Understanding ERISA and Employee Benefits Compliance
The Employee Retirement Income Security Act (ERISA) of 1974 is a comprehensive federal law that sets minimum standards for most voluntarily established retirement and health plans in the private sector. For HR professionals preparing for the SHRM exam, ERISA is a complex but important law that governs how employers administer benefit plans, manage plan assets, and communicate with plan participants.
Plans Covered by ERISA
ERISA applies to most private-sector employee benefit plans, which fall into two broad categories:
- Welfare benefit plans: Plans that provide health, disability, death, and other welfare benefits to employees and their dependents. Examples include medical, dental, and vision insurance; life insurance; disability insurance; and employee assistance programs.
- Pension benefit plans: Plans that provide retirement income to employees. These include defined benefit plans (traditional pensions), defined contribution plans (such as 401(k) plans), and profit-sharing plans.
ERISA does not cover plans established or maintained by government entities, churches (unless they elect ERISA coverage), or plans maintained solely to comply with workers compensation, unemployment, or disability insurance laws.
Fiduciary Responsibilities
ERISA imposes strict fiduciary duties on anyone who exercises discretionary authority or control over a plan's management or assets, or who provides investment advice for a fee. The core fiduciary duties include:
- Duty of loyalty: Acting solely in the interest of plan participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable plan expenses.
- Duty of prudence: Acting with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use under similar circumstances.
- Diversification: Diversifying plan investments to minimize the risk of large losses, unless it is clearly prudent not to do so.
- Following the plan document: Acting in accordance with the documents governing the plan, insofar as they are consistent with ERISA.
Fiduciaries who breach these duties may be personally liable for any losses to the plan resulting from the breach.
Reporting and Disclosure Requirements
ERISA requires plan administrators to provide participants with important plan information and to file reports with the government. Key requirements include:
- Summary Plan Description (SPD): A document written in plain language that describes the plan's features, including eligibility requirements, benefits, claims procedures, and participants' rights. It must be provided to participants within 90 days of becoming covered (or within 120 days of the plan's effective date).
- Summary of Material Modifications (SMM): A notice describing material changes to a plan, which must be distributed to participants within 210 days after the end of the plan year in which the change was adopted.
- Summary Annual Report (SAR): A summary of the plan's annual financial report that must be provided to participants each year.
- Form 5500: An annual report filed with the Department of Labor that discloses financial and operational information about the plan.
Claims and Appeals Procedures
ERISA requires every employee benefit plan to establish and maintain reasonable procedures for filing benefit claims and for appealing denied claims. The claims procedure must include initial claims processing within specified timeframes (generally 30 days for pension plans and varying periods for health plans), written notice of any claim denial that includes the specific reasons and the plan provisions on which the denial is based, a right to appeal the denial to a named fiduciary, and a full and fair review of the denied claim on appeal.
Prohibited Transactions
ERISA prohibits certain transactions between the plan and "parties in interest" (including fiduciaries, employers, plan service providers, and their relatives). Prohibited transactions include the sale, exchange, or lease of property between the plan and a party in interest; lending money between the plan and a party in interest; furnishing goods or services between the plan and a party in interest; and the transfer or use of plan assets by or for the benefit of a party in interest.
Enforcement and Penalties
ERISA is enforced by the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). Penalties for ERISA violations can be severe, including personal liability for fiduciary breaches, excise taxes on prohibited transactions, civil penalties for failure to file required reports, and criminal penalties for willful violations.
SHRM Exam Tips
For the SHRM exam, focus on the fiduciary duties (loyalty, prudence, diversification, plan document compliance), the major reporting and disclosure documents (SPD, SMM, SAR, Form 5500), the claims and appeals process, and the distinction between welfare and pension plans. Understanding who qualifies as a fiduciary under ERISA is a commonly tested concept.