When Congress enacted the Employee Retirement Income Security Act (ERISA) in 1974, it sought to balance two competing concerns:
To meet these different goals, ERISA imposed certain disclosure obligations on employers that maintain employee benefit plans (as defined in the law).
Massachusetts law, on the other hand, seeks to ensure that employees are given the option of healthcare coverage in the first place.
ERISA does not require an employer to provide health-related benefits, rather, it regulates how an employer must operate a benefit plan if it chooses to have one. However, under a Massachusetts law that became effective in 2007, employers with 11 or more full-time employees must offer health plans to employees to give them the option of purchasing health coverage on a pre-tax basis. If an employer fails to provide a health plan, it may be required to pay a surcharge if their employees rely heavily on the state’s healthcare option.
ERISA governs how an employer must run its plan to protect the interests of employees and other plan beneficiaries. It defines an “employee benefit plan” as either an “employee welfare benefit plan” or an “employee pension benefit plan.” This definition does not include:
An employee welfare benefit plan includes the following plans maintained by an employer for the benefit of its employees or their beneficiaries:
Several other types of plans may qualify as an employee welfare benefit plan. However, an employer should be mindful that certain plans that implicate these benefits are not considered employee welfare benefit plans. The Department of Labor issued regulations that exempt certain arrangements from this definition, such as salary continuation programs in the event that a participant suffers a temporary disability.
An employee pension benefit plan is a plan, fund, or program that provides retirement income to employees or their beneficiaries, or results in a deferral of income by employees extending to the termination of employment or beyond. These plans include:
The recent Massachusetts healthcare reform requires employers to make certain disclosures to the state and contribute to their group health plans or be liable to pay a per-employee contribution to the state’s healthcare trust fund.
Additionally, ERISA imposes certain obligations on employers that sponsor an employee benefit plan, including:
According to Massachusetts law, an employer must not only offer to its employees a group health plan, but it must also make fair and reasonable premium contributions to the plan or else pay an annual per-employee amount – i.e., a "fair share contribution" – to the state’s healthcare trust fund. The maximum annual fair share contribution amount is $295 per full-time employee. The fair share contribution payments, if owed, must be made to the healthcare trust fund on a quarterly basis (i.e., up to $73.75 per full-time employee per quarter).
Massachusetts regulations state that an employer must offer to make a premium contribution of at least 33% of the cost of its employer-sponsored group health plan offered to full-time employees.
Under ERISA, plan sponsors have the obligation to fund certain employee benefit plans. The law requires that employee pension benefit plan assets be held for the benefit of the participants and beneficiaries. An informal promise to pay an employee when he retires may subject the employer to ERISA’s funding requirements. In addition, defined benefit pension plans and certain defined contribution plans must meet minimum funding levels to pay participants or their beneficiaries the retirement benefits promised to them under the plan. Most welfare benefit plans are not subject to ERISA’s funding requirements, although ERISA requires that assets intended to fund benefits be set aside for participants and beneficiaries.
All plans subject to ERISA must be in writing. If an employer fails to maintain a written plan, it may be required to pay a fine. Even if an employee benefit plan is not in writing, however, it is still subject to ERISA’s other requirements.
ERISA requires the plan sponsor to maintain a plan document and to explain the plan to participants in a summary plan description. A summary plan description is generally a summary of the terms of the plan. It must be drafted in a manner that may be understood by the average plan participant. A summary plan description also must contain certain provisions, including a statement of ERISA rights and claims review procedures. The employer may store benefit plan documents in an employees’ personnel file so long as the documents do not include personal medical information of the employee.
A summary plan description is typically the only document a participant receives regarding his or her benefits. Some courts have determined that a participant may sue based on the terms of the summary plan description, even when its terms conflict with the actual terms of the plan. For this reason, summary plan description should be carefully drafted.
If a participant requests documents used by the employer to operate the plan, the documents must be provided within 30 days of the request. Failure to provide the documents within this time period may result in a fine of up to $127 per day.
There are numerous other disclosures that may be required for various employee benefit plans, including notices regarding blackout periods, summary annual reports, and COBRA notices.
Under Massachusetts law, the employer must submit an annual “Employer Fair Share Report” to the Massachusetts Division of Unemployment Assistance (DUA). In this report, the employer discloses its:
DUA uses the employer’s self-reported data to determine whether the employer owes a per-employee contribution to the Commonwealth’s healthcare trust fund. Any information filed by the employer may be audited or otherwise validated by DUA or another Massachusetts agency. The employer may report this information online at:
Most ERISA plans are required to file a Form 5500 with IRS. This requirement does not apply to unfunded or fully insured plans (or a combination) with less than 100 participants. Failure to file a Form 5500 could result in the imposition of a penalty of up to $2,400 per day. Sponsors of ERISA plans may take advantage of the Department of Labor’s Delinquent Filer Voluntary Correction Program to reduce the penalty for failure to timely file a Form 5500.
A sample Form 5500 is available at:
Employers should consult with counsel to determine if any additional reporting requirements apply to their benefit plans (including certain reporting obligations to the Pension Benefit Guaranty Corporation).
Under ERISA, any individual who administers an employee benefit plan must comply with the statute’s fiduciary responsibility provisions. These individuals must manage the benefit plans solely in the interests of the participants and beneficiaries. Fiduciaries may be personally liable for losses to a plan.
ERISA gives participants or beneficiaries the right to sue the employer for benefits due under the plan’s terms. It further provides penalties for the plan administrator’s failure to provide requested documents or required notices. Participants may also sue a plan administrator for failing to manage the plan in the participant’s interest. Lawsuits under ERISA must be brought in federal court, rather than state court. ERISA does not give a participant a right to a jury trial; therefore, a judge decides most cases.
The Internal Revenue Code governs most of the requirements for employee benefit plans and imposes tax consequences for noncompliance with the rules. In addition, ERISA imposes certain requirements that, if ignored, may create give rise to legal claims. These requirements include:
Insured welfare benefit plans must also comply with state insurance laws.
ERISA also prohibits pension benefits from being assigned or transferred other than to the participant or a beneficiary. This rule includes exceptions: the IRS may garnish the plan account or a qualified domestic relations order (QDRO) may apply to the account.
A qualified domestic relations order (QDRO) is a court ruling that awards pension benefits to a non-participating spouse or former spouse. Not all state court divorce orders meet the requirements of a QDRO. Only state court orders that comply with the IRS and ERISA rules for QDROs will permit a distribution. Generally, in order to be a QDRO, the domestic relations order must be a judgment from a court, signed by a judge, which relates to child support, alimony payments or marital property rights under state domestic relations law.
Furthermore, it must specify certain things, including:
In addition, the order cannot require the plan to make payments in a form or a manner for which the plan does not provide. It is important that employers be sure that court orders specifically comply with the QDRO rules before allowing a distribution from a qualified pension plan.
The Internal Revenue Code also imposes strict requirements on employee benefit plans that are similar in many ways to the ERISA requirements. Failure to satisfy the Internal Revenue Code’s requirements may result in adverse tax consequences.
The Department of Labor’s (DOL) recently released guidance on cybersecurity best practices for plans covered by ERISA, which makes it clear that plan sponsors, service providers and participants share responsibility for protecting plan accounts. The guidance includes tips for hiring service providers, cybersecurity program best practices and online security tips. It also provides a best practices roadmap to follow. Some action items employers can take as a best defense against fiduciary litigation and DOL investigations are:
When selecting and using third-party providers, you should conduct due diligence to identify service providers with strong established cybersecurity practices. The DOL recommends that plan sponsors inquire about a service provider’s cybersecurity standards, policies and practices, which also should include regular audits by an outside auditor. Contract with caution. Look out for contract provisions that limit the liability of the service provider, while simultaneously trying to include provisions that provide you with greater protection. For example:
As a plan fiduciary, you have an obligation to mitigate cybersecurity risks. As mentioned previously, when hiring a service provider, you should make certain the provider has adopted a strong cybersecurity program. A strong program identifies and assesses internal and external cybersecurity risks that aim to breach the confidentiality, integrity or availability of stored nonpublic information. Components of an effective policy include:
Retirement plan participants and beneficiaries share accountability for maintaining the security of their retirement account information. Plan participants and beneficiaries who check their retirement accounts online should be educated on how they can reduce the risk of fraud and loss. In its guidance, the DOL provides the following tips:
It is recommended that plan sponsors, service providers and participants rely on the DOL’s guidance to establish a minimum threshold for cybersecurity compliance. Plan sponsors should establish consistent guidelines for vetting third-party providers and, as with any fiduciary decision, should carefully document the decision-making process. Further, plan sponsors should not limit compliance with these cybersecurity practices to ERISA-covered retirement plans; as a best practice, all ERISA-covered plans for which the plan sponsor has a fiduciary duty should fall under the policy’s umbrella.
This chapter is a summary of the key requirements and obligations ERISA imposes on employers. Additional information is available at:
An employer may also want to consult with an ERISA attorney.
For more information on Massachusetts healthcare reform, go to: