ERISA is a popular acronym, but few know how it applies to them as employees. ERISA, which stands for the Employee Retirement Income Security Act, became law in 1974.
The law sets standards for pension and welfare plans to protect employees and their beneficiaries, safeguarding any employer-sponsored plan. If the employer/employee contributes in any fashion, they’re covered under the law. It also has been amended to include important rules that impact employee-employer health coverage.
This article unpacks all of that. But let’s start with who oversees the law and its rules.
Who oversees ERISA?
When it was enacted, ERISA established regulatory oversight to three departments of the government: The Department of Labor creates rules and duties for fiduciaries (plan managers), disclosure and reporting. The IRS is responsible for creating and managing participation fund and vesting rules; and the Pension Benefit Guaranty Corp (PBGC) was established as a guarantor (insurer) of private pension funds.
What are the ERISA rules?
ERISA is complex. It outlines guidance for plan managers to ensure funds are protected, fiduciaries are acting in the best interest of the fund, and employees receive their benefits. Standards include:
- Providing facts to employees regarding their health and retirement plans
- Establishing trust accounts for holding any plan assets
- Depositing contributions in a timely manner
- Recordkeeping guidelines
- Document filing guidelines
- Fiduciary responsibilities
- Minimum funding requirements
- Uniform vesting schedules
- Appeals and grievance processes
- Notification to employees of any changes to the plan(s)
- The right to sue for breach of fiduciary responsibility
What is an ERISA qualified/non-qualified plan?
Any employer that contributes to a health or retirement plan is bound by the rules of ERISA. The size of the company or headcount is irrelevant. Only government entities and some churches are exempt from compliance.
Any employer-sponsored plan that requires salary deductions from the employee, or contributions by the employer constitutes a qualified plan. Qualified plans generally require either contributions to be deducted from the employee on a pre-tax basis or that the contribution is tax deductible under IRS rules. Qualified plans must also meet non-discriminatory rules to assure that every employee is eligible for the same benefits.
Plans that are non-qualified under ERISA include tax-deferred compensation and bonus plans. These are generally reserved for executive-level staff. Any deductions from employee salaries, or contributions made by the employer, would be taxable.
The Fine Print and SPD
ERISA requires employees to be provided in writing with detailed information about the plans to which they are eligible to participate. For health, dental, and vision coverage, these typically include information from the insurer (Blue Cross, Humana, etc.) about the scope of coverage. For employers who self-fund insurance, information is created by the employer.
Employers must create or provide staff with a Summary Plan Description that covers all the important information about the plan as well as employee rights. This could include eligibility notifications (for example, employees need to complete 90 days of full-time service to join the health plan), costs, benefits provided, etc. Some employers work with a third-party administrator (TPA) to create and manage the documentation. The SPD(s) must be issued to and available for employees based on ERISA rulings.
For retirement plans, most companies have a “vesting” period after the employee becomes eligible to participate. Most commonly, employees will have to complete a year of service to join the retirement plan (401(k), pension, etc.) then the “vesting” period begins. Employees may always keep the portion of the fund they contribute, but vesting means any employer-match to the fund is not theirs (and can be forfeited back to the employer) unless a specific time frame has been met.
The vesting period can vary depending on the structure the employer chooses. There are two basics, although employers can vary the structure of a graduated plan:
- Cliff Vesting: employees are 100% vested after 5 years of participation in the fund.
- Graduated Vesting – employees are vested:
- 20% vested after 3 years
- 40% vested after 4 years
- 60% vested after 5 years
- 80% vested after 6 years
- 100% vested after 7 years
Until the vesting period is satisfied, employers can take back any funds they contributed to the plan if the employee has a voluntary or involuntary break in service.
What is a fiduciary?
ERISA requires a fiduciary is named to manage any plans or funds. The fiduciary is responsible for maintenance of the plan, notifications to employees, keeping records, and complying with mandatory reporting needs.
Fiduciaries have discretion or authority over plans and funding: they are responsible, under the law, to work solely in the interest of participants and beneficiaries by providing benefits and paying necessary expenses. They are responsible for making payments in a timely manner as well as avoiding losses and conflicts of interest.
What does ERISA have to do with health insurance?
ERISA has been amended over the years to include two commonly-known acts that have a direct impact on employer-plan health insurance policies: COBRA and HIPAA.
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was the first. COBRA allows separated employees to continue to purchase health coverage from the employer for up to 18 months — or up to 36 months for spouses and children — if they were terminated for anything except gross misconduct. Qualifying events, like divorce, also give previously covered spouses the right to continue to purchase benefits.
In 1996 The Health Insurance Portability and Accountability Act (HIPAA) became the second amendment to ERISA. HIPAA removes the barriers that employees held when changing employers/health insurance providers by reducing or eliminating pre-existing conditions exclusions.
Unless you’re in your 60s, you probably don’t know what it meant to be insecure about your medical or retirement benefits. Unfortunately, prior to ERISA, some unscrupulous employers treated employee retirement funds and even health benefit payments as an asset to the company, borrowing or raiding the funds for their own gain. ERISA put a stop to those practices, ensuring any contributions made, either an employer promise to pay for the benefit or the employee’s own funds are secure. ERISA is one of the most important protections most employees don’t even know they have.
This article is for informational purposes and is not meant to provide legal, regulatory, accounting, or tax advice.