The
Employee Retirement Income Security Act of 1974 (
ERISA) is an
AmericanThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
federal statuteAn act of Congress is a statute enacted by government with a legislature named "Congress," such as the United States and the Philippines....
that establishes minimum standards for pension plans in private industry and provides for extensive rules on the
federal income taxThe federal government of the United States imposes a progressive tax on the taxable income of individuals, partnerships, companies, corporations, trusts, decedents' estates, and certain bankruptcy estates. Some state and municipal governments also impose income taxes. The first 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 to them of financial and other information concerning the plan; by establishing standards of conduct for plan
fiduciariesA fiduciary duty is a legal or ethical relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary...
; and by providing for appropriate remedies and access to the
federal courtsThe United States federal courts comprises the Judiciary Branch of government organized under the Constitution and laws of the federal government of the United States...
.
ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the
Internal Revenue CodeThe Internal Revenue Code is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax , payroll taxes, gift taxes, estate taxes and statutory excise taxes...
and ERISA itself.
Responsibility for the interpretation and enforcement of ERISA is divided among the
Department of LaborThe United States Department of Labor is a Cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services, and some economic statistics. Many U.S. states also have such departments. The...
, the
Department of the TreasuryThe Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
(particularly the
Internal Revenue ServiceThe Internal Revenue Service is the United States federal government agency that collects taxes and enforces the internal revenue laws. It is an agency within the U.S. Department of the Treasury and is responsible for interpretation and application of Federal tax law. The official U.S...
), and the
Pension Benefit Guaranty CorporationThe Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...
.
History
The history of ERISA can be said to have begun in 1961 when
PresidentThe President of the United States is the head of state and head of government of the United States and is the highest political official in the United States by influence and recognition...
John F. KennedyJohn Fitzgerald "Jack" Kennedy , often referred to by his initials JFK, was the 35th President of the United States, serving from 1961 until his assassination in 1963....
created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the
Studebaker CorporationStudebaker Corporation, or simply Studebaker , was a United States wagon and automobile manufacturer based in South Bend, Indiana. Founded in 1852 and incorporated in 1868 under the name of the Studebaker Brothers Manufacturing Company, the company was originally a producer of wagons for farmers,...
, an
automobileAn automobile, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...
manufacturer, closed its plant in 1963; the pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions. The company created three groups. Group 1 consisted of 3,600 workers who reached the retirement age of 60. They got full pension benefits. Group 2 consisted of 4,000 workers, aged 40-59, who had ten years with Studebaker. They got lump sum payments that roughly equated to 15% of the actuarial value of their pension benefits. Group 3 was a residual group of 2,900 workers with no vested pension rights. They got nothing.
In 1967,
SenatorThe United States Senate is the upper house of the bicameral United States Congress, the lower house being the House of Representatives. The composition and powers of the Senate and the House are established in Article One of the U.S. Constitution . Each U.S state is represented by two senators,...
Jacob JavitsJacob Koppel "Jack" Javits was a Jewish-American politician who served as United States Senator from New York from 1957 to 1981. A moderate Republican, he was originally allied with Governor Nelson A. Rockefeller, fellow U.S. Senators Irving Ives and Kenneth Keating, and New York City Mayor John V...
proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and
labor unionsA trade union is an organization of workers who have banded together to achieve common goals in key areas, such as working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labor contracts with employers...
, both of whom sought to retain the flexibility they enjoyed under pre-ERISA law.
A turning point in the history of ERISA came in 1970, when
NBCThe National Broadcasting Company is an American television network and former radio network headquartered in the GE Building in New York City's Rockefeller Center with additional major offices in Burbank,California...
broadcast
Pensions: The Broken Promise, an hour-long
television specialA television special is a television program which interrupts or temporarily replaces programming normally scheduled for a given time slot. Sometimes, however, the term is given to a special TV telecast of a theatrical film, such as The Wizard of Oz or The Ten Commandments, as opposed to the...
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 FordGerald Rudolph Ford, Jr. was the 38th President of the United States, serving from 1974 to 1977, and the 40th Vice President of the United States serving from 1973 to 1974...
on September 2, 1974 — Labor Day. In the years since 1974, ERISA has been amended repeatedly.
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 once it has been established.
Under ERISA, pension plans must provide for
vestingIn law, vesting is to give an immediately secured right of present or future enjoyment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal...
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.
Health benefit plans
ERISA does not require that an employer provide
health insuranceHealth insurance is insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided through a government-sponsored social insurance program, or from private insurance companies...
to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one.
There have been several significant amendments to ERISA concerning health benefit plans:
- The Consolidated Omnibus Budget Reconciliation Act of 1985
The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, is a law passed by the U.S. Congress and signed by President Reagan that, among other things, mandates an insurance program giving some employees the ability to continue health insurance coverage after leaving employment. COBRA...
(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 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
The Health Insurance Portability and Accountability Act was enacted by the U.S. Congress in 1996. According to the Centers for Medicare and Medicaid Services website, Title I of HIPAA protects health insurance coverage for workers and their families when they change or lose their jobs...
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 ActThe Newborns’ and Mothers’ Health Protection Act of 1996 is a piece of legislation relating to the coverage of maternity by health insurance plans in the United States of America...
, the
Mental Health Parity ActThe Mental Health Parity Act is legislation signed into United States law on September 26, 1996 that requires that annual or lifetime dollar limits on mental health benefits be no lower than any such dollar limits for medical and surgical benefits offered by a group health plan or health insurance...
, and the
Women's Health and Cancer Rights ActThe U.S. Women's Health and Cancer Rights Act , signed into law on October 21, 1998, contains protections for patients who elect breast reconstruction in connection with a mastectomy...
.
During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees limited or eliminated those benefits. 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 in order to eliminate those 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 retirement (age 65 or perhaps age 55), regardless of the length of the employee's service.
As of 2007, employees' benefits in a defined benefit pension plan must become vested at 100% after five years or under a seven-year graded-vesting schedule (20% a year for each year of service beginning with the third year of service and ending with 100% after seven years).
Under the
Pension Protection Act of 2006The Pension Protection Act of 2006 , 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.-Pension reform:...
, employer contributions made after 2006 to a defined contribution plan must become vested at 100% after three years or under a six-year graded-vesting schedule (20% a year for each year of service beginning with the second year of service and ending with 100% after six years). Different rules apply with respect to employer contributions made before 2007. Employee contributions are always 100% vested.
Pension funding
Under ERISA, minimum funding requirements were established for defined benefit plans. By their nature, defined contribution plans are always fully funded, even if the employee has not yet become vested in the employer contributions.
Before the Pension Protection Act (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
amortizedIn business, amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chiefly used in loan...
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 will be amortized, but the amortization period for benefit improvements adopted after 2007 will be 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 pre-emption
ERISA Section 514
preempts-Legal:*In any federal system of law, preemption refers generally to the displacement of a lower jurisdiction's laws when they conflict with those of a higher jurisdiction.**Federal preemption, displacement of U.S. state law by U.S...
all state laws that
relate to any employee benefit plan, with certain, enumerated exceptions. The most important exceptions — i.e. state laws that survive despite the fact that they may
relate to an employee benefit plan — are state insurance, banking, or securities laws, generally applicable criminal laws, and domestic relations orders that meet ERISA's qualification requirements.
A major limitation is placed on the insurance exception, known as the "deemer clause", which essentially provides that state insurance law cannot operate on employer self-funded benefit plans. The Supreme Court has created another limitation on the insurance exception, in which even a law regulating insurance will be pre-empted if it purports to add a remedy to a participant or beneficiary in an employee benefit plan that ERISA did not explicitly provide.[1]
The result is that the only remedy available to a covered person who has been denied benefits or dropped from coverage altogether is to seek an order from a federal judge (no jury trial is permitted) directing the Plan (in actuality the insurance company that underwrites and administers it) to pay for "medically necessary" care. If a person dies before the case can be heard, however, the claim dies with him or her, since ERISA provides no remedy for injury or wrongful death caused by the withholding of care.
Even if benefits are improperly denied, the insurance company cannot be sued for any resulting injury or wrongful death. Many persons included among the some 47 million people presently without health care coverage in the United States are former ERISA "subscribers", insurance terminology for Plan beneficiaries. who have been denied benefits-usually on the ground that the prescribed care is not medically necessary or is "experimental"-or dropped from coverage, often because they have lost their jobs due to the very illness for which care was denied.
Many consumer and health care advocates have called for a "restoration of the freedom of contract enforcement," to the 75% of Americans insured under these work place group plans-in effect, a repeal of the ERISA pre-emption. Permitting these insured persons access to customary state remedies (98% of all civil disputes are resolved in state courts) would, they contend, result in a substantial reduction in arbitrary denial of care benefits, simultaneously alleviating a major burden on state Medicaid systems and clogged federal court dockets.
Hawaii Prepaid Healthcare Act exemption
ERISA contains an exemption specifically regarding the Hawaii Prepaid Healthcare Act, which was enacted by that state a few months before ERISA was signed into law. As a result, private employers in Hawaii are bound by the rules of that state law in addition to ERISA. The exemption also freezes the law in its original 1974 form, meaning the Hawaii legislature is not able to make non-administrative amendments without Congressional approval.
Title I: Protection of Employee Benefit Rights
Title I protects employees' rights to their benefits. The following are some of the ways in which it achieves that goal:
- Participants must be provided plan summaries.
- Employers are required to report information about the plan to the Labor Department and provide it to participants upon request. The information is reported on Form 5500, which is available for public inspection and may be viewed at websites such as freeERISA.com and Free5500.com.
- If a participant requests, the employer must provide the participant with a calculation of her or his accrued and vested pension benefits.
- Employers have fiduciary responsibility to the participants and to the plan.
- Certain transactions between the employer and the plan are prohibited.
- A pension plan is barred from investing more than 10% of its assets in employer securities.
Title I also includes the pension funding and vesting rules described above.
Title II: Amendments to the Internal Revenue Code Relating to Retirement Plans
Title II amended the Internal Revenue Code (IRC). The changes include the following:
- The addition of various requirements for a pension plan to be tax-favored ("qualified"), including:
- the plan must offer retirees the option of a joint-and-survivor annuity,
- benefits under the plan may not discriminate in favor of officers and highly-paid employees,
- and plans are subject to the pension funding and vesting rules described above.
- The imposition of maximum limits on the annual benefit that may be paid from a qualified defined benefit pension plan and the annual contribution that may be made to a qualified defined contribution pension plan.
- The creation of individual retirement account
An Individual Retirement Arrangement is a retirement plan account that provides some tax advantages for retirement savings in the United States.-Types:...
s (IRAs).
- Revision of the rules concerning the maximum tax deduction
A tax deduction or a tax-deductible expense affects a taxpayer's income tax. A tax deduction represents an expense incurred by a taxpayer. They are variable amounts that you can subtract, or deduct, from your gross income.It is subtracted from gross income when the taxpayer computes his or her...
allowed with respect to a contribution to a pension plan.
- The imposition of an excise tax if the employer fails to make a required contribution to a pension plan or engages in transactions prohibited by ERISA.
Title III: Jurisdiction, Administration, Enforcement; Joint Pension Task Force, Etc.
Title III outlines procedures for co-ordination between the Labor and Treasury Departments in enforcing ERISA.
It also created the
Joint Board for the Enrollment of ActuariesThe Joint Board for the Enrollment of Actuaries licenses actuaries to perform a variety of actuarial tasks required of pension plans in the United States by the Employee Retirement Income Security Act of 1974...
, which licenses
actuariesAn actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries have a deep understanding of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms ....
to perform a variety of actuarial tasks required of pension plans under ERISA. The Joint Board administers two examinations to prospective Enrolled Actuaries. After an individual passes the two exams and completes sufficient relevant professional experience, she or he becomes an
Enrolled ActuaryAn Enrolled Actuary is an actuary who has been licensed by a Joint Board of the Department of the Treasury and the Department of Labor to perform a variety of actuarial tasks required of pension plans in the United States by the Employee Retirement Income Security Act of 1974...
.
Title IV: Plan Termination Insurance
Title IV created the
Pension Benefit Guaranty CorporationThe Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...
(PBGC) to insure benefits of participants in underfunded terminated plans. It also describes the procedures that a pension plan must follow in order to terminate.
Standard termination
An employer may terminate a single-employer plan under a standard termination if the plan's assets equal or exceed its liabilities. If the assets are less than the liabilities, the employer must contribute the amount necessary to fully fund the plan. A standard termination is sometimes referred to as a voluntary termination because the employer has chosen to terminate the plan.
In a standard termination, all accrued benefits under the plan become 100% vested. The plan must purchase annuity contracts for all participants. If the plan permits the payment of lump sums, employees may be offered the choice of a lump sum payment or an annuity.
If any assets remain in the plan after a standard termination has been completed, the provisions of the plan control their treatment. In some plans, the excess assets revert to the employer; in other plans, the excess assets must be used to increase participants' benefits.
Distress termination
An employer may terminate a single-employer plan under a distress termination if the employer demonstrates to the PBGC that:
- the employer is facing liquidation under bankruptcy
Bankruptcy in the United States is permitted by the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
proceedings,
- the costs of continuing the plan will cause the business to fail, or
- the costs of continuing the plan have become unreasonably burdensome solely because of a decline in the employer's workforce.
If the PBGC finds that a distress termination is appropriate, the plan's liabilities are calculated and compared with its assets. Depending on the difference between the two values, the termination may be treated as if it had been a standard termination or as if it had been initiated by the PBGC.
Termination initiated by the PBGC
PBGC may initiate proceedings to terminate a single-employer plan if it determines that:
- the employer has not made its minimum required contributions to the plan,
- the plan will not be able to pay benefits when due, or
- PBGC's long-term cost can be expected to be unreasonably higher if it does not terminate the plan.
A termination initiated by the PBGC is sometimes called an involuntary termination.
The benefits paid by the PBGC after a plan termination may be less than those promised by the employer. See
Pension Benefit Guaranty CorporationThe Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...
for details.
Multiemployer plans
A multiemployer plan may be terminated in one of three ways:
- It may be amended so that participants receive no credit for future service,
- All contributing employers may withdraw from the plan or stop making contributions to it, or
- It may be converted into a defined contribution plan.
Non-ERISA status and bankruptcy
In 2005, Public Law 109-8
http://www.ll.georgetown.edu/guides/bankruptcy_act_2005.cfm amended the Bankruptcy Code, by exempting most organised retirement plans, even those not subject to ERISA, and accorded them protected status, claimable as exempt property by a debtor declaring bankruptcy under the
U.S. Bankruptcy CodeBankruptcy in the United States is permitted by the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
.
Now, most pension plans have the same protection as an ERISA
anti-alienation clauseAn Anti-alienation clause is a provision in the governing document for an arrangement such as a trust that specifies that the beneficial or equitable owner of the property held in that arrangement cannot transfer his or her interest to a third party...
giving these pensions the same protection as a
spendthrift trustA spendthrift trust is a trust that is created for the benefit of a person that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary...
. The only remaining unprotected areas are the
SIMPLE IRAA SIMPLE IRA is a type of tax-advantaged employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for later use. Specifically, it is a type of Individual Retirement Account that is set up to be an employer-provided plan...
and the
SEP IRAA Simplified Employee Pension Individual Retirement Account is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration...
. The SEP IRA is functionally similar to a self-settle trust, and a sound policy reason would exist to not shield SEP IRAs, but many financial planners argue that a rollover (or direct transfer) from a SEP IRA to a
rollover IRA would give those funds protected status, too.
Finding statutes
Portions of ERISA are codified in various places of the
United States CodeThe United States Code is a compilation and codification of the general and permanent federal law of the United States. It contains 50 titles and is published every six years by the Office of the Law Revision Counsel of the US House of Representatives.- Codification process :The official text of...
, including , and
Internal Revenue CodeThe Internal Revenue Code is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax , payroll taxes, gift taxes, estate taxes and statutory excise taxes...
sections and (relating to the
Individual Retirement AccountAn Individual Retirement Arrangement is a retirement plan account that provides some tax advantages for retirement savings in the United States.-Types:...
) and sections through , and , and .
A cross-reference between the sections of the ERISA law and the corresponding sections in the U.S.Code can be found at http://www.harp.org/erisaxref.htm.
See also
- Bankruptcy in the United States
Bankruptcy in the United States is permitted by the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
- Employee Benefits Security Administration
The Employee Benefits Security Administration is an agency of the United States Department of Labor responsible for administering the provisions of the Employee Retirement Income Security Act of 1974 . At the time of its name change in February 2003, EBSA was known as the Pension and Welfare...
- Pegram v. Herdrich
Pegram v. Herdrich, 530 U.S. 211 is a United States Supreme Court case that held that ERISA does not provide a remedy for coverage determinations by health maintenance organizations...
- Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...
- Vivien v. Worldcom
Vivien v. WorldCom, Civil Action No. 2-01329 , established a new legal theory permitting workers to recover for losses in their 401 retirement plans caused by investment in their employers’ stock....
External links
- Department of Labor 2003 "interpretive bulletin," Field Assistance Bulletin 2003-3, May 19, 2003, concerning allocation of expenses in a defined contribution plan.
- Guide to ERISA rights from the United States Department of Labor
The United States Department of Labor is a Cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services, and some economic statistics. Many U.S. states also have such departments. The...
- LA Times, 21 August 2005,
- Text of the Employee Retirement Income Security Act - 29 U.S. Code Chapter 18