ERISA Basics
By Melissa Benfer-Harding, Blue Ridge ESOP Associates

The acronym ERISA stands for Employee Retirement Income Security Act and was introduced in 1974. This federal law states the minimum standards for most voluntarily established pension and health plans in the private sector. The purpose behind such a law is to provide protection for individuals participating in these plans. ERISA requires that participants are provided with information such as plan features and funding. 

ERISA also requires that plan administrators give plan participants the most important facts about their retirement and health benefit plans in writing.  These include:

• The Plan Rules
• Financial Information
• Documents on the operation and management of the plan

One of the most important documents needed by a plan participant is the Summary Plan Description (SPD). The SPD tells the participants what the plan provides and how it functions. It conveys greatly needed information such as:

• When the employee can begin to participate in the plan
• How service and benefits are calculated
• When the benefits become vested
• When and in what form the benefits are paid
• How to file a claim for benefits

According to ERISA, if a plan is changed, participants must be informed, either through a revised SPD or in a separate document, which must be given to the plan participants free-of-charge. The plan administrator must automatically give plan participants a copy of the plan’s Summary Annual Report (SAR). This financial report is a summary of the plans Form 5500 with the Department of Labor and should be given to the plan participants on an annual basis. 

ERISA also regulates the fiduciary responsibility of persons who manage and control plan assets. The persons or entities who exercise discretionary control and authority over plan management or plan assets have authority and responsibility for the administration of the plan. Also any person providing investment advice to a plan for compensation or having any authority or responsibility to do so is subject to fiduciary responsibilities. Plan fiduciaries include:

• Plan trustees
• Plan administrators
• Members of a plan's investment committee

The main responsibility of a fiduciary is to run the plan only for the interest of the participants and beneficiaries. A fiduciary is also responsible for the exclusive purpose of providing benefits and paying plan expenses.  Fiduciaries are expected to be prudent and diversify the plan’s investments in order to minimize the risk of large losses. Fiduciaries are required also to follow the terms of plan documents to the extent that the plan terms are consistent with ERISA.

As a fiduciary, one must avoid conflicts of interest and may not engage in a transaction on behalf of the plan benefiting parties related to the plan. The parties included in this description include other fiduciaries, service providers, and the plan sponsor. If a fiduciary is found to be not in compliance with these rules of conduct, he or she may be personally liable to restore any losses to the plan or restore any profits made through improper use of plan assets. Under ERISA, courts are free to take whatever action is deemed necessary when fiduciaries breach their duties, including removal from their fiduciary position. In a related note, ERISA requires plans to establish a grievance and appeals process for participants to get benefits from their plans and gives participants the rights to sue for benefits and breaches of fiduciary duty.

Finally, there have been many amendments to ERISA which increase the protection available to health benefit plan participants and beneficiaries. A very popular example of this is the Consolidated Omnibus Budget Reconciliation Act (COBRA) which grants some workers and their families the right to continue their health coverage for a certain period of time after a certain event, such as the loss of a job.

Another amendment which is fairly well known is the Health Insurance Portability and Accountability Act, also known as HIPAA.  This amendment provides new protection for employees and their families who have pre-existing medical conditions or might otherwise be discriminated against in health coverage because of their specific medical situation.  Additional amendments added to ERISA include:

• The Newborn’s & Mother’s Health Protection Act
• The Mental Health Parity Act
• The Women’s Health & Cancer Rights Act

Generally speaking, ERISA does not cover group health plans established or maintained by governmental entities, churches, or plans which are maintained solely to comply with applicable worker’s compensation, unemployment, or disability laws.

ERISA doesn’t cover plans maintained outside the United States which are primarily for the benefit of nonresident aliens or unfunded excess benefit plans.

There is nothing basic about ERISA law, but it is comforting to remember the ERISA “golden rule” for plan fiduciaries – always operate the plan for the exclusive benefit of plan participants.

^©2006. The Beyster Institute and its authors and their entities. All rights reserved.

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