The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by: Requiring the disclosure of financial and other information concerning the plan to beneficiaries; Establishing standards of conduct for plan fiduciaries; Providing for appropriate remedies and access to the federal courts.
ERISA is sometimes used to refer to the full body of laws that regulate employee benefit plans, which are mainly in the Internal Revenue Code and ERISA itself.
Responsibility for interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.
History In 1961, U.S. President John F. Kennedy created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker Corporation, an automobile manufacturer, closed its plant in South Bend, Indiana, in 1963. Its pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions. The company created a program in which 3,600 workers who had reached the retirement age of 60 received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebaker received lump sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining 2,900 workers received no pensions.
In 1963, Senator John L. McClellan (D) of Arkansas began an investigation through the Permanent Investigations Senate Subcommittee into labor leader George Barasch, alleging misuse and diversion of $4,000,000 of union benefit funds. After three years the investigation had failed to find any wrongdoing, but had resulted in several proposed laws, including McClellan's October 12, 1965 bill setting new fiduciary standards for plan trustees. Additionally, due much in part to his "dismay" over Barasch's sole control over union benefit plan funds, Senator Jacob K. Javits (R) of New York also introduced bills in 1965 and 1967 increasing regulation of welfare and pension funds to limit the control of plan trustees and administrators and to address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bills were opposed by business groups and labor unions, which sought to retain the flexibility they enjoyed under pre-ERISA law. Provisions from all three bills ultimately evolved into the guidelines enacted in ERISA.
On September 12, 1972, NBC broadcast an hour-long television special, Pensions: The Broken Promise, that showed millions of Americans the consequences of poorly funded pension plans and onerous vesting requirements. In the following years, Congress held a series of public hearings on pension issues and public support for pension reform grew significantly.
ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2, 1974, Labor Day. In the years since 1974, ERISA has been amended repeatedly.
Coverage Pension plans ERISA does not require employers to establish pension plans. Likewise, as a general rule, it does not require that plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan in the private sector once it has been established.Napoletano, E. (December 3, 2021). "What ERISA Means For Your Retirement Plan". Forbes Advisor.
Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements.
ERISA also regulates the manner in which a pension plan may pay benefits. For example, a defined benefit plan must pay a married participant's pension as a "joint-and-survivor annuity" that provides continuing benefits to the surviving spouse unless both the participant and the spouse waive the survivor coverage.
The Pension Benefit Guaranty Corporation was established by ERISA to provide coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants. Later amendments to ERISA require an employer who withdraws from participation in a multiemployer pension plan with insufficient assets to pay all participants' vested benefits to contribute the pro rata share of the plan's unfunded vested benefits liability.
There are two main types of pension plans: defined benefit plans and defined contribution plans. Defined benefit plans provide retirees with a certain level of benefits based on years of service, salary and other factors. Defined contribution plans provide retirees with benefits based on the amount and investment performance of contributions made by the employee and/or employer over a number of years.Lemke and Lins, ERISA for Money Managers §1:1 (Thomson West, 2012).
Health benefit plans
Likewise, ERISA does not require that an employer provide health insurance to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one.
ERISA has led to tension with reforms which partner with the states, such as the Patient Protection and Affordable Care Act. There have been several significant amendments to ERISA concerning health benefit plans: The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides some employees and beneficiaries with the right to continue their coverage under an employer-sponsored group health benefit plan for a limited time after the occurrence of certain events that would otherwise cause termination of such coverage, such as the loss of employment. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits a health benefit plan from refusing to cover an employee's pre-existing medical conditions in some circumstances. It also bars health benefit plans from certain types of discrimination on the basis of health status, genetic information, or disability.
Other relevant amendments to ERISA include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.
about 60% of insured employees in the US were in self-funded plans subject to ERISA. During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees limited or eliminated those benefits. Alt URL ERISA does not provide for vesting of health care benefits in the way that employees become vested in their accrued pension benefits. Employees and retirees who were promised lifetime health coverage may be able to enforce those promises by suing the employer for breach of contract, or by challenging the right of the health benefit plan to change its plan documents to eliminate promised benefits.
Pension vesting Before ERISA, some defined benefit pension plans required decades of service before an employee's benefit became vested. It was not unusual for a plan to provide no benefit at all to an employee who left employment before the specified retirement age, such as 65, regardless of the length of the employee's service.
Under the Pension Protection Act of 2006, employer contributions made after 2006 to a defined contribution plan must either become 100% vested after the employee has three years of employment or vests gradually over the employee's six years of employment.(a)(2)(b)
Accrued benefits under a defined benefit plan must become 100% vested after five years or of employment or vests gradually over the employee's seven years of employment.(a)(2)(a) Different rules apply with respect to employer contributions made before 2007.
Employee contributions are always 100% vested.(a)(1)
Pension funding ERISA established minimum funding requirements for pension plans, which includes defined benefit plans and money purchase plans but not profit sharing or stock bonus plans.
Before the Pension Protection Act of 2006 (PPA), a defined benefit plan maintained a funding standard account, which was charged annually for the cost of benefits earned during the year and credited for employer contributions. Increases in the plan's liabilities due to benefit improvements, changes in actuarial assumptions, and any other reasons were amortized and charged to the account; decreases in the plan's liabilities were amortized and credited to the account. Every year, the employer was required to contribute the amount necessary to keep the funding standard account from falling below $0 at year-end.
In 2008, when the PPA funding rules went into effect, single-employer pension plans no longer maintain funding standard accounts. The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called "at-risk status").
The PPA has different funding requirements for multiemployer pension plans, which preserve most of the pre-PPA funding rules, including the funding standard account. Under PPA, increases and decreases in the plan's liabilities are amortized, but the amortization period for benefit improvements adopted after 2007 are shortened. As with single-employer plans, multiemployer pension plans that are significantly underfunded are subject to restrictions. The restrictions, which may limit the plan's ability to improve benefits or require the plan to reduce employees' benefits, vary depending whether a pension plan's funding status is termed "endangered", "seriously endangered", or "critical". The restrictions accompanying each deficient funding status are progressively more severe as funding status worsens.
ERISA preemption ERISA Section 514 preempts all state laws that relate to any employee benefit plan, with certain, enumerated exceptions.See, e.g., . The most important exceptions (i.e., state laws that survive despite the fact that they may relate to an employee benefit plan), known as the "savings clause", are state insurance, banking, or securities laws, generally applicable criminal laws, and domestic relations orders that meet ERISA's qualification requirements.. Thus, the savings clause generally permits states to regulate entities in these covered industries without running afoul of ERISA's preemptive scheme. ERISA also does not govern public pension funds, but it is often looked to for guidance regarding fund duties in addition to state pension codes.
Application of the savings clause is cabined by what is commonly referred to as ERISA's "deemer clause", which generally provides that an employee benefit plan governed by ERISA shall not be "deemed" an insurer, bank, trust company, investment company, or a company engaged in the insurance or banking business in order to be subject to state law (and accordingly, avoid ERISA preemption). The Supreme Court has created another limitation on the insurance exception, in which even a law that regulates insurance is preempted if it purports to add a remedy to a participant or beneficiary in an employee benefit plan that ERISA did not explicitly provide.