What is the Employee Retirement Income Security Act (ERISA)?
The Employee Retirement Income Security Act (ERISA) is a federal law that was created to protect individuals who are covered through retirement and health plans. Enacted in 1974 by U.S. President Gerald Ford, ERISA sets the minimum standards for most established retirement and health plans in private industries.
ERISA does not cover retirement and health plans established by government entities, unemployment law, disability law, churches for their employees, plans maintained solely for workers’ compensation, or coverage plans outside the United States.
- Enacted in 1974, ERISA is a federal law that was created to protect participants on retirement and health coverage plans.
- There are two main types of retirement plans: defined benefit plans and defined contribution plans.
- Established retirement and health plans must follow specific ERISA requirements. Fiduciaries responsible for the control of benefit assets are required to follow strict guidelines and may be held liable if the guidelines are violated.
Types of Retirement Plans
There are two types of retirement plans: defined benefit plans and defined contribution plans. They are discussed in detail below:
1. Defined Benefit Plans
Defined benefit plans are a type of retirement plan that guarantees a specified monthly benefit after retirement – such as $400 a month. The specified monthly benefit is calculated through a plan formula that uses factors such as salary and service. For example, it may be calculated as 5% of salary for every year of service with an employer.
2. Defined Contribution Plans
Defined contribution plans do not guarantee a specified monthly benefit after retirement. Instead, the employer or employee (or both) are required to contribute a percentage of salary that goes towards retirement. Defined contribution plans can be in the form of 401(k)s, 403 (b)s, ESOPs, and profit-sharing plans.
What are the Requirements of ERISA?
Listed below are some of the requirements most established retirement and health plans must follow under the 1974 Employee Retirement Income Security Act.
- Requires important plan information to be provided to the participants. It includes plan features, benefit accrual, vesting, and funding.
- Must disclose the fiduciary responsibilities of those who manage the plan’s assets.
- The plans are required to establish grievance and appeal processes so that participants may receive benefits from their plan.
- Participants are given the right to sue for benefits or breaches of fiduciary duty.
- If the benefit plan is terminated, the payment of certain benefits must be run through a federally chartered corporation.
Fiduciary responsibilities are given to individuals or entities who exercise control through the management of your coverage and plan assets. Listed below are their responsibilities:
- Fiduciaries must run the coverage plan with regards to the participant’s best interest and benefit.
- Fiduciaries are expected to act politically by diversifying the plan’s investment in the lowest-risk way possible.
- Fiduciaries must follow the ERISA guidelines.
- If guidelines and principles are breached, fiduciaries may be liable for the debt.
Below are some of the amendments made to ERISA since its enactment in 1974:
- Consolidated Omnibus Budget Reconciliation Act (COBRA): Provides certain workers and families with the right to continue their health coverage for a limited time after specific events such as the loss of a job.
- Health Insurance Portability and Accountability Act: Provides protection for working Americans and their families who might suffer discrimination in health plans based on the individual’s status of health.
- Affordable Care Act (ACA): Provides more affordable options for health insurance and expanded the Medicaid program to cover all adults below the poverty line.
Hawaii Prepaid Health Care Act Exemption
The Employee Retirement Income Security Act contains an exemption relating to the Hawaii Prepaid Health Care Act. The result is that private employers in Hawaii are bound by both their state laws and by ERISA.
The exemption also freezes the law into its original 1974 form, meaning the Hawaiian legislature is unable to make non-administrative amendments without the approval of the U.S. Congress.
- Title I: The first title, Protection of Employee Benefit Rights, describes the ERISA guidelines that are implemented to protect employees’ rights to their benefits.
- Title II: The second title, Amendments to the Internal Revenue Code Relating to Retirement Plans, describes all of the revisions made to tax law to account for ERISA.
- Title III: The third title, Jurisdiction, Administration, Enforcement; Joint Pension Task Force, etc., describes the procedures of coordination between the Labor Department and the Treasury Department.
- Title IV: The fourth title, Plan Termination Insurance, outlines the procedures that coverage plans must follow regarding termination.
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