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The Employee Retirement Income Security Act (ERISA) is a federal law that governs employee benefit plans. Does ERISA apply to your organization? If you want to know the ins and outs of the act and its key components, read along.

What is the Employee Retirement Income Security Act (ERISA)?

The Employee Retirement Income Security Act of 1974, commonly known as ERISA, is a federal tax and labor law that establishes minimum standards for pension and health care plans in the private sector. The act contains rules on the federal income tax effects of transactions associated with employee benefit plans.

The Depart of Labor’s Employee Benefits Security Administration, the Treasury Department’s Internal Revenue Service and the Pension Benefit Guaranty Corporation all administer ERISA.

Why is the Employee Retirement Income Security Act (ERISA) Important?

ERISA was established due to concerns about private pension plan fund mismanagement and abuse. Its main purpose is to protect employees and their beneficiaries enrolled in benefit plans.

How Does the Employee Retirement Income Security Act (ERISA) Protect Employees?

There are a number of ways that ERISA protects employees. For example, standards are set to combat mismanagement and abuse. These standards then provide transparency and protection of welfare plans.

  • Mismanagement and abuse. ERISA puts parameters in place to mitigate risks for employees with benefit plans. These dictate that plan/fund managers act in the best interest of the enrollee/insured.
  • Transparency and accountability. The act ensures that participants have information about their plan(s), such as setting minimum standards to participate, vesting and fiduciary responsibilities.
  • Protection. ERISA protects “welfare plans,” or funds such as medical, hospital care and unemployment benefits. It requires such plans to include the fiduciary names, responsibilities, claims procedures, the privacy of health information, portability and benefit payments.

How Does the Employee Retirement Income Security Act (ERISA) Affect Healthcare Plans?

ERISA covers the majority of health care plans found in the private sector. The act requires that plans provide plan information, Consolidated Omnibus Budget and Reconciliation Act (COBRA)and Health Insurance Portability and Accountability Act (HIPAA).

Plan Information

ERISA requests that all participants receive important information in writing about each plan such as plan rules, financial information and documents on the operation and management of the plan. For example, a summary of the plan, also known as the summary plan description (SPD) is a document required under the act. The documents are to be provided to employees at no cost. Required information includes the plan name, employer’s name and address, plan administrator’s name and contact information, ERISA disclosures, grievance and/or appeal process, employee eligibility requirements, how benefits are calculated and paid and when vesting is applicable.

Consolidated Omnibus Budget and Reconciliation Act (COBRA)

Amended in 1986, ERISA requires that employers provide temporary continuation of group health care coverage (COBRA) for certain circumstances for current and/or former employees. For example, employees who experience a reduction in hours can continue with their group health benefits for a certain period. The premiums are the responsibility of the employee in addition to a 2% administrative fee. Employers are required to provide notification of this benefit.

Health Insurance Portability and Accountability Act (HIPAA)

Amended in 1996, HIPAA plan participants and their beneficiaries receive rights and protections in group health plans. This act protects participants by prohibiting discrimination and allows for special enrollment. For example, a participant who may have previously declined health care coverage may now enroll during the plan’s open enrollment period. Additionally, employees and/or their dependents who lose coverage may request enrollment within 30-days, or 60-days if coverage is lost under a state Children’s Health Insurance Program (CHIP) or Medicaid program.

How Does the Employee Retirement Income Security Act (ERISA) Affect Retirement Plans?

Similar to health care plans, ERISA requires retirement plans to provide plan information. However, providing fiduciary responsibilities and insurance are also required by the act as it relates to retirement plans.

Fiduciary Responsibilities

A fiduciary is someone who manages funds and/or property on the behalf of someone else. ERISA protects employee retirement plans and/or pensions by requiring that “those persons or entities who exercise discretionary control or authority over plan management or plan assets, have discretionary authority or responsibility for the administration of a plan, or provide investment advice to a plan for compensation or have any authority or responsibility to do so are subject to fiduciary responsibilities,” as per the Department of Labor.

ERISA requires that there be no conflict of interest to minimize the risk of the participant and their beneficiaries by requiring diversifying  plans, and adhering  to the items outlined in the plan documents.

Insurance

ERISA requires that the individuals who are responsible for the funds and property in the plan to be covered by a fidelity bond, a type of insurance that covers policy holders for their losses due to fraud. For example, wrongful conversion, misappropriation, forgery, theft and embezzlement are types of fraudulent behavior that would be covered.

The fidelity bond is not the same as fiduciary liability insurance. Fiduciary insurance covers the fiduciary, while fidelity bonds insure the plan.

Anyone responsible for the plan funds or property is required to be bonded unless the plan is exempt under ERISA. To obtain a bond, visit the Department of Treasury Listing of Approved Sureties, Department Circular 570.

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Questions You’ve Asked Us About the Employee Retirement Income Security Act (ERISA)

Plans covered by ERISA are employer-sponsored, like retirement plans (e.g 401(k)). Plans that may be exempt are government entities and churches.

There are several ERISA violations. Failure to provide plan documents, improperly denying benefits to current and former employees and breach of fiduciary responsibilities are a few examples.

Employer-sponsored plans are monitored by ERISA.

Wendy is an HR professional with over 10 years of HR experience in education and health care, both in the private and non-profit sector. She is the owner of KHRServices, a full service HR management agency. She is also SHRM and HRCI certified, serves as a HRCI Ambassador, and voted 2021 Most Inclusive HR Influencer.

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