee completes the claims process, the employee can file a lawsuit under ERISA, and a court may determine that the employee is entitled to benefits under the plan.

Amendments to ERISA

Since its inception, ERISA has been amended several times to expand its protections. The three most common additions are the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health Insurance Portability and Accountability Act (HIPPA), and the Affordable Care Act (ACA).

COBRA allows some workers and their families to continue to purchase health coverage for a limited time after a qualifying event, such as a layoff.

HIPPA protects patient information and reduces health coverage discrimination based on pre-existing condition exclusions.

The ACA provides access to affordable health care for millions of Americans. In addition, it made reforms to the health insurance market to make it easier for employers to provide health insurance.

Other amendments include the Newborns' and Mothers' Health Protection Act, the Women's Health and Cancer Rights Act, and the Mental Health Parity and Addiction Equity Act.

Key Takeaways

• ERISA regulates retirement and welfare plans for millions of Americans.
• Employers must comply with minimum standards set by ERISA or face penalties.
• ERISA gives employees the right to an appeals and grievances process, to fight discrimination, and to sue for benefits or fiduciary wrongdoing.
• ERISA ensures certain pension benefits in the event of plan termination.

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