The Employee Retirement Income Security Act of 1974 (ERISA) was enacted on September 2, 1974. ERISA is a federal law that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:
- Requiring the disclosure of financial and other information concerning the plan to beneficiaries.
- Establishing standards of conduct for plan fiduciaries.
- Providing for appropriate remedies and access to the federal courts.
In general, ERISA does not cover retirement plans established or maintained by governmental entities, churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans
ERISA Rules
- Requires plans to provide participants with plan information including important information about plan features and funding.
- Sets minimum standards for participation, vesting, benefit accrual, and funding. provides fiduciary responsibilities for those who manage and control plan assets.
- Requires plans to establish a grievance and appeals process for participants to get benefits from their plans.
- Gives participants the right to sue for benefits and breaches of fiduciary duty
- If a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC).
History
In 1961, U.S. President John F. Kennedy created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker, an automobile manufacturer, closed its plant in 1963. Studebaker's pension plan was so poorly funded that only 3,600 workers who were of retirement age received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebaker received lump sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining 2,900 workers received no pensions .
Studebaker Avanti 1963
The Avanti was one of the last cars created by Studebaker before their plant was closed. At the time of closure, more than 2500 employees didn't receive owed benefits and compensation due to poor plan funding.
In 1967, Senator Jacob K. Javits proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and labor unions, that sought to retain the flexibility they enjoyed under pre-ERISA law.
ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2, 1974, Labor Day. In the years since 1974, ERISA has been amended repeatedly.
Pension & Health Benefit Plans
ERISA does not require employers to establish pension plans. Likewise, as a general rule, it does not require that plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan once it has been established. Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements.
ERISA does not require that an employer provide health insurance to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one. There have been several significant amendments to ERISA concerning health benefit plans two of which are the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
Pension Vesting
Before ERISA, some defined benefit pension plans required decades of service before an employee's benefit became vested. It was not unusual for a plan to provide no benefit at all to an employee who left employment before the specified retirement age (e.g. 65), regardless of the length of the employee's service.
Under the Pension Protection Act of 2006 (PPA), employer contributions made after 2006 to a defined contribution plan must become vested at 100% after three years or under a second sixth year gradual-vesting schedule Employee contributions are always 100% vested. Accrued benefits under a defined benefit plan must become vested at 100% after five years or under a third seventh year gradual vesting schedule.
Pension Funding
Under ERISA, minimum funding requirements were established for defined benefit plans. By their nature, defined contribution plans are always fully funded, even if the employee has not yet become vested in the employer contributions.
The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called "at-risk status").