INSURANCE 101: Employee Retirement Income Security Act (ERISA)

The Employment Retirement Income Security Act (ERISA) was enacted by Congress in 1974 as a result of increased awareness towards employee benefits in the workplace and the lack of regulation over employer-sponsored welfare plans.  Before ERISA, employers had little incentive for providing welfare benefits to employees, and if provided, company welfare plans were often vulnerable to funding mismanagement and abuse due to a lack of disclosure and adequate safeguards concerning their operation.

Commonly referred to as ERISA, this federal law established minimum guidelines pertaining to the administration of employer-based pension plans and employee welfare benefit plans such as life, health and disability insurance.  The overall purpose of the law is to protect participating employees and their beneficiaries from unethical or unlawful practices in regards to the funding, management and distribution of employee retirement and insurance benefits.

ERISA is regulated by the Department of Labor and is administered and enforced through the department’s Employee Benefits Security Administration.  ERISA regulation applies to all non-governmental, private employer-groups in the U.S. who offer employee benefit plans.  Government employees as well as religious organizations are exempt from ERISA rules, as are individuals who purchase private individual retirement and insurance plans.

It is important to note that ERISA does not ‘preempt,’ or supersede state insurance laws, as the states ultimately regulate insurance; however, since employer-sponsored plans involve interstate commerce, such plans also fall under federal jurisdiction for federal taxation purposes because they substantially affect the revenues of the United States due to the preferential Federal tax treatment provided to such plans.

ERISA regulation does not pertain to the types and levels of plan benefits, nor does it mandate that groups establish pension or insurance plans; however, for those groups that do establish such plans, ERISA regulation pertains to the administration of the group’s benefit plan in how it is managed to ensure it benefits the members of the group for which it was established.

Reporting and Disclosure
ERISA mandates the reporting and disclosure of plan eligibility, benefits provided under the plan and the limitations of the plan to participating employees by the employer or other group sponsor through a Summary Plan Description (SPD), in addition to any policy summary provided by the insurer.  Under ERISA, the plan sponsor must establish a written policy, whether purchased by an insurer or self-insured by the sponsor itself, the sponsor is ultimately responsible for providing such disclosures to members of the group, and is held accountable for ERISA compliance.  While state laws mandate insurer disclosure, ERISA mandates employer disclosure, in addition to material provided by the insurer.

Under ERISA, the group’s sponsor has the fiduciary responsibility to act in the best interests of the plan’s participants and to ensure proper participation and vesting standards are met.  It is the responsibility of the plan sponsor to ensure safeguards are in place to ensure proper collection of plan funds, as well as distribution and claims processes to avoid discrimination within the group.