ERISA

The Employment Retirement Income Security Act, or ERISA, has been in effect in the United States since September of 1974, during the presidency of Gerald Ford. The Act was intended to create reform for pension and retirement plans for people who work in the private sector, and to prevent abuse of those plans by their administrators. It requires that there be clear information available to the plan owners as to the details of their plans.

Some of the types of information required to be given, as enacted by ERISA, include:

• General features of the plan, and how it is funded (does the employer match the amount their employee contributes? This is common);
• Length of Service: often, an employee must work for their employer for a certain amount of time before they can participate in the plan;
• Minimum Contribution: employees who participate in the plan must meet the minimum contribution required;
• Time of Vesting: an employee must also often work for a certain amount of time before they are granted access to all of the funds (or, their share of the funds. They do not receive the employer's contribution, generally, if they take the funds out before their retirement);
• Process for Appealing: When an employee participant has a complaint related to the plan, they should follow the method laid out in the plan for filing a grievance; and
• Right to Sue: plan participants should be notified that they may file suit if the appeals process fails.

ERISA provides minimum standards for things like funding and vesting of plans.

Administering Employee Pension and Benefit Plans

The employer administers the plan, and when talking about retirement plans, they are referred to as the fiduciary. They are required to follow the plan as it is written. They should provide employee participants with the details of the plan in writing. The employer/fiduciary has a duty to their employee/participants to treat them with a reasonable standard of care.

This duty includes making any decisions regarding the plan for the benefit of the plan and its participants. Basically, they should invest wisely, and produce as much money as possible in benefits.

Who Enforces ERISA?

ERISA is enforced by:

• The Labor Department's Employee Benefits Security Administration;
• The Internal Revenue Service; or
• The Pension Benefit Guaranty Corporation.

Types of Benefits Plans Included in ERISA

We have talked generally, up to this point, about ERISA covering “pension” or “retirement” plans. Here is a more detailed description of the types of plans covered by the Act:

• Pension Plans: These are established, voluntarily, by employers, in order to provide a source of income for employee/participants upon their retirement; and
• Welfare Plans: These include plans for employee “benefits.” Benefits are things like health insurance, disability insurance, vacation policies, day care, and other types of benefits employers may grant their employees.

Plans NOT Included in ERISA

ERISA was created to govern private-sector plans. Thus, plans in the following categories are not covered by the Act:

• Plans put in place by churches;
• Plans only maintained to comply with workers' compensation or unemployment;
• Government pension plans for employees who do not work in the U.S. (and who are not citizens); and
• Simplified Employee Pension plans, or SEPs. These are still retirement accounts set up by employers to help employees save for retirement, but are not subject to the complicated rules and regulations of ERISA.

How Does ERISA Provide Protection?

In three significant ways:

• Eligibility Guidelines: the plan must be offered to any employee, aged 21+, who has worked for the employer for a minimum of 12 months.
• Management of Funds: as part of their fiduciary duty, the employer has the responsibility for managing funds with care. They may be subject to prosecution for failure to do so.
• Wrongful Termination: an employer cannot terminate an employee simply to keep from having to give them benefits.

ERISA also provides a guarantee that funds will be paid, even if something happens to the benefit program, like the employer going bankrupt. The funds are guaranteed to be paid via the Pension Benefit Guaranty Corporation.

The Act has been amended numerous times, to add the Consolidated Omnibus Reconciliation Act (COBRA), which allows terminated employees to continue benefits for a time and at a greater cost, and the Health Insurance Portability and Accountability Act (HIPAA), which keeps individuals' information private to prevent discrimination against them.

There are a number of reporting requirements under ERISA which ensure compliance. In the event of a compliance failure, the fiduciary may be subject to civil and criminal penalties.

Some Main Administrative Requirements Under ERISA

ERISA plan administrators fulfill the majority of the compliance requirements under the Act. an individual may not have to do anything unless they are acting as their own plan administrator.

In many instances, an individual's insurance company acts as the plan administrator and handles any obligations. However, it is still important for an individual to be aware of the requirements so that they can ensure that their business is meeting its ERISA obligations.

There are three main components of ERISA compliance, including:

• Reporting;
• Disclosure; and
• Paying claims.

Plan administrators are required to report, or file, a summary plan description with the IRS and the department of Labor. This filing is required to include an explanation of the coverage levels and claims procedures of the plan. If a modification is made, such as a decrease or increase in coverage, it is required to be reported.

A plan administrator is required to disclose information to the participants of the plan upon their request. A plan participant can obtain information regarding coverage levels as well as financial information.

Any plan which is subject to ERISA must establish a claims procedure to allow claims for benefits to be processed. The participants in the plan are required to be provided with information regarding their claims when those claims are denied.

ERISA Exemption

An individual or company is exempt from ERISA coverage if the individual is self-employed or if you have a partnership where only the individual and their partner are covered by the plan. This is due to the fact that no employees are covered under the plan.

Is My Retirement Plan Covered by ERISA?

In general, ERISA applies to the majority of private sector employers that choose to offer some type of retirement plan to their employees. There are, however, some exceptions, including:

• Most government employers;
• Churches;
• Benefit plans designed solely for complying with:
  • workers' compensation;
  • disability; or
  • unemployment laws;
• Unfunded excess benefit plans; and
• Plans maintained outside of the United States which are intended to benefit non-resident aliens.

It is important to note that ERISA does not require employers to provide retirement benefits.

Fidelity Bond

Although they are referred to as bonds, fidelity bonds are more akin to insurance policies. These bonds protect policyholders against losses which are incurred as a result of dishonest or fraudulent acts committed by trusted parties.

Pursuant to ERISA, certain parties who handle plan assets of employee benefits plans are required to be bonded, including:

• Fiduciaries;
• Officers;
• Employees; or
• Service providers.

These bonds will cover the plan from loss of assets due to dishonesty or fraud. An ERISA bond is required to protect the applicants and beneficiaries from the dishonest acts of a fiduciary who handles the plan assets.

Who Must be Bonded?

As previously noted, any party who handles an ERISA plan asset is required to be bonded, including:

• Fiduciaries;
• Officers;
• Employees; or
• Service providers.

In the context of these plans, handle can mean:

• Physical contact;
• Power to transfer;
• Disbursement authority;
• Authority to sign checks; and
• Any supervisory or decision making responsibility over trust assets.

It is important to note that ERISA does not require all fiduciaries to be bonded, but only those individuals who handle plan assets. For example, financial advisors owe plan participants a fiduciary duty but they are not required to be bonded if they only handle advice and they do not handle plan assets.

What Coverage Amount is Required for a Fidelity Bond?

The parties listed above who handle plan assets are required to be bonded for at least 10% of the amount of the funds which they handle. The bond amount which is required pursuant to ERISA for one plan is a minimum amount of $1,000 and a maximum amount of $500,000 per plan.

The maximum amount increases to $1,000,000 when the plan holds employer securities. 

Requirements for a ERISA Fidelity Bond

There are several requirements for ERISA fidelity bonds, including:

• The bond must have a minimum payout equal to at least 10% of the amount of funds they handle;
• The bond must be a minimum amount of $1,000 and a maximum amount of $500,000 per plan;
• The bond does not have a deductible;
• The bond must be in the name of the retirement plan or a trust;
• The bond covers ERISA criminal losses regulation;
• The bond is placed with the Department of Treasury-approved surety or reinsurer, and the plan fiduciaries cannot have any control or interest in the surety or reinsurer; and
• The bond is fixed each year for each fiduciary.

Exemptions to the Bonding Requirement

There are certain limited exemptions to the ERISA bonding requirement, including:

• Unfunded plans: Plans which only pay benefits out of general employer or union assets, also referred to as unsegregated funds, are exempt from ERISA bonding requirements; and
• Entities that are already subject to state or federal regulation: Entities which handle plan assets but are already subject to federal or state oversight may be exempt from ERISA bonding requirements. Commonly entities that are exempted include:
  • banking institutions;
  • trust companies;
  • savings and loan associations;
  • insurance companies; and
  • brokers and dealers.

Losses Covered Under the Fidelity Bond

A fidelity bond protects against the losses which result from dishonesty or fraud and covers:

• Larceny;
• Embezzlement;
• Misappropriation;
• Wrongful conversion; and
• Willful misapplication.

Difference Between Fidelity Bonds and Fiduciary Liability Insurance

Fiduciary liability insurance insures employee benefit plans against the losses which are caused by breaches of fiduciary responsibility. A fidelity bond covers losses which are caused by dishonesty or fraud, as noted above.

Fiduciary liability insurance is not required by ERISA. Although fiduciary liability insurance is not required by ERISA like a fiduciary bond, every fiduciary of an ERISA plan should consider carrying liability insurance coverage.

Protect Your Rights with ERISA

In order for an individual to protect their investment in their retirement account, it is important that they stay informed. An employer has a fiduciary duty to their employees to properly administer pension plans.

Pursuant to ERISA, every employee is entitled to be provided with a summary of the plan as well as to be provided with calculations of their benefits. It is important for an individual to be aware of the rules governing their plan and how much money is in their account.

In addition, they should closely examine the language of any non-compete provisions in the pension plan. It may be helpful to discuss these issues with an attorney.

Once an individual has signed their employment agreement and becomes enrolled in the pension plan, they may be bound by the non-compete agreement, which may limit their access to their retirement funds in the future.

ERISA Compliance Encouraged

ERISA compliance is encouraged by tax breaks as well as other incentives provided for employers. Failure to comply, on the other hand, may result in a loss of favorable tax treatment and other penalties.

Employers are aware of the possible penalties as well as the possibility of lawsuits. Administrators of these plans are required to file returns with the Department of Labor as well as the IRS and include details regarding the plans and any modifications which are made to them. 

How Can a Workers Compensation Lawyer Help?

ERISA may be complex to understand and it places numerous requirements on employee benefit plans. It can be helpful to consult with a workers' compensation lawyer who has experience with pensions and benefits.

Your lawyer can assist you with determining whether your employee benefit plan is subject to ERISA bonding requirements, the individual who must be bonded, and how much the bond should be. Always remember that a lawyer can review any document you are required to sign before you sign it and help you understand the implications.

If you feel that there has been a violation of your benefit plan under ERISA, contact a local workers compensation lawyer. They can assist you with gaining the benefits you are owed. Employers may also want to contact attorneys if they have questions about whether they are in compliance.