ERISA is a federal law that governs employee benefits. The term ERISA is shorthand for the federal Employee Retirement Income Security Act of 1974. Most people have never heard of ERISA, but its comprehensive scope impacts the vast majority of American workers and their dependents and beneficiaries. The original intent behind ERISA’s enactment was to remedy historic pension plan abuses and insure that workers received the benefits they were promised by their employers. However, just prior to Congress’ passage of the ERISA law, the scope of the legislation was dramatically expanded to not only cover retirement plans, but to also encompass “employee welfare benefits” such as medical and hospital benefits, as well as life and disability benefits.
Table of Contents
Types of ERISA Plans
The first question that is commonly asked is “what is an ERISA plan?” ERISA’s scope is so broad that covers almost all employer-sponsored benefits with very few exceptions. ERISA encompasses all types of retirement and deferred compensation plans, along with welfare benefits (see below), and may also include severance benefits and other programs offered by employers. A common misconception is that ERISA only governs plans that are “self-funded;” i.e., paid for entirely by employers. That is untrue since the statute explicitly states that ERISA also covers insured plans such as disability and life insurance. Most employees in the U.S. workforce receive ERISA-governed benefits, retirement accounts and other benefits such as health insurance purchased by self-employed individuals are not subject to ERISA. In addition, benefits for government employees, and employees of religious organizations (church plans) are ERISA-exempt. While many of the specific rules governing ERISA are highly technical, the following discussion tries to simplify the main principles.
Anyone who works for a private-sector organization which sponsors retirement benefits such as pension plan or a 401(k) plan (or 403(b) for non-profits) receives an ERISA-governed benefit that becomes vested; i.e., non-forfeitable so long as the employee works for the employer for a sufficient number of years. Because of ERISA’s reporting and disclosure requirements, as well as fiduciary obligations imposed on employers and anyone who has responsibility in managing investments and making benefit determinations, employees’ rights to receive the benefits they were promised are protected by ERISA. Employers are responsible for providing employees with summary plan descriptions that describe their eligibility to receive benefits, a vesting schedule that shows when benefits become non-forfeitable, and other plan terms and conditions. Employees are protected against mismanagement by rules requiring that the plan managers act at all times in the employees’ best interest.
In some instances, employers establish deferred compensation programs for highly compensated and/or high-level employees. Those plans are also governed by ERISA but lack fiduciary protections for employees and may be more easily subject to changing eligibility and payment schedules.
Likewise, some employees work for employee-owned companies that are owned by Employee Stock Ownership Plans (ESOP). Those plans are governed by ERISA and benefits may be forfeited in whole or in part if the employee does not work for the company for a long enough period.
Individual retirement accounts are set up and maintained by individuals without employer involvement. Thus, ERISA does not apply to such benefits.
ERISA uses the term “welfare benefit plan.” However, that use of that term in the ERISA statute has no reference to public assistance benefits, but instead describes benefits that are provided for the employees’ welfare such as health, life, and disability benefits. Regardless of whether such benefits are self-funded or fully insured, they are subject to ERISA. That means if a dispute arises, many of the protections offered by state law for other types of insurance are non-existent because ERISA “preemption” negates the applicability of state laws that relate to employee benefits plans with the exception of state laws regulating insurance policies, although laws that give insureds include the right to sue for punitive damages in the event of a “bad faith” denial of benefits are preempted as well.
Health benefits, in particular, can raise issues. Some plans contain anti-assignment provisions, which means that when the employee sees the doctor or is hospitalized, the provider does not necessarily have the right to be paid directly by the plan. Also, if the plan is self-funded, participants in those plans may not have the same protections offered by state regulation of insurance.
In addition to the exemption of government (federal, state, municipal) employees and employees of religious organizations, including religiously affiliated healthcare providers, a significant exception exists in situations where the employee pays all of the premiums for a benefit and the employer has no responsibility for administering the benefit. Plans that are set up to benefit only the owners of a business would also be exempt from ERISA; however, if any such plan covers even one non-owner employee, ERISA is implicated, and any claim brought by the employer or an employee would be subject to ERISA’s rules and requirements.
What Is an ERISA “Plan Administrator”?
Every ERISA plan is required to also have a summary plan description that is provided to employees which offers basic information describing the benefit being offered, and explaining rules regarding eligibility to receive benefits, claims procedures, and procedures for challenging claim denials. The summary plan description (SPD) is also required to list the “plan administrator.” Typically, the employer serves as the the plan administrator, although the plan administrator may be a trustee or an insurance company. The plan administrator’s responsibilities include providing information to employees about the terms and conditions of a plan and to assist employees in enrolling in benefit plans and helping them to process claims.
What Type of Information Is the Plan Administrator Required to Provide?
If an employee has not been provided with a summary plan description, the employee may request a copy from the plan administrator. Employees are also entitled to request addition plan documents such as the actual plan itself or annual reports. If a plan administrator fails to provide required information, the employee may seek penalties and attorney’s fees.
Can ERISA Be Avoided?
ERISA was passed by Congress to provide employees with more protection of their benefits than they had prior to the law’s enactment in 1974. However, that intent has not been fulfilled, and employees may find they have less protection than they would have had prior to the law’s enactment, such as when employers have reserved discretion to interpret plan terms and make benefit eligibility decisions. In such instances, the employee would need to prove the employer acted unreasonably or arbitrarily in order to prevail in challenging a claim denial.
In short, there is no way to avoid ERISA. Employees do not have the option of paying a special premium or making a separate payment to opt out of ERISA. ERISA’s scope is comprehensive and unavoidable.
What if ERISA Coverage Is Uncertain?
In some instances, it may be uncertain whether ERISA applies. However, ERISA plans are required to file a Form 5500 each year and such filings are publicly available. The filing of such forms is a good indication that a plan is governed by ERISA; however, it is not determinative and further investigation may be necessary.
For employees of religiously based organizations, the Internal Revenue Code gives such organizations the option of electing to be subject to ERISA, and it is possible that some plans sponsored by such organizations are exempt while others are not. Government employee status is also not always clear. For example, employees of public schools are considered government employees and their benefit plans are exempt from ERISA. The same applies to charter school teachers as well. However, some organizations are only quasi-governmental entities, and it is not always clear whether plans sponsored by such organizations are ERISA-governed. In some other instances, though, even as to governmental employees, certain benefits may be provided through their union. If so, that may trigger ERISA coverage.
There are often no practical differences between ERISA-governed plans and non-ERISA plans, but if a dispute over benefits arises, it is advisable for employees to immediately contact a knowledgeable and experienced employee benefits attorney for guidance on whether their benefits are subject to ERISA and to assist in securing benefits.