What Is ERISA?
A big concern for many employees when starting a new job is if they’ll be able to put aside enough for their retirement and whether they’ll have easy access to the funds. The Employee Retirement Income Security Act, also known as ERISA, was enacted in the early 1970's. ERISA provides pension or insurance companies and private employers with guidelines on how to administer employee benefit plans.
It’s important to remember that ERISA doesn’t cover health plans by governmental entities or plans established by churches for their employees. It also doesn’t cover plans that relate to state laws, like unemployment or workers compensation. Although the ERISA definition doesn’t require private employers to have pension plans, it provides minimum standards for those that do.
Why was ERISA enacted?
Prior to ERISA's enactment in 1974, the U.S. Department of Labor started regulating employee benefit plans when the Welfare and Pension Plans Disclosure Act (WPPDA) came about in 1959. The WPPDA required employers to make plan descriptions and annual financial reports available to the government and plan participants. Although this was meant to give employees a chance to keep an eye out on any abuse or mismanagement of their funds, the WPPDA was still very limited in scope and it was because of this that ERISA was enacted.
ERISA provisions apply to plan years starting on or after January 1, 1975. The Act has widened the scope of information being relayed to employees. It has implemented a type of healthcare plan enforcement that requires employers to manage funds exclusively for plan participants and their best interests, and expanded on the reporting procedures to the government.
How does ERISA protect the interests of employees?
Thanks to ERISA, employees are now supplied with more information on their pension plans. The Act requires each plan to notify participants on how to file a claim for benefits and also to notify them if any significant changes will be made to their plans. ERISA also requires that employers make participants aware of what standards they must meet in order for their benefits to vest. For example, employers must notify participants about how quickly they should file a claim when they’re injured in order for it to be covered by their plan. Remember, important information like this must be provided to employees in writing, either automatically by the plan administrator or upon request.
ERISA also protects the employees from any wrongdoing by a plan fiduciary. A fiduciary is anyone who has discretionary authority and control over the management and assets of the plan. Plan administrators or trustees are considered fiduciaries. These fiduciaries must work solely for the benefit and best interests of plan participants, while being careful not to risk too much when investing an employee's retirement plan. If any improper planning takes place that results in a large loss for the employee, a fiduciary may be personally liable to restore that loss. This provides employees more security against any abuses carried out in the management of their funds.
There have been a number of amendments to ERISA over the years. These were enacted mostly to provide employees with more protections whether it be for mental health issues, longer coverage, or reconstructive surgery for cancer patients.
One of the more important amendments includes the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA was enacted in 1985 to ensure that employees who voluntarily resigned or were let go under certain circumstances could receive healthcare coverage for a certain period of time. The Health Insurance Portability and Accountability Act (HIPAA) was an amendment that was enacted to limit preexisting medical conditions and give employees credit for the time they held previous coverage. The Newborns' and Mothers' Health Protection Act (the Newborns' Act), another ERISA amendment, requires plans that offer maternity coverage to pay for the mother's hospital stay after childbirth.
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