The Employee Retirement Income Security Act of 1974 ( ERISA ) (Pub.L. 93-406, 88 Stat. 829, enacted September 2, 1974) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure to them of financial and other information concerning the plan; by establishing standards of conduct for plan fiduciaries; and by providing for appropriate remedies and access to the federal courts.
ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself.
Responsibility for the interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.
History
The history of ERISA can be said to have begun in 1961 when President John F. Kennedy created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker Corporation, an automobile manufacturer, closed its plant in 1963; the pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions. The company created three groups. Group 1 consisted of 3,600 workers who reached the retirement age of 60. They got full pension benefits. Group 2 consisted of 4,000 workers, aged 40–59, who had ten years with Studebaker. They got lump sum payments that roughly equated to 15% of the actuarial value of their pension benefits. Group 3 was a residual group of 2,900 workers with no vested pension rights. They got nothing.
In 1967, Senator Jacob Javits proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and labor unions, both of whom sought to retain the flexibility they enjoyed under pre-ERISA law.
A turning point in the history of ERISA came in 1970, when NBC broadcast Pensions: The Broken Promise , an hour-long television special that showed millions of Americans the consequences of poorly funded pension plans and onerous vesting requirements. In the following years, Congress held a series of public hearings on pension issues and public support for pension reform grew significantly.
ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2 , 1974 — Labor Day. In the years since 1974, ERISA has been amended repeatedly.
Coverage
Pension plans
ERISA does not require employers to establish pension plans. Likewise, as a general rule, it does not require that plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan once it has been established.
Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements.
ERISA also regulates the manner in which a pension plan may pay benefits. For example, a defined benefit plan must pay a married participant's pension as a "joint-and-survivor annuity" that provides continuing benefits to the surviving spouse unless both the participant and the spouse waive the survivor coverage.
The Pension Benefit Guaranty Corporation was established by ERISA to provide coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants. Later amendments to ERISA require an employer who withdraws from participation in a multiemployer pension plan with insufficient assets to pay all participants' vested benefits to contribute the pro rata share of the plan's unfunded vested benefits liability.
Health benefit plans
ERISA does not require that an employer provide health insurance to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one.
There have been several significant amendments to ERISA concerning health benefit plans:
- The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides some employees and beneficiaries with the right to continue their coverage under an employer-sponsored group health benefit plan for a limited time the occurrence of certain events that would otherwise cause termination of such coverage, such as the loss of employment.
- The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits a health benefit plan from refusing to cover an employee's pre-existing medical conditions in some circumstances. It also bars health benefit plans from certain types of discrimination on the basis of health status, genetic information, or disability.
Other relevant amendments to ERISA include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.
During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees limited or eliminated those benefits. ERISA does not provide for vesting of health care benefits in the way that employees become vested in their accrued pension benefits. Employees and retirees who were promised lifetime health coverage may be able to enforce those promises by suing the employer for breach of contract, or by challenging the right of the health benefit plan to change its plan documents in order to eliminate those promised benefits.
Pension vesting
Before ERISA, some defined benefit pension plans required decades of service before an employee's benefit became vested. It was not unusual for a plan to provide no benefit at all to an employee who left employment before retirement (age 65 or perhaps age 55), regardless of the length of the employee's service.
As of 2007, employees' benefits in a defined benefit pension plan must become vested at 100% after five years or under a seven-year graded-vesting schedule (20% a year for each year of service beginning with the third year of service and ending with 100% after seven years).
Under the Pension Protection Act of 2006, employer contributions made after 2006 to a defined contribution plan must become vested at 100% after three years or under a six-year graded-vesting schedule (20% a year for each year of service beginning with the second year of service and ending with 100% after six years). Different rules apply with respect to employer contributions made before 2007. Employee contributions are always 100% vested.
Pension funding
Under ERISA, minimum funding requirements were established for defined benefit plans. By their nature, defined contribution plans are always fully funded, even if the employee has not yet become vested in the employer contributions.
Before the Pension Protection Act (PPA), a defined benefit plan maintained a "funding standard account", which was charged annually for the cost of benefits earned during the year and credited for employer contributions. Increases in the plan's liabilities due to benefit improvements, changes in actuarial assumptions, and any other reasons were amortized and charged to the account; decreases in the plan's liabilities were amortized and credited to the account. Every year, the employer was required to contribute the amount necessary to keep the funding standard account from falling below $0 at year-end.
In 2008, when the PPA funding rules went into effect, single-employer pension plans no longer maintain funding standard accounts. The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called "at-risk status").
The PPA has different funding requirements for multiemployer pension plans, which preserve most of the pre-PPA funding rules including the funding standard account. Under PPA, increases and decreases in the plan's liabilities will be amortized, but the amortization period for benefit improvements adopted after 2007 will be shortened. As with single-employer plans, multiemployer pension plans that are significantly underfunded are subject to restrictions. The restrictions, which may limit the plan's ability to improve benefits or require the plan to reduce employees' benefits, vary depending whether a pension plan's funding status is termed "endangered", "seriously endangered", or "critical". The restrictions accompanying each deficient funding status are progressively more severe as funding status worsens.
ERISA pre-emption
ERISA Section 514 preempts all state laws that relate to any employee benefit plan , with certain, enumerated exceptions. The most important exceptions — i.e. state laws that survive despite the fact that they may relate to an employee benefit plan — are s
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