When you’re responsible for your employees’ well-being in the form of their retirement plans and health benefits, that’s where ERISA comes in.
ERISA, the Employee Retirement Income Security Act of 1974, is a piece of federal law with a broad reach. It sets minimum standards and safeguards designed to protect employees in the private sector participating in employer-sponsored retirement plans and benefit plans (like healthcare coverage).
If you’re a small business owner, HR professional, or startup founder, understanding ERISA law is essential to ensure you fulfill your duties while protecting the interests of your employees.
What Is the Background of ERISA?
In the decades before ERISA, managing pensions was somewhat of a gamble for employees. Cases of mismanagement, financial instability, and outright fraud in defined benefit pension plans meant many workers lost the retirement savings they’d worked a lifetime for. Congress recognized that stronger federal regulation was needed to stop this trend.
In response to these widespread concerns, ERISA was enacted in 1974 by the U.S. Department of Labor (DoL). This landmark law aims to achieve several important objectives:
Setting Minimum Standards: ERISA establishes a set of baseline expectations for private-sector benefit plans. It ensures that employers meet specific criteria when offering retirement or healthcare plans.
Protecting Plan Participants: At its heart, ERISA safeguards the rights and well-being of employees who participate in these employer-sponsored plans.
Fiduciary Responsibility: ERISA introduces the concept of fiduciaries — individuals or entities with a legal obligation to act in the best interests of plan participants.
These core objectives make up ERISA. This law has been a guiding force in regulating employee benefits for nearly 50 years. While the law has seen various amendments and updates, the focus on protecting workers’ retirement income security and benefit plans remains steadfast.
What Are ERISA’s Key Components?
ERISA might feel like a distant federal law for many employers, but it has direct implications for how you approach retirement plans and employee benefits — and how your team benefits from your choices.
Here’s a look at the main categories ERISA addresses:
Retirement Plans
Retirement plans are a cornerstone of ERISA regulations. The law broadly classifies employer-sponsored plans into two types:
Defined Benefit Plans (Traditional Pensions)
This type of employee pension plan provides a guaranteed monthly benefit to employees at retirement. The exact amount is usually calculated based on eligibility factors like your income, how long you’ve worked for the company and your age at retirement. ERISA sets standards to help ensure these plans are adequately funded to deliver on their promises.
Defined Contribution Plans (Like 401(k)s)
In this model, the eventual retirement payout isn’t guaranteed. Instead, both you (the employer) and your employees contribute to individual accounts within the plan. The final value depends on factors like the amount contributed and the investment performance of those funds. ERISA helps safeguard these accounts by setting rules for how they are managed.
Protecting Retirement Security
Regardless of which type of retirement plan you offer, ERISA places key protections on these funds:
Transparency and Disclosure: ERISA mandates detailed plan information be available to participants, keeping everyone informed of their rights and benefits.
Fiduciary Duty: Those managing your retirement plan have a legal responsibility to act in the best interests of plan participants, not for personal gain.
As an employer, understanding these retirement plan details is essential to fulfilling your responsibilities under ERISA. However, ERISA’s scope extends far beyond retirement accounts. Next, let’s take a look at how it also applies to health insurance coverage, disability plans, and other benefits you may offer employees.
Employee Benefit Plans
Alongside benefiting retirees, ERISA also covers benefits your company may offer employees. These can include:
Group Health Insurance: Employer-sponsored health plans, ensuring your employees have access to healthcare.
Disability Insurance: Providing income protection in the event an employee cannot work due to disability.
Life Insurance: Offering financial support to beneficiaries if an employee passes away.
Other Benefits: ERISA can extend to other benefits, depending on the specifics of your offerings.
ERISA sets clear standards for managing these benefits, giving you, as an employer, a baseline for business compliance. Let’s look at some specific ways ERISA ensures fairness and transparency within these plans.
Safeguarding Participants
ERISA recognizes that things don’t always go according to plan. That’s why it empowers your employees with the tools to protect their rights within their benefit plans.
Here’s how it does it:
Anti-Discrimination Clauses: ERISA bars discrimination based on health status when it comes to enrollment in health plans.
Continuation of Coverage (COBRA): This provision lets employees temporarily continue their group health coverage if they experience events like job loss under certain conditions.
Claims and Appeals Procedures: ERISA establishes processes by which plan participants can dispute denied benefits or file appeals.
These provisions demonstrate ERISA’s commitment to protecting employees when it comes to the essential benefits that impact their health, well-being, and financial security.
What Is the Role of Fiduciaries Under ERISA?
Within the ERISA framework, certain individuals and entities hold a unique and important role: They are known as fiduciaries. A fiduciary isn’t just anyone involved in a plan. It is a specific person or company with legal authority or control over the plan’s management or assets.
Examples include:
Plan Administrators: Those directly responsible for the day-to-day operation of the plan.
Employers: Especially in situations where the employer exercises discretion over plan management.
Trustees: Individuals or entities holding legal ownership of plan assets.
Service Providers: Investment advisors or third-party companies providing administrative services to the plan.
It’s not enough to just hold the title of a fiduciary — ERISA demands a high standard of conduct. Fiduciaries are legally obligated to act solely in the best interests of plan participants and their plan beneficiaries. Their decisions must always prioritize the well-being of those the plan is designed to serve.
Key Fiduciary Duties
This responsibility translates into several key duties ERISA outlines:
Prudence: Fiduciaries must manage the plan with the same skill and care as a prudent expert would exercise.
Diversification: Spreading investments across various assets helps protect the plan from being overly exposed to risk.
Plan Documents: Fiduciaries must follow the rules and procedures set out by the federal government.
Avoiding Conflicts of Interest: Personal gain or self-dealing has no place in fiduciary decision-making.
ERISA doesn’t take fiduciary duty lightly. If there’s a breach of fiduciary duty obligations, they can be held personally liable. This means they may have to restore losses to the plan or be subject to other legal penalties.
How Does ERISA Extend to Health and Welfare Benefit Plans?
We’ve seen how ERISA safeguards retirement plans. Now, let’s explore how it extends similar protections to health and other welfare benefit plans.
Participant rights are as follows:
HIPAA and Special Enrollment
The Health Insurance Portability and Accountability Act (HIPAA), a key piece of legislation that operates within ERISA’s scope, grants employees the right to enroll in their group health plan outside regular enrollment periods under certain circumstances (for instance, marriage or the birth of a child).
Anti-Discrimination
ERISA prohibits employers from denying health coverage based on an employee’s health status or pre-existing conditions.
ERISA and the Affordable Care Act (ACA)
The ACA significantly expanded health insurance access for Americans. ERISA acts as a key enforcement mechanism, ensuring employers with a certain number of employees offer ACA-compliant healthcare coverage, with provisions like coverage for essential health benefits.
What Are Additional Protections Under ERISA?
When you offer employees retirement plans or benefits like healthcare, there’s an implicit promise that they’ll get what they’ve worked for. ERISA reinforces this promise with specific provisions designed to prevent those benefits from disappearing.
Here’s how:
Vesting and Benefit Accrual
ERISA understands that your employees work hard. It ensures they don’t walk away empty-handed if they leave your company before retirement.
Vesting, as mandated by ERISA, means your employees gradually gain ownership of the retirement or benefit plan contributions made on their behalf. ERISA sets minimum vesting schedules that employers must follow.
Pension Benefit Guaranty Corporation (PBGC)
ERISA recognizes that circumstances beyond anyone’s control can sometimes happen. If a defined benefit pension plan is terminated, the PBGC steps in. This government-backed corporation acts as a safety net, ensuring that eligible participants continue receiving their pension benefits even if the plan itself fails.
Legal Recourse for Participants
ERISA empowers your employees to protect their hard-earned benefits. If they believe their rights under the law have been violated, plan participants can file lawsuits in federal court to seek remedies.
Ensure You’re Compliant With Mosey
ERISA stands as a safeguard for employees participating in employer-sponsored benefit plans in the private sector. It ensures fairness, promotes transparency, and instills confidence that the promises made regarding retirement and benefits will be honored.
As an employer, understanding your obligations under ERISA is more than a matter of compliance. It means you’re practicing responsible business and supporting your workforce. Compliance can feel overwhelming, but that’s where Mosey comes in.
Our platform helps streamline state compliance tasks and alerts you to potential obligations, giving you peace of mind while supporting your commitment to your employees. Book a demo today to see what it’s all about.
