The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. ERISA requires plans to provide participants with plan information, including information about plan features and funding; establishes fiduciary responsibilities for those who manage and control plan assets; requires plans to establish grievance and appeals procedures for participants; and gives participants the right to sue for benefits and breaches of fiduciary duty.
While private sector pension plans have been in existence since the latter part of the 19th century, their period of greatest growth occurred following the decision by the Supreme Court in the Inland Steel Case of 1949. The Court upheld the ruling by the National Labor Relations Board that pension benefits constitute wages and are thus subject to collective bargaining, as are other conditions of employment. By 1974, nearly 31 million workers were covered by private pensions, with 27 million enrolled in defined benefit plans. Private retirement plans had become a major source of income for many retired workers.
In the early 1970s, the U.S. Senate held hearings on deficiencies in the pension system, which included the high rate of ineligibility for pension benefits among plan participants and the forfeiture of pensions even after many years of service. These hearings set the stage for the eventual passage of the ERISA. Among its other objectives, ERISA established the minimum standards employees must satisfy to ensure the receipt and protection of benefits when they either leave their jobs or die. Among other things, ERISA established participation rules and vesting requirements for pensions (and other covered benefit plans) to qualify for preferential tax treatment.
In 1974, ERISA established funding rules that in their most basic outline require sponsoring employers to calculate the present value of future payments the plan owes, plus the present value of future benefit payments the plan is likely to owe in the future. The plan sponsor then is required to compare those obligations with the value of the assets held by the plan. If the present value of the liabilities exceeds the value of the assets, a contribution is required. However, the act, and the rules promulgated to guide sponsors in compliance with the act, goes into extensive detail related to the assumptions to be used in valuation and the terms and conditions related to funding adequacy.
ERISA also sought to protect benefit plan assets by designating as fiduciaries those who control, manage, or provide investment advice relative to plan assets, subject to fiduciary responsibilities. The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the purpose of providing benefits and paying plan expenses. Fiduciaries are required to act prudently in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents and avoid conflicts of interest. Fiduciaries who do not follow the requirements stipulated may be held personally liable to restore any losses to the plan or to restore any profits made through improper use of plan assets.
To further protect the benefits promised to employees under a qualified pension plan, Title IV of ERISA established the Pension Benefit Guaranty Corporation to ensure the payment of plan benefits under specified conditions.
ERISA requires plan sponsors to provide to every participant in a retirement or health benefit plan, or a beneficiary receiving benefits under such a plan, a summary of the plan, called the summary plan description (SPD). The SPD must provide participants with information on what the plan provides and how it operates. It must provide information on eligibility to participate, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits. If a plan is changed, participants must be informed, either through a revised SPD or in a separate document. In addition to the SPD, the plan administrator must give participants a copy of the plan’s summary annual report each year. This report is a summary of the annual financial report, which most plans must file with the Department of Labor on Form 5500.
Initial ERISA regulations stipulated that most defined benefit plans should allow employees to participate on attaining the age of 25 or after the completion of 1 year of service, whichever comes later. Later, the Retirement Equity Act of 1984 required almost all plans to lower the age requirement to 21. ERISA also established rules related to an array of plan provisions, including vesting, breaks in service, survivor benefits, payout options, and many other plan features that are beyond the scope of this summary.
While most equate ERISA with pension plans, the act also covers self-funded welfare plans—for example a group health plan in which the organization pays the claims against the plan versus purchasing coverage through a third-party insurer. Historically, states have controlled traditional health insurance sold within a state. However, ERISA exempts those employers that “self-insure” their health benefit plans from state regulation, taxation, and control. Under these plans, the employer pays the health care claims directly, instead of purchasing an insurance policy to pay claims, and thus escapes state regulation of insurance.
The exemption from state regulation that ERISA provides self-insured plans has been an important feature for many large organizations that have operations in multiple states, enabling them to provide a common benefit plan for all employees versus purchasing plans on a state-by-state basis that comply with the requirements imposed by each state. In 1974, only 6 million Americans were insured through self-funded plans. Today, that figure stands at 55 million, or approximately 40% of all group health care coverage in the United States. Research indicates that the majority of employers that converted to self-insurance did so to avoid state regulations.
There have been a number of amendments to ERISA, expanding the protections available to health benefit plan participants and beneficiaries. One amendment, the Consolidated Omnibus Budget Reconciliation Act, provides 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, which provides protections for employees and their families who have preexisting medical conditions or might otherwise suffer discrimination in health coverage.
While ERISA has provided a set of standards and rules for plans to follow in order to receive favorable tax treatment, some critics have argued that the regulatory burden imposed by the funding rules of the act on defined benefit pension plans are at least in part responsible for the dramatic decline of such plans in favor of defined contribution plans. Others point to the act as weakening the ability of states to mandate various types of health care coverage for employers providing such benefits to workers in their states. Since ERISA preempts state control over self-funded health care programs, state legislatures that mandate coverage—for instance, coverage for same-sex partners or for mental health services—are unable to do so except for health insurance programs purchased by an employer from a third-party provider. As such, most of the largest employers are able to avoid the mandates to expand coverage sought by states through the protections afforded by the act.
Benefits, Employee; Moral Hazard; Pension Benefit Guaranty Corporation (PBGC); Pensions
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