ERISA

Which plans ERISA covers

ERISA applies to employee benefit plans set up or maintained by private-sector employers. It splits them into two groups.

Pension plans include defined benefit pensions and defined contribution plans such as the 401(k). These get the full set of rules: participation, vesting, funding (for defined benefit plans), fiduciary duties and reporting.

Welfare benefit plans include group medical, dental, vision, life and disability insurance, many employee assistance programs and some severance plans. They are covered by the reporting, disclosure, fiduciary and claims rules, but not vesting or funding.

ERISA does not cover government plans, church plans that have not elected coverage, plans maintained only to comply with workers' compensation, unemployment or disability insurance laws, or payroll practices such as paying regular wages during vacation or sick leave from general assets. For the wider benefit set, see employee benefits.

What employers and plan sponsors must do

• Written plan document. Every ERISA plan must be maintained under a written document that names a fiduciary and explains how the plan is funded, amended and administered. Many insured health plans have only the insurance certificate, which is usually not enough on its own; employers add a wrap document.
• Summary plan description (SPD). A plain-language summary given to participants within 90 days of becoming covered, with updates when the plan changes materially.
• Form 5500. An annual report filed with the Department of Labor, due by the last day of the seventh month after the plan year ends (July 31 for calendar-year plans), with an extension available. Small welfare plans with fewer than 100 participants that are fully insured or unfunded are generally exempt.
• Claims and appeals procedures that meet DOL timelines.
• Fidelity bond covering people who handle plan funds, generally 10 percent of plan assets with a minimum and maximum set by the rules.
• Vesting. In defined contribution plans, employer contributions must vest at least as fast as a 3-year cliff or a 2-to-6-year graded schedule. Employee deferrals are always 100 percent vested. See vesting.

Fiduciary duties

Anyone who exercises discretionary control over a plan or its assets is a fiduciary. That usually includes the company as plan sponsor, a benefits committee and anyone who picks investment options or vendors. ERISA requires fiduciaries to act solely in the interest of participants, for the exclusive purpose of providing benefits and paying reasonable expenses, with the care of a prudent expert, following the plan documents and diversifying investments. Fiduciaries can be personally liable for losses caused by a breach.

In practice this means minutes of committee meetings, a regular review of fund performance and fees, and a documented process for choosing recordkeepers and brokers. Excessive fee lawsuits against 401(k) plans have become common, and a well-documented process is the main defense.

The payroll problem: late deposits

The most common ERISA failure HR and payroll teams cause is depositing employee 401(k) deferrals late. DOL rules say deferrals become plan assets as soon as they can reasonably be separated from company money, and no later than the 15th business day of the following month. That outer limit is not a safe harbor for large plans; the DOL expects deposits within a few days if that is what the payroll process allows. Plans with fewer than 100 participants have a safe harbor of seven business days.

When deposits are late, the employer must make up lost earnings, correct through the DOL's Voluntary Fiduciary Correction Program or a self-correction method, and report the failure on Form 5500. High-volume employers with weekly payrolls, off-cycle checks and frequent rehires are especially exposed. Build the deposit into the payroll calendar with a named owner.

ERISA in HR operations

Several everyday HR decisions have ERISA consequences:

• Section 510 makes it unlawful to fire or discriminate against a participant to interfere with benefits they would otherwise get. Terminating someone shortly before vesting, or cutting hours to avoid benefits eligibility, invites a claim.
• Preemption. ERISA generally overrides state laws that relate to employee benefit plans, which is why multi-state employers can run one plan nationwide. State insurance laws still apply to insured plans.
• Severance plans with ongoing administration and discretion can be ERISA plans, which brings SPD and claims requirements.
• COBRA continuation rules sit partly in ERISA; see COBRA.

ERISA is enforced by the DOL's Employee Benefits Security Administration, the IRS (for tax qualification) and the Pension Benefit Guaranty Corporation (for defined benefit plans). This page is informational, not legal advice.