Next up in Otegrity’s labor law series: ERISA (Employee Retirement Income Security Act of 1974).
Why was ERISA enacted?
In the 1920s, the IRS was the primary regulator of private pensions plans. The Revenue Acts that were passed allowed employers to deduct pension contributions from corporate income, and allowed for the income of the pension fund’s portfolio to accumulate tax free. To qualify, a business’ retirement plans had to meet certain minimum employee coverage and employer contribution requirements. The participants of the plan would not receive money from the fund until their employer distributed it to them, provided the plan was tax qualified.
Sound vague? It was. So, in 1942, another Revenue Act was passed which provided stricter participation requirements and, for the first time, disclosure requirements. Soon it became too much for just the IRS to track. Thus, in 1959 the U.S. Department of Labor (DOL) started regulating employee benefit plans under the Welfare and Pension Plans Disclosure Act (WPPDA). This required plan sponsors to provide plan descriptions and give employees enough information to monitor their plans to prevent mismanagement and abuse of plan funds.
Still, WPPDA was limited in its scope. In 1963, Studebaker, a car manufacturing company, left 4000+ employees without access to their pensions. This made the headlines and caused the government to realize they needed to take further action. The company was forced to shut down its plant and an investigation began. It took over 10 years for the investigations to be completed which ultimately led to 3 bills being passed by Congress.
What is ERISA?
Signed into law by President Gerald Ford on September 2, 1974, ERISA set minimum standards for most voluntary retirement and health plans in the private sector to provide protection for employees on these plans. It required employers to provide participating employees with plan information, gave participants the right to sue for benefits and breaches of fiduciary duty, provided fiduciary responsibilities for those who manage and control plan assets, and required a grievance and appeals process to be established for plans.
ERISA has broadened the scope of information available to plan participants. It has also implemented healthcare plan enforcement that requires employers to manage funds exclusively for plan participants.
Who governs ERISA?
ERISA is governed by the US Department of Labor (DOL), the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC).
Title I- is governed by the US Department of Labor (DOL) and it incorporates the rules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement.
Title II- is governed by The Internal Revenue Service (IRS) which provides amendments to the Internal Revenue Code that mirrors several of the Title I rules.
Title III- is governed by both DOL and IRS, which concerns jurisdictional aspects and helps to coordinate enforcement and regulatory activities.
Title IV- is administered by Pension Benefit Guaranty Corporation (PBGC), which concerns the insurance of defined benefit pension plans.
In 1978, ERISA was reorganized in order to maintain a better structure for the plans ahead. As a result, the U.S. Department of Labor oversees reporting, disclosure and fiduciary requirements. The main reports include the Form 5500 Series, Form PR, and Form M-1.
Is your business subject to ERISA?
If your business has a retirement plan, yes! ERISA applies to private-sector companies that offer pension plans to their employees. This means that ERISA does not apply to church and government plans, though there are some exceptions to these exemptions. If you fail to comply with ERISA regulations, you could incur fees, lawsuits, and even jail time.
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