What Is Employee Retirement Income Security Act (ERISA)?

The Employee Retirement Income Security Act (ERISA), enacted in 1974, is a federal law that sets minimum standards for pension plans in private industry. It also regulates employee benefit plans provided by government agencies or in the public sector. ERISA applies to all forms of profit-sharing and retirement plans; it also requires most employers who offer pensions to put their pension plans in writing. ERISA does not cover health insurance, disability insurance, or accident insurance. ERISA is a complex law that impact as both employers and employees.

Who Is Covered by the ERISA Law?

The ERISA law covers anyone who participates in a company pension plan or other employee benefit plan. This includes employees, retirees, and their beneficiaries. ERISA does not cover ex-employees and their beneficiaries. This law does not apply to federal employees, state employees, or public school teachers. Some states do regulate pensions of state and city workers; however these regulations vary from state to state.

 Why Do You Need to Know About This Law?

As an employer, it is important to be familiar with the basics of ERISA. This will help you understand your responsibilities as an employer and ensure that your company’s pension and other employee benefit plans are in compliance with the law. Employees should also be aware of their rights under ERISA, in case they have any questions or concerns about their pension or benefit plan.

What Are the Rules Included in ERISA? 

ERISA sets minimum standards for pension plans including: vesting, funding and reporting requirements. As an employer why do you need to know about this law? There are many reasons that employers should understand what the ERISA law covers and how it applies to them. Perhaps most importantly from a legal perspective, since ERISA preempts all state laws regulating benefits plans, employers need to know which state laws apply and if their plan complies with those requirements. If employees are covered by ERISA, then the employer is automatically covered as well; no separate action need be taken. However, employers who don’t offer pension plans may wish to consider whether they should provide any benefits at all. Which benefits are provided could affect hiring, productivity and morale. There are many reasons an employer may want to stop providing certain benefits; the most common reason is cost. If this is the case, it’s best to get out of the business altogether rather than provide an inferior benefit plan. This includes terminating the plan completely or simply choosing not to carry it going forward. If the employer stops providing a benefit altogether, that’s considered termination, and it must be communicated to employees in writing within 30 days of the date the plan terminates. Only an actuary can determine specific contribution amounts, but employers must contribute enough to keep their plans “funded” at all times. Contributions are based on several factors, including the number of employees in the plan, their ages and salaries. ERISA imposes a wide range of administrative and reporting requirements on employers who offer pension plans. Among other things, they must file an annual report with the Department of Labor (DOL) disclosing certain financial and other information about the plan. This report is known as Form 5500. ERISA also requires employers to provide participants with a Summary Plan Description (SPD), which summarizes the key features of the plan. The SPD must be written in a way that is easy for employees to understand.

How Does the ERISA Law Affect Employees? 

Before you can understand how ERISA affects employees, you must know what ERISA is. ERISA is a federal law that regulates any type of benefit plan for employees. It protects those who participate in the plan from being taken advantaged of by anyone involved with the plan. ERISA sets minimum standards for private-sector pension plans and establishes reporting, disclosure and fiduciary responsibilities under those plans. ERISA requires that pension plans are adequately funded, benefits are timely paid, and that certain records are kept. ERISA applies to all private-sector employees who receive a regular paycheck from an employer. This includes regular part-time workers, seasonal workers, temporary workers or independent contractors who have been terminated by their employer under “at will employment” laws. What does all of this mean for employees? Simply put, it means that employers must adhere to certain rules and regulations when it comes to employee benefits plans. If they do not, employees have the right to take legal action. These rules protect employees from being taken advantage of by their employer or anyone else involved in the benefit plan. These rules are set in place to ensure that benefits are distributed in a timely manner, and any discrepancies or theft are dealt with accordingly. Protections are also put in place to make sure employees receive all of their benefits without any complications. Employees who come under the ERISA law include:

  • Temporary workers
  • Seasonal workers
  • Part-time employees
  • Independent contractors who are terminated by an employer

When Does the ERISA Law Apply?

The Employee Retirement Income Security Act of 1974, or ERISA, applies to all benefit plans for employees that meet certain criteria. This includes:

  • Private-sector employers with more than one employee
  • Benefit plans that provide retirement income, medical care, or death benefits
  • Benefit plans that are funded by contributions from the employer or employee

ERISA does not apply to:

  • Governmental entities (federal, state, and local)
  • Churches and other religious organizations
  • Plans covering only employees of educational institutions
  • Plans covering only employees directly participating in the day-to-day management of the business (i.e., sole proprietors)

ERISA also does not apply to plans maintained outside of the US, unless they are offered to employees who primarily work in the US.

When Is a Benefit Plan Considered “Under ERISA”? 

A plan is considered “under ERISA” when it meets two criteria:

  • The employer uses the services of a third party to manage, contribute toward, or make decisions about the plan (i.e., insurance companies)
  • Contributions are made by employees or employers on behalf of employees

The Bottom Line

As a potential employee, you have the right to review the benefit plans your potential employer offers. You also have the right to know if your benefits are, or will be, under ERISA protection. If you are not satisfied with the plan, or if you discover that it is under ERISA protection, speak to your employer about making changes. If you feel your employer has violated the terms of the plan or acted in a way that is unbecoming of an administrator of an ERISA-protected benefit plan, it may be time to contact an attorney. In many cases, you should not have to pay for legal representation. Many times your attorney will take your case on a contingency basis, which means that they will only get paid if the court awards damages.

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.
Employers are required to comply with certain rules when providing benefits or setting up plans. If your employer fails to meet these requirements, you may be able to take legal action.
ERISA protects individuals in pension and health plans by establishing rules for plan administration, funding, vesting, and disclosure.
Employees who work for private companies with 20 or more employees whose work regularly involves them in commerce between states are covered under ERISA.
Teachers, firefighters, and police officers employed by a state or local government; elected officials of the United States or any state; some railroad workers; some religious workers; U.S. citizens employed abroad; and individuals who only participate in their employer's day-to-day business operations (e.g., self-employed individuals) are not covered by ERISA.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.