Employee Retirement Income Security Act
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The Employee Retirement Income Security Act of 1974 (Pub.L. 93-406, 88 Stat. 829, September 2, 1974), commonly known as ERISA, is a United States federal statute which sets minimum standards for pension plans in private industry and provides for extensive rules on Federal income tax effects of dealings in connection with various employee benefit plans. ERISA was enacted to protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.
The interpretation and enforcement of ERISA is handled by the U.S. Department of Labor and the Internal Revenue Service.
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[edit] History
In 1974, Senator Jacob Javits and Congressman John N. Erlenborn led the charge to tighten regulations for pension vesting and funding.
Originally passed in 1974 (and amended from time to time) to deal with widespread concerns about the funding and vesting of defined benefit pension plans, today the most controversial provision of ERISA is the preemption of many state laws relating to insurance. Yale Law professor John Langbein argues that the Court has mistakenly construed trust law as limiting an employee's available remedies in ERISA cases, and that the Court has an impoverished view of equitable remedies (see below).
[edit] Coverage
ERISA requires pension plans to provide for vesting of employees' pension rights after a specified minimum number of years and to meet certain funding requirements. It also establishes an entity, the Pension Benefit Guaranty Corporation (PBGC), that will provide some minimal benefits coverage in the event that a plan does not, on termination, have sufficient assets to provide all the benefits employees and retirees have earned. Later amendments to the Act require employers who are withdrawing from participation in a multiemployer pension plan that has insufficient assets to pay all of employees' vested benefits to pay their pro rata share of that unfunded vested benefits liability.
ERISA does not, on the other hand, require employers to establish pension plans; instead it only applies to those plans that an employer has established. ERISA likewise does not, as a general rule, require employers that have established pension plans to provide any minimum level of benefits; instead it regulates the manner in which an employee can obtain vested rights to a pension and the manner in which pension benefits can be reduced because of events such as early retirement or return to work in the industry after retirement. ERISA does, on the other hand, require employers to provide some forms of benefits, such as joint and survivor annuities that allow married couples who have opted for such coverage to provide for continuing benefits to a surviving spouse, that plans might not have offered previously.
ERISA likewise does not require employers to provide any health insurance, but regulates the manner in which such health benefits plans operate. There have been a number of amendments to ERISA expanding the protections available to health benefit plan participants and beneficiaries. One important amendment, the Consolidated Omnibus Budget Reconciliation Act of 1985, better known as COBRA, provides some workers and their families with the right to continue their health coverage for a limited time after certain events, such as the loss of a job. Another amendment to ERISA is the Health Insurance Portability and Accountability Act, or HIPAA, which allows employees to obtain continued coverage for preexisting medical conditions in some circumstances when they move from one plan to another, prohibits some forms of discrimination in health coverage based on factors that relate to an individual's health, and requires stringent privacy protections for certain types of health information. Other important amendments include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.
Many employers that promised "lifetime" health benefits coverage to retirees have attempted to avoid those promises in recent years. ERISA does not provide for vesting of the right to future health care benefits coverage in the way that employees can obtain vested rights to future pension benefits. Employees and retirees who have been promised "lifetime" health benefits coverage may, on the other hand, be able to enforce such promises by suing the employer for breach of contract or by challenging the health benefits plan's right to change its plan documents to eliminate such benefits.
[edit] Funding, vesting and other pension protections
Before ERISA, some plans contained decade-long vesting rules. The risk of working up to retirement date only to lose all benefits because a worker was one day from vesting combined with extremely long vesting periods made benefits insecure. Today pension plan sponsors must either vest employer's contributions in defined contribution plans 100% after 5 years or in a 20% graded increment after 3 years so that 40% is vested after 4 years, 60% vested in 5 years, 80% vested after 6 years and full vesting occurs after 7 years in this graded schedule. If the plan is top heavy according to Section 416 of the IRC, the vesting period is faster. Funding is governed by the minimum funding standard account for defined benefit plans. Defined contribution plans are by definition fully funded at the start, even if the employee has yet to vest. 100% of employee contributions are 100% fully vested though.
Prior to the Pension Protection Act of 2006 ("PPA"), the funding rules required that pension plans keep a "funding standard account" ("FSA"). Keeping the FSA balanced entailed adding credits for employer contributions and charges for liabilities. The pre-PPA rules were more flexible, allowing plans 30 years to amortize "past service liabilities" (liabilities based on time worked before the plan was instituted). Beginning in 2008, the PPA funding rules go into effect, and these dispense with the FSA, requiring simply that plans stay fully funded or make up the difference in 7 years. "At-risk" plans are governed by even stricter rules. The changes in the rules regarding interest rates are also important. Under the PPA, pension plans can only use interest rates from AAA-grade corporate bonds or better, whereas previously, BBB-grade corporate bonds could be used. The lower the grade of the bond, the higher the interest rate, which as a result requires less cash. Requiring a higher grade bond essentially means requiring much more cash, since even very small changes in the interest rate used results in drastically different pictures of funding status. The new interest rate rules also allow only 24 months of interest rate "smoothing" (i.e. averaging), which means pension plans are much more subject to the volatility of the market. The pre-PPA rules allowed smoothing over 5 years.
[edit] ERISA preemption
ERISA Section 514 preempts all state laws that "relate to any employee benefit plan," with certain enumerated exceptions. The most important exceptions -- that is, state laws that survive despite the fact that they may "relate to" an employee benefit plan -- are state insurance, banking, or securities laws, generally applicable criminal laws, and domestic relations orders that meet ERISA's qualification requirements.
A major limitation is placed on the insurance exception, known as the "deemer clause," which essentially provides that state insurance law cannot operate on employer self-funded benefit plans. The Supreme Court has carved out another limitation on the insurance exception, in which even a law that regulates insurance will be preempted if it purports to add a remedy to a participant or beneficiary in an employee benefit plan that ERISA did not explicitly provide. See Aetna Health Inc. v. Davila, 542 U.S. 200 (2004).
[edit] Title I, Fiduciary liability and prohibited transactions
While employers bear investment risk of plan assets in defined benefit plans, employers also have fiduciary responsibility both to participants and to the plan for defined contribution plans. However, ERISA Section 404(c) provides the guidelines for employers who wish to offload the investment risk if they can provide a range of investment choices and give their employees sufficient control over their individual accounts. Title I also covers prohibited transactions and the ten percent limit on employer stock.
[edit] Title III, Enrollment of actuaries
This title creates the Joint Board for the Enrollment of Actuaries because ERISA pensions are jointly regulated by the Treasury and Labor Departments. The board administers two examinations to prospective actuaries. Once the two examinations are passed, the individual becomes an Enrolled Actuary.
[edit] Title IV, Plan termination
In a voluntary termination, the employer must purchase annuity contracts for all participants. Title IV governs how this is to be done. If the employer is solvent, it must provide for all accrued benefits; therefore all nonvested benefits become 100% vested upon termination. In a voluntary plan termination, the sponsor must either buy annuities from an insurer or be on the hook for the benefit payments. Even if the sponsor buys annuities to cover the benefits, the Department of Labor has regulations specifying a sponsor's duties in selecting a strong and sound company lest the sponsor remain liable if the insurer fails to pay benefits.
[edit] Non ERISA status and bankruptcy
Public Law 109-8 amended the Bankruptcy Code to exempt most retirement plans organized even those not subject to ERISA and accord them protected status as property that could be claimed as exempt by the debtor under the U.S. Bankruptcy Code.
Now most plans have the same protection as an ERISA anti-alienation clause giving these pensions the same protection as a spendthrift trust. The only area left unprotected are SIMPLE IRAs and SEP IRAs. The SEP is functionally similar to a self settle trust and a sound policy reason would exist not to shield SEPs, but many financial planners argue that a rollover (or direct transfer) from a SEP to a rollover IRA would give those funds protected status too.
[edit] Finding statutes
Portions of ERISA are codified in various places of the United States Code, including 29 U.S.C. ch.18, and Internal Revenue Code sections § 219 and § 408 (relating to the Individual Retirement Account) and sections § 410 through § 415, and § 4971, § 4974 and § 4975. A cross-reference between the sections of the ERISA law and the corresponding sections in the U.S.Code can be found at http://www.harp.org/erisaxref.htm.
