ERISA stands for the Employee Retirement Income Security Act of 1974, which was a sweeping federal law that created the Individual Retirement Arrangement (IRA), as well as established a set of rules for pension plans and other employee benefit plans to qualify for preferential tax treatment.
The term “qualified plan” as we use it today, in the pension and employee benefit context, generally means the plan in question meets the requirements for favorable tax treatment under ERISA.
While employers are not obligated to establish a pension plan for workers (some narrow-margin businesses would find this to be very difficult if it did!), employer-sponsored pensions must meet certain criteria under ERISA to qualify for a full tax deduction for the employer and tax-favored status for the employee, as well. Among these requirements:
- Workers must be vested in their pensions within a certain number of years.
- Traditional pension plans must calculate retiree benefits based on the joint life expectancies of a married couple, and not just on one spouse, unless both spouses specifically waive this benefit (in exchange for a higher initial payout).
ERISA also established funding standards for sponsors of traditional, defined benefit pension plans.
Additionally, ERISA formally established the Pension Benefit Guaranty Corporation – a quasi-government entity that steps in to take over pensions when a given plan becomes insolvent and cannot pay expected benefits. This way, retiree incomes are more secure: If a pension should fail, the PBGC will pay pension obligations, up to a certain monthly amount.
If you sponsor any kind of traditional defined benefit or defined contribution pension, plan, you must file a Form 5500 with the Department of Labor.
ERISA also requires you to provide plan summaries to all plan participants. On request, plan sponsors must provide all participants with calculations of accrued and/or vested benefits earned in their pensions.
ERISA also holds plan investment managers, trustees and sponsors to a fiduciary standard. That’s the highest standard of care, fair dealing and utmost good faith recognized under the law.
This high standard imposed on plan sponsors benefits workers, but it also creates an elevated level of risk to the employer in the form of potential liability for failures to live up to that exacting standard. For this reason, many plan sponsors also carry Directors & Officers’ Liability Insurance and employment practices liability insurance to protect the company officers and the company itself from liability arising from errors and omissions related to the benefit.
Later amendments to ERISA prohibits employers from discriminating against lower-paid workers. Congress intended the bulk of ERISA’s tax benefits to go to lower to middle class employees. Anti-discrimination rules and so-called “Top Hat” rules that prohibit managers from fully participating in plans unless the plan gets sufficient participation from the rank and file.
ERISA provides similar benefits and conditions to medical plans. If an employer wants the benefit of a full tax deduction for medical plans as part of its compensation package, it must offer the benefit to all full-time employees and not just to executives and management.
The well-known COBRA, or Consolidated Omnibus Budget Reconciliation Act of 1985, amended ERISA to require employers to provide workers who leave the company the option of continuing to remain on board with their current health insurance plan for a limited period of time.
HIPAA, or the Health Insurance Portability and Accountability Act of 1986, also amends ERISA to prevent health carriers from discriminating against individuals with pre-existing conditions.