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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated July 29, 2024 Part of the Series Guide to Employment LawAgencies and Entities
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The Employee Retirement Income Security Act (ERISA) is a federal law that protects the retirement assets of American workers. The law outlines rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. It also covers certain health plans.
Under the law, plan administrators must regularly inform participants about the plan. ERISA is enforced by the Employee Benefits Security Administration (EBSA), a unit of the U.S. Department of Labor (DOL).
ERISA was established by the federal government in 1974 and holds fiduciaries responsible for their actions as they relate to the maintenance of certain employer-sponsored retirement and health plans.
Plans that fall under its mandate include defined-benefit plans and defined-contribution plans, such as 401(k) plans, 403(b) plans, employee stock ownership plans (ESOPs), and profit-sharing plans. ERISA also covers certain private-sector health plans.
ERISA addresses fiduciary provisions and bans the misuse of assets through these provisions. Under ERISA, a fiduciary is anyone who exercises "discretionary control or authority over plan management or plan assets," including those who provide investment advice for the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan.
The law also sets minimum standards for participation, vesting, benefit accrual, and funding. ERISA also grants participants "the right to sue for benefits and breaches of fiduciary duty," according to EBSA.
To ensure that participants do not lose their retirement assets if a defined-benefit pension plan is terminated, or other circumstances (such as company bankruptcy) arise, ERISA guarantees payment of certain benefits through a federal agency known as the Pension Benefit Guaranty Corporation (PBGC).
Not every employer-sponsored retirement plan is subject to the terms of ERISA. ERISA does not cover plans set up or maintained by government entities and churches. Plans maintained outside the United States for nonresident employees are not covered by ERISA, either.
ERISA rules can be complicated. As such, they may deter some small business owners from setting up retirement accounts for their employees.
There are alternatives that allow small businesses to sidestep some of ERISA's complexity. For example, small businesses with 100 or fewer employees can offer SIMPLE IRAs to their employees. This type of tax-deferred retirement savings plan is covered by ERISA and doesn’t have the reporting and administrative burden that retirement plans such as 401(k)s do.
Employers must follow ERISA rules that dictate which employees are eligible and how a company handles employee contributions. They are also required to clearly spell out details of the plan's features with a summary plan description.
ERISA provides protections to workers who participate in various healthcare plans.
Under the law, plan administrators must keep participants updated about their plans, including:
The law was amended with the passage of the Affordable Care Act (ACA), which mandated that employers with 50 or more workers offer healthcare coverage. It capped out-of-pocket expenses and eliminated the denial of coverage due to preexisting conditions.
EBSA administers and enforces ERISA. To ensure compliance with ERISA, plan administrators must follow plan document terms and make deposits and deferrals on time. They must also submit notices, disclosures, and forms to participants, and update participants of any changes to the plan within mandated time frames.
Plan administrators may choose to manage the paperwork on their own. But if it proves to be too cumbersome, they may hire a third party to do the work for them. Doing so, however, doesn't absolve the administrator from their fiduciary responsibility to their participants.
Retirement accounts that qualify under ERISA are generally protected from creditors, bankruptcyproceedings, and civil lawsuits.
ERISA is the culmination of a series of laws that attempted to regulate pension plans. The impetus was a growing wave of public concern in the 1960s and 1970s that funds of private pension plans were being mismanaged and abused. Take, for example, the Teamsters' Central States Pension Fund, which had a history of questionable loans to sources with ties to Las Vegas casinos and real estate developments. And in 1963, when Studebaker closed its Indiana factory, more than 4,000 auto workers lost some or all of their pension plan benefits.
ERISA was signed into law on September 2, 1974 by President Gerald Ford, who said it "may finally give the American worker solid protection in his pension plan."
The law has gone through several changes since it was first enacted. For instance, lawmakers approved an amendment that lengthened the time a worker is allowed to be away from work before they lose out on their plan's vesting period. ERISA has also since created a process where, during divorce proceedings, a spouse may claim access to a participant's retirement benefits via a qualified domestic relations order (QDRO). The law has also modified healthcare. For example, COBRA, which was passed in 1985, ensured the continuation of health insurance coverage after an individual's employment situation changes.
ERISA is very broad. It applies to essentially anyone with a qualified plan who works for a partnership, limited liability company, S-corporation, C-corporation, or nonprofit organization. It even covers businesses with only one employee. However, governmental and religious organizations aren't typically covered, and plans that operate outside the United States primarily for the benefit of nonresident employees aren't covered.
The majority of health insurance plans that are offered by employers are covered under ERISA. Plans that fall in this category include defined benefit and defined contribution plans.
ERISA violations occur when a fiduciary doesn't meet their responsibilities as outlined by ERISA. For instance, a plan administrator who doesn't provide full disclosure about fees and plan benefits may be in violation of the law. This may also be the case if a fiduciary misuses funds or fails to send updated information about the plan to participants, including statements, disclosures, and notices.
As a federal law, ERISA's main purpose is to protect the interests of workers who participate in qualified plans. These include certain employer-sponsored healthcare and retirement plans, such as 401(k)s and pensions.
ERISA regulates plan administrators and sponsors to ensure that they provide plan information to their participants and remain compliant with their fiduciary duties.
And it's not just plan participants like you who are protected: it's your beneficiaries, too.
