What Is ERISA?
The Employee Retirement Income Security Act (ERISA) of 1974 is a federal law that sets minimum standards for most voluntarily established employee benefit plans in the private sector. ERISA covers both retirement plans (such as 401(k) plans and pension plans) and welfare benefit plans (such as health insurance, life insurance, and disability plans).
For HR professionals studying for the SHRM-CP or SHRM-SCP exam, ERISA is a core benefits compliance topic. The law establishes requirements for plan administration, fiduciary responsibility, reporting and disclosure, and claims procedures. Understanding ERISA is essential for managing benefits programs effectively.
ERISA does not require employers to offer benefit plans, but once a plan is established, it must comply with ERISA's requirements. The law is enforced by the Department of Labor's Employee Benefits Security Administration (EBSA) and, for certain tax-related provisions, by the Internal Revenue Service.
Fiduciary Duties Under ERISA
One of ERISA's most important provisions is the establishment of fiduciary duties for plan administrators and anyone who exercises discretionary authority over plan management or assets. Key fiduciary duties include:
- Duty of loyalty: Fiduciaries must act solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable plan expenses.
- Duty of prudence: Fiduciaries must act with the care, skill, prudence, and diligence that a prudent person acting in a similar capacity would use.
- Diversification: Fiduciaries must diversify plan investments to minimize the risk of large losses, unless it is clearly prudent not to do so.
- Plan document compliance: Fiduciaries must administer the plan in accordance with its governing documents, to the extent those documents are consistent with ERISA.
Fiduciaries who breach these duties can be held personally liable for losses to the plan. They may be required to restore any losses, disgorge any profits made through use of plan assets, and pay other equitable relief as a court may direct.
On the SHRM exam, fiduciary responsibility questions often present scenarios where a plan administrator must decide between the interests of the employer and the interests of plan participants. The correct answer consistently prioritizes participants' interests.
Reporting, Disclosure, and Claims Procedures
ERISA imposes specific reporting and disclosure requirements:
- Summary Plan Description (SPD): A written document provided to participants that describes plan benefits, rights, and obligations in understandable language. Must be provided within 90 days of becoming a participant (or 120 days for a new plan).
- Summary of Material Modifications (SMM): Must be provided within 210 days after the end of the plan year in which a material change occurs.
- Summary Annual Report (SAR): A summary of the plan's financial status, distributed to participants annually.
- Form 5500: An annual report filed with the Department of Labor containing financial and operational information about the plan.
ERISA also requires plans to have a formal claims procedure that includes an initial review of claims, a process for denials with specific written explanations, and an appeal process. Participants must be given at least 60 days to appeal a denied claim for most types of benefits.
ERISA Preemption and Relationship to Other Laws
ERISA contains a broad preemption clause that supersedes state laws that "relate to" employee benefit plans. This means that in most cases, state laws cannot impose additional requirements on ERISA-covered plans. However, several important exceptions exist:
- State insurance laws (the "savings clause") are not preempted, meaning states can regulate insurance companies and their products.
- Self-insured employer health plans are exempt from state insurance regulation (the "deemer clause"), giving them significant flexibility in plan design.
- State criminal laws, domestic relations orders, and certain other state laws are not preempted by ERISA.
ERISA also interacts with other federal laws. COBRA amended ERISA to add continuation coverage requirements. HIPAA added portability and privacy provisions. The Affordable Care Act added additional requirements for group health plans.
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ERISA is a fundamental topic on the SHRM certification exam, which features 134 questions over 4 hours at Prometric or OnVUE. Master fiduciary duties, reporting requirements, and preemption rules to handle these questions confidently.
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