What Is the ERISA Law?

ERISA, the Employee Retirement Income Security Act of 1974, is a federal law that establishes basic requirements for most retirement and health benefit plans offered by private-sector employers. If your employer offers a 401(k), pension or health plan, ERISA requires clear plan information, sets rules for who can join and when benefits vest, and holds the people managing plan assets to a fiduciary standard. It doesn’t require employers to offer a plan. The Department of Labor’s Employee Benefits Security Administration (EBSA) enforces it, and government and church plans are generally exempt.

If you need help planning and saving for retirement, try working with a financial advisor.

What Types of Plans Does ERISA Cover?

ERISA was enacted partly in response to concerns that workers could lose retirement benefits they had spent years earning, particularly when employer pension plans were poorly funded or terminated. The law established a federal framework for overseeing workplace benefit plans, including how they are administered and managed.

ERISA applies to several types of retirement plans, including traditional pensions and 401(k) plans. Traditional pensions, also called defined benefit plans, promise a retirement benefit based on a formula. Defined contribution plans, such as 401(k)s, accumulate savings through contributions and investment earnings. ERISA also covers certain employee welfare benefit plans, including employer-sponsored life and disability insurance.

One important distinction is that ERISA generally applies to employer-sponsored plans rather than individual retirement accounts (IRAs) that you open on your own. Those accounts are subject to separate federal tax rules. ERISA also works alongside the Internal Revenue Code, which governs much of the tax treatment of retirement savings.

What Rules Does ERISA Include?

ERISA establishes rules that affect how employers administer benefit plans and what employees are entitled to receive. These requirements cover several areas, including participation, vesting, plan disclosures and fiduciary responsibilities.

Eligibility and Participation

Companies can place limits on who can and can’t participate in their retirement plans, but only within the parameters set out by ERISA. In many cases, an employer can require employees to be at least 21 years old and complete one year of service before joining a retirement plan.

Different rules may apply to certain plans and part-time employees. However, companies generally can’t exclude older employees from joining simply because they are approaching retirement.

Benefit Accrual and Vesting

ERISA also governs how your company can adjust the benefits you receive when you retire. For defined benefit plans, the company can change the rate at which you accrue benefits in future years, but it generally cannot reduce benefits you’ve already earned.

You’re immediately vested in any money you contribute to your retirement plan, along with the earnings on those contributions. Different vesting rules apply to contributions made by your employer, depending on the type of plan:

Defined benefit plans: Employers can generally use a five-year cliff schedule, where employees become fully vested after five years of service. Alternatively, they can use a graded schedule that provides at least 20% vesting after three years, increasing to 100% after seven years.
Defined contribution plans: For traditional 401(k) plans, employer contributions generally must become fully vested after three years under a cliff schedule or six years under a graded schedule. Certain employer contributions, including those made under some safe harbor arrangements, must vest immediately.

Keep in mind that being vested doesn’t necessarily mean you can access your retirement savings whenever you want. Separate rules govern when you’re allowed to withdraw funds from your retirement plan.

Plan Disclosures and Benefit Claims

ERISA gives employees certain rights when it comes to understanding and accessing their benefits. Plan administrators generally must provide a summary plan description that explains how the plan works, including eligibility requirements and procedures for claiming benefits.

If a retirement or health insurance claim is denied, ERISA requires plans to offer an appeals process. Participants may also have the right to take legal action to recover benefits or address violations of the law.

Fiduciary Responsibilities

Another important aspect of ERISA is its fiduciary requirements. Individuals responsible for managing plan assets must act prudently and in the best interests of participants and beneficiaries.

These responsibilities apply to decisions involving plan investments, fees and the management of retirement savings. Fiduciaries who breach their duties may be held personally responsible for losses resulting from those violations.

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What Other Provisions Have Been Added to ERISA?

The Consolidated Omnibus Reconciliation Act (COBRA) was passed in 1985. This provision ensures that if you lose health insurance coverage because your employment ends, you can extend it. You’ll pay 100% of the premium, including anything the company used to pay, plus an administrative fee.

The second addition is the Health Insurance Portability and Accountability Act (HIPAA.) Passed in 1996, this revision to ERISA extended new protections to those getting their health insurance through their employer. HIPAA limits exclusions for pre-existing conditions. It also protects employees and dependents from discrimination based on health status. Employees also have the right to purchase health coverage after COBRA eligibility is up.

ERISA and Small Businesses

For small business owners, understanding ERISA is essential if they offer retirement plans, health insurance, or other welfare benefit plans, as it governs how these plans should be managed and what disclosures are necessary. ERISA requires that plan administrators act in the best interest of participants, meet certain funding requirements and provide transparency through regular reports and documents.

Failure to comply with ERISA can lead to fines and legal complications, making it crucial for small businesses to adhere to its regulations or consult a professional. Additionally, ERISA mandates fiduciary responsibilities, meaning that anyone managing plan assets must do so responsibly and solely in the interest of the plan participants. While ERISA does not require employers to offer benefits, for those who do, it sets guidelines on plan details, reporting, and fiduciary conduct to safeguard employee benefits, which can help build trust and loyalty within a small business team.

Bottom Line

ERISA is a law that governs how companies must administer health and retirement plans that are offered to employees. EBSA, a part of the Department of Labor, enforces the law. Employees can contact a DoL office to file complaints under ERISA. Lawyers who specialize in ERISA cases can also help you, especially the more complicated your case becomes.

Retirement Investing Tips

If you’re thinking about retirement, consider using a financial advisor to help you figure out how to get there. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Knowing exactly how much money you’ll have in retirement is key, so don’t forget about the money you’ll be getting from the government each month. You can use a free Social Security calculator to determine how much you can expect to receive from the government benefit.
SmartAsset’s retirement planning checklist can help you figure out what you still need to do to get ready for retirement. It includes steps like taking inventory of your assets, If you have a lot of items unchecked, start thinking about what you can do to get on track.