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Benefits 101: Understanding fundamental ERISA compliance

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in Employee Benefits Program

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for retirement and health benefit plans in private industry. ERISA does not require any employer to establish a plan. It only requires those that do to meet certain standards.

Essentially, ERISA governs the administration of employee benefit plans and the rights of plan beneficiaries. It was enacted in response to perceived abuses of retirement benefits by private-sector employers, with the goal of protecting employees against the loss of promised benefits.

Complying with ERISA can be difficult because it is a complex law. There are three components to compliance:

  • Reporting: Employers must submit certain reports to the IRS each year and comply with U.S. Department of Labor requests.
  • Disclosure: Employers must advise employees of certain facts regarding their benefits packages.
  • Paying claims: Benefit plans must spell out the procedures for processing and paying of claims.

Fiduciary duty

The concept of fiduciary duty is central to ERISA compliance. Employers must care for employee benefits as they would their own assets.

The recent collapse of the subprime mortgage market, followed by the financial crisis on Wall Street, has led to a proliferation of breach of fiduciary duty lawsuits. As of this writing, an estimated 1,500 lawsuits are pending.

Application of ERISA

Congress clearly intended for ERISA to be the governing law for employee benefit plans and designed the law to set forth uniform standards. ERISA pre-empts state laws relating to employee benefit plans, with a few exceptions (involving insurance, banking or securities laws).

ERISA covers any “employee benefit plan” established or maintained by an employer engaged in commerce or in any activity affecting commerce. The term “employee benefit plan” can refer to an employee pension benefit plan—covering retirement benefits—or an employee welfare benefit plan, which involves medical, accident, disability, death, unemployment, vacation, apprenticeships, training programs, day care, scholarship funds, prepaid legal services and other benefits.

The law broadly defines an “employee” as “any individual employed by an employer.” The Supreme Court has ruled that “employee” status is determined by the amount of control the employer exerts over a worker to differentiate him from an independent contractor.

Under ERISA, you must permit employees to participate in a plan if they are age 21 or older and have one year of service.

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