Employee Retirement Income Security Act (ERISA)

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

The Employee Retirement Income Security Act (ERISA) of 1974 protects the retirement assets of workers in the U.S. by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. ERISA also covers some non-retirement accounts, such as employee health plans.

Under ERISA, plans must provide participants with information about plan features and funding, regularly and free of charge. The Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL), oversees and enforces ERISA provisions.

Understanding the Employee Retirement Income Security Act (ERISA)

Most employer-sponsored retirement plans, both defined-benefit and defined-contribution, are covered by ERISA. Common examples include 401(k) plans, pensions, deferred-compensation plans, and profit-sharing plans. Examples of non-retirement employer plans that fall under ERISA include health maintenance organization (HMO) plans, flexible spending accounts (FSAs), disability insurance, and life insurance.

ERISA requires accountability of plan fiduciaries. It generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan’s management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan. In addition, ERISA addresses fiduciary provisions and bans the misuse of assets through these provisions.

ERISA also sets minimum standards for participation, vesting, benefit accrual, and funding. The law defines how long a person may be required to work before becoming 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).

Not every retirement plan is subject to the terms of ERISA. ERISA does not cover IRAs or plans set up and maintained by government entities and churches. Similarly, if a company sets up a plan outside of the U.S. for its nonresident alien employees, ERISA does not govern that plan.

History of ERISA

ERISA was enacted to address irregularities in the administration of certain large pension plans. These issues highlighted a lack of protections for workers. When Studebaker-Packard closed its Indiana factory in 1963, for example, more than 4,000 workers lost some or all of their pension plan benefits because the plan was underfunded.

In another high profile incident that took place in the 1960s, the Teamsters' Central States Pension Fund, which had a rather colorful history involving questionable loans to Las Vegas casinos, brought the issue of fiduciary malfeasance related to retirement accounts into the public eye.

In general, retirement accounts that qualify under ERISA are protected from creditors, bankruptcy proceedings, and civil lawsuits. If your employer declares bankruptcy, your retirement savings are not at risk. Also, creditors to whom you owe money cannot make a claim against funds held in your retirement account.

Special Considerations

The complicated rules of ERISA deter some small-business owners from setting up retirement accounts for their employees. To allow these companies to sidestep some of the confusing regulations, there are alternatives. A SIMPLE IRA, for example, is a retirement savings plan that most small businesses with 100 or fewer employees can use. SIMPLE stands for "Savings Incentive Match Plans for Employees."

While SIMPLE IRAs are covered by ERISA, they don't have the reporting and administrative burden that qualified retirement plans such as 401(k)s do, and they are easier to set up. With a SIMPLE IRA, the employer chooses and files the plan using IRS forms 5304-SIMPLE or 5305-SIMPLE. 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.