ERISA – Employee Retirement Income Security Act

The Employee Retirement Income Security Act (ERISA) lays out federal law demands for employer retirement plan policies. It specifies what employers must do to create, administer, and maintain employee benefit retirement programs to stay on the right side of the law, including avoiding inadvertent promises that may restrict employer rights and preventing informal practices from becoming ERISA-covered policies.

ERISA was created to ensure that employee benefits plans were created fairly, administered and maintained appropriately, and provided to retiring employees as promised by their employer.

Coverage

ERISA covers two types of benefits plans.

1. Employee pension benefits plans
   
   
   1. Defined benefits plans provide a specific benefit when the employee retires or in a certain period of time after retirement.
      
      
   2. Defined contribution plans provide an individual account for the employee based upon the amount contributed to the plan, plus any earnings and losses.  Defined contribution plans include: 401(k) plans; profit-sharing plans; employee stock ownership plans (ESOP); and money purchase pension plans. 
2. Employee welfare benefits plans
   
   Such plans include: health and accident coverage, life insurance, vacation, sick pay, day care, pre-paid legal services, severance pay, educational assistance, dependent care assistance, financial assistance for employee housing expenses, and death benefits plans.

Exceptions to ERISA include:

• federal, state, and local government entities;
  
  
• tax-exempt churches;
  
  
• plans maintained solely to comply with Workers’ Compensation, unemployment, or disability laws;
  
  
• plans maintained outside of the United States solely for nonresident aliens; and
  
  
• unfunded excess plans.

Employees must have reached the age of 21 and worked at least 1,000 hours for an employer in a 12-month period in order to be eligible for ERISA.

Key Definitions

Vesting happens within a certain period of time, when employees have a right to receive retirement benefits promised to them by their employer.  Benefits may vest when employees terminate employment, but before they reach retirement age.

A top-heavy plan occurs when more than 60% of a plan’s benefits go to highly compensated employees; then other employees’ benefits must vest at a faster rate than under the normal vesting rules.

Contributions and benefits have limits that apply to the maximum annual benefits employees may receive, annual additions made to their account in a defined contribution plan, and to the employer’s tax deduction for contributions made to the plan.

A named fiduciary is the person or persons identified in the written plan document who operates and administers the plan.

In addition, anyone who performs the following functions may also be treated as a fiduciary.

1. Exercising discretionary authority or control in managing the plan or in acquiring or selling plan assets;
   
   
2. Rendering investment advice for a fee or other compensation, direct or indirect, with respect to any money or other plan property; and
   
   
3. Acting with discretionary authority or responsibility in plan administration.

Non-fiduciary administrators do not have power to make any decisions on plan policy, interpretations, practices, or procedures.  Responsibilities include:

1. Determining eligibility for participation or benefits;
   
   
2. Calculating services and compensation credits for benefits;
   
   
3. Preparing communications given to employees;
   
   
4. Maintaining employee records;
   
   
5. Preparing reports required by government agencies;
   
   
6. Calculating benefits;
   
   
7. Orienting new participants and letting participants know their rights and options under the plan;
   
   
8. Collecting and applying contributions in compliance with the plan;
   
   
9. Preparing participants’ benefits reports;
   
   
10. Processing claims; and
    
    
11. Giving advice to others on matters concerning plan administration.

A plan administrator is responsible for administering a qualified plan, is generally liable for any breach of the fiduciary rules by a co-administrator, and must adhere to ERISA’s requirements, including:

1. Performing administrative duties with the care, skill, and diligence that “a prudent man” would use in the same situation; and
   
   
2. Diversifying the plan’s assets “so as to minimize the risk of large losses.”

Qualified medical child support orders (QMCSOs) are group health plans that must provide benefits to a participant’s child.

Record-Keeping Requirements

The administrator of a qualified plan must:

• file an annual report (IRS Form 5500) with the DOL;
  
  
• supply all plan participants and beneficiaries with a summary of the annual report that explains the plan’s terms in an understandable manner; and
  
  
• upon request, file a summary of the plan description with the Department of Labor with a copy also given to participating employees within three months of the date the plan takes effect or the employees become covered by the plan.
  
  Note: Amendments to the 1997 Taxpayer Relief Act eliminated the ERISA requirement that plan administrators file copies of the most recent versions of summary plan descriptions and of summaries of material plan modifications — which must be given to plan participants and beneficiaries — with the Labor Department.  Instead, plan administrators are required to provide the Labor Department, on request, any plan document, including but not limited to summary plan descriptions, summaries of material plan modifications, collective bargaining agreements, trust agreements, and contracts.

Failure to comply may result in a civil penalty of up to $110 a day from the date of such a failure, but not in excess of $1,100 per request. A plan administrator can waive the penalty if it can show, within 30 days, that its failure to comply was due to matters beyond its control.

Administrators of benefits plans subject to the Pension Benefit Guaranty Corporation’s (agency created by ERISA to guarantee payment of benefits to plan participants and beneficiaries) termination rules must file an annual form along with a copy of the plan’s termination insurance premium for the year.

The following information must be included in the summary of the plan description.

1. Name of the plan and, if different, the name by which the plan is known to its participants and beneficiaries;
   
   
2. Name and address of employer;
   
   
3. Employee identification number (assigned by the IRS);
   
   
4. Type of pension or welfare plan involved;
   
   
5. Type of administration of the plan (e.g., contract administration, insurer administration or joint board of trustees);
   
   
6. Plan administrator’s name, business address, and business telephone number;
   
   
7. Name of the person designated as agent for service of process and the address where process may be served on that person;
   
   
8. The plan’s participation and benefits eligibility requirements;
   
   
9. In the case of pension plans, a statement describing any joint and survivor benefits provided under the plan, including any requirement that an election be made as a condition for accepting or rejecting the joint and survivor annuity;
   
   
10. Circumstances that may result in disqualification or ineligibility or denial, loss, forfeiture, or suspension of any benefits, plus any plan provision relating to forfeiture of benefits, breaks in service, and eligibility for participation and benefits;
    
    
11. Provisions for determining years of service of eligibility to participants, vesting, breaks in service, and years of participating for benefit accrual, plus the number of years of service required to accrue full benefits and how benefits are prorated for partial years of service;
    
    
12. Sources of contributions to the plan (e.g., employer and employee), and how contribution amounts are calculated;
    
    
13. Identity of the funding mechanism (e.g., an ESOP) used to accumulate assets through which benefits are provided; and
    
    
14. Date of the end of the plan’s fiscal year.

Notification Requirements

Plan information must be provided on request of covered employees.  A summary of any changes made to the plan must be provided within 210 days of the plan year in which the changes are made.  When there is a decrease in benefits, employees must be notified at least 15 days before the change takes effect.

Plan administrators must inform participants of their rights under the plan.  The basic types of disclosure documents and notices that ERISA requires include:

• summary plan descriptions;
  
  
• updated summary plan descriptions;
  
  
• summaries of plan modifications;
  
  
• summary annual reports;
  
  
• notice of claim denial;
  
  
• notice of COBRA rights; and
  
  
• notice of rights under qualified medical child support orders (QMCSOs).

Withdrawal Provisions

A qualified plan must make distributions available to participants and beneficiaries who have:

• reached age 65;
  
  
• completed 10 years of service; or
  
  
• stopped working for the employer.

Certain plans must distribute the benefits of married participants in the form of a joint and survivor annuity, unless a properly-executed waiver has been drafted.  Special rules apply to lump-sum distributions, distributions eligible for rollover directly into another qualified plan, and to plans that permit in-service hardship distributions and plan loans.

Normal distribution is made at the time of the employee’s disability, retirement, attainment of age 59 1/2, separation from service, or death.

Hardship withdrawals may be made under the following circumstances.

1. Medical expenses are incurred by the participant, or the participant’s spouse or tax dependents.
   
   
2. The purchase of the participant’s principal residence.
   
   
3. To prevent eviction from the participant’s principal residence or the foreclosure of the mortgage on that principal residence.
   
   
4. Tuition payments for the next semester or quarter of postsecondary education for the participant or the participant’s spouse, child, or dependent.

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