When Congress enacted the Employee Retirement Income Security Act (ERISA) in 1974, it wanted to balance two competing concerns:
Therefore, while providing plan participants with certain causes of action to sue their employers in federal court (or, sometimes, state court) if they are not provided the benefits they were promised and imposing certain disclosure obligations on employers that maintain “employee benefit plans” (as defined in the law), ERISA also provides nearly exclusive regulation of such plans. ERISA preempts state laws that attempt to regulate employee benefit plans, except certain laws that regulate insurance, securities or the banking industry. Therefore, any claim that an employee may bring that relates to an employee benefit plan (other than the exceptions noted below), such as a claim for benefits or for breach of fiduciary duty, must be brought under ERISA.
The U.S. Supreme Court ruled in 2013 that individuals in legal same-sex marriages are required to be treated as married under federal law. The IRS has issued a notice clarifying that qualified retirement plans must comply with the decision. These requirements apply only to qualified retirement plans. However, non-qualified plans, severance agreements, incentive plans and other agreements often include the similar terminology in discussing employees and relationships. Thus, employers should take care to consider its uses of these terms.
ERISA defines an “employee benefit plan” as either an “employee welfare benefit plan” or an “employee pension benefit plan.” An employee benefit plan does not include, however:
An employee welfare benefit plan includes the following plans maintained by an employer for the benefit of its employees or their beneficiaries:
This list is not all-inclusive. Furthermore, the Department of Labor has issued regulations and guidelines that make an exception of programs or arrangements that have these benefits as a part of the program or arrangement. The programs or arrangements might include salary continuation programs in the event 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:
ERISA imposes certain obligations on employers that sponsor an employee benefit plan, including:
In addition, ERISA (and the Internal Revenue Code, if the employer wishes to retain the plan’s tax-qualified status) requires that employee benefit plans contain a number of provisions. These obligations are discussed herein.
Plan sponsors have the obligation to fund defined benefit plans and money purchase pension plans. Unless benefits are paid for through insurance contracts, employee pension benefit plan assets must be held in trust for the benefit of the participants and beneficiaries in order to pay the benefits when they come due. An informal promise to pay an employee when he retires may subject the employer to ERISA’s funding as well as other ERISA requirements. In addition, retirement 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 must be contained in trust or funded by insurance.
All plans subject to ERISA must be in writing. An employee benefit plan that is not in writing (such as an informal promise to pay retirement benefits) is still subject to ERISA, however. ERISA requires the plan sponsor to maintain a plan document and to explain the plan to participants in a summary plan description. These summary plan descriptions are generally a summary of the plan and must be drafted in a manner calculated to be understood by the average plan participant. Summary plan descriptions also must contain certain provisions, including a statement of ERISA rights and claims review procedures. Summary plan descriptions are more than a summary of plan terms, however. They are typically the only document a participant receives that describes the benefits and some courts have determined that a participant can sue based on the terms of the summary plan description, even if the terms conflict with the plan document. For this reason, great care should be taken in drafting summary plan descriptions.
If a participant requests documents used by the plan administrator to operate the plan, they must be provided within 30 days of the request. Failure to provide the documents within this time period could result in a fine of up to $119 per day.
Most ERISA plans are required to file a Form 5500 with IRS. Excepted from this filing requirement are unfunded or fully insured welfare 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 $2,233 per day.
Under ERISA, any individual who is able to make decisions in administering an employee benefit plan or who handles the assets of the plan is a fiduciary and must comply with the statute’s fiduciary responsibility provisions including certain bonding requirements. Fiduciaries must perform their duties prudently and solely in the interests of the participants and beneficiaries. Fiduciaries can be liable for losses to a plan.
ERISA gives participants or beneficiaries the right to sue the employer or the plan for benefits due to them under the plan’s terms and for penalties for the plan administrator’s failure to provide requested documents. Participants may also sue for breach of fiduciary duty. Most lawsuits under ERISA must either be filed in federal court or the defendant will be allowed to have the case sent to federal court, a process called removal. ERISA does not give a participant a right to a jury trial, so most cases are decided by a judge.
Most of the substantive requirements for employee benefit plans are governed by the Internal Revenue Code. Aside from the tax consequences for failure to comply with the Code, ERISA imposes certain requirements that if not complied with could allow an individual to file a lawsuit against the plan, employer and/or fiduciaries. These requirements include:
Insured welfare benefit plans must also comply with state insurance laws.
Furthermore, an important provision of ERISA is that pension benefits may not be assigned or transferred other than to the participant or a beneficiary. The exceptions to this rule are if the IRS garnishes the plan account or a qualified domestic relations order (QDRO) is submitted. Not all state court divorce orders that award pension benefits to the non-participating spouse meet the QDRO requirements and, until these orders are revised to meet the requirements, a distribution should not be allowed. Only state court orders that comply with the IRS rules and parallel ERISA requirements will allow such 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:
Also, 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.
This chapter is intended as a brief overview of some of the requirements and obligations ERISA imposes on employers. It is by no means exhaustive. If more information is needed, consult an ERISA attorney or visit:
Policies and Forms
Chapter 13: Benefits