Employee Retirement Income Security Act (ERISA)
Nobody likes to have the rug pulled out from under them. Counting on a pension to secure your retirement, only to discover that your nest egg evaporated when the company you worked for failed could be devastating. That's exactly what happened to 4000 Studebaker employees in 1963 in a case that became the impetus for pension reforms leading to the Employee Retirement Income Security Act of 1974 (ERISA). Now, the safety net is more durable — retirement plans and those who manage them are subject to strict rules to help ensure the money will be there at retirement.
Federal law imposes certain requirements on employee benefit plans voluntarily established and maintained by employers. [29 USC §1001 et seq.; 29 CFR 2509 et. seq.] ERISA covers two general types of plans: retirement plans, and welfare benefit plans designed to provide health benefits, scholarship funds, and other employee benefits.
ERISA facilitates portability and continuity of health insurance coverage as a result of added provisions under the Health Insurance Portability and Accountability Act (HIPAA). It also covers continued health care coverage rules mandated under the Consolidated Omnibus Budget Reconciliation Act (COBRA).
Employers Subjected to ERISA
Employers in the private sector who have an employee benefit plan generally are subject to ERISA rules. ERISA does not apply, however, to government plans; church plans; plans maintained to comply with state workers' compensation, unemployment compensation, or disability insurance laws; and plans maintained outside the United States primarily for nonresident aliens.
Basic Rules of ERISA
The rules under ERISA are intended to ensure that employee benefit plans are fair and economically sound. This means if an employer sets up a plan, the promised benefits must be delivered.
Benefits Covered By ERISA
Retirement plans, which include pensions and other types of retirement plans. These are often referred to as “qualified plans” because most must meet tax law qualification rules in order to avoid immediate taxation of benefits to participants.
Welfare benefit plans, which include plans that provide healthcare benefits, disability benefits, death benefits, prepaid legal services, vacation benefits, day care centers, death benefits, scholarship funds, apprenticeship and training benefits, and other similar benefits.
ERISA rules are directed at persons and entities, referred to as “plan administrators,” who manage and have control over these plans.
ERISA Rules Require
Management of plans for the exclusive benefit of participants and beneficiaries.
Fiduciary rules that require plan duties to be conducted in a prudent manner and without self-dealing or certain conflict-of-interest transactions (called “prohibited transactions”). For example, you generally cannot sell property to the plan, even if it's a good deal for the plan.
Also, your company cannot borrow money from the plan, even if you pay a fair rate of interest to the plan.
Certain exemptions to the prohibited transaction rules allow everyday events to continue undisturbed. For example, your controller's management of your pension plan assets would not preclude him or her from also being a plan participant.
Compliance with limitations on certain plan investments (such as employer securities).
Funding of benefits as required by the tax law.
Reporting and disclosure of information on the operation and financial condition of plans to both participants and the government.
Providing documents required in the conduct of investigations to ensure compliance with the law.
Operating Under ERISA
As an employer, you're not required to establish or maintain any type of employee benefit plan. However, if you choose to do so, you must comply with ERISA requirements.
Reporting Requirements
The administrator of any employee plan you set up must meet certain reporting requirements to inform participants and report to the government about the plan. The “government” means one or more of the following: the Internal Revenue Service (IRS), the Department of Labor (DOL), and/or the Pension Benefit Guaranty Corporation (PBGC).
Summary Plan Description
The administrator must give participants a summary plan description (SPD), which describes the benefits, rights, and other terms of the plan in understandable language. If you make any changes to the plan, you must provide a summary of these changes. You do not have to furnish a copy of the SPD or any plan changes to the government unless asked to do so. Under prior law, copies of the SPD had to be sent to the DOL. Now this is only required in specific situations. The contents and format of the SPD are spelled out in DOL regulations. [29 CFR Part 2520]
If for any reason your company might change the terms of the plan in the future, you cannot tell employees that no changes are expected. This can amount to actively misinforming employees about the plan and can expose you to actions by employees who rely on your misinformation.
Recently, several employees sued their former employer for enhanced retirement benefits under a plan implemented after their retirement. The employees alleged the company breached its fiduciary duty under ERISA. The court found, however, there wasn't enough evidence that the employer seriously considered implementing the new benefit plan prior to the employees' retirement.
Annual Reporting to the Government
New rules require that the administrator must file an annual report with the Pension and Welfare Benefits Administration or The Department of Labor (certain fringe benefit plans are required to file an annual return with the IRS) containing financial and other information about the plan. The report is made on an IRS form in the 5500 series.
For plan years after January 1, 1999, Form 5500 is filed regardless of the number of plan participants.
The Form 5500-C is filed every third year, while the Form 5500-R is filed the other two years.
Certain plans may be exempt from annual reporting requirements. For example, welfare benefit plans with less than 100 participants don't have to file annual reports if the plans are fully insured or un-funded. [29 CFR 2520.104-20] Note, however, that certain plans must file an annual return with this IRS even if there are fewer than 100 participants.
These plans are cafeteria plans, educational assistance programs, and adoptions assistance programs.
Notice to the PBGC: If a defined benefit plan is under-funded, don't try to keep it under your hat. Funding situations that put the plan in jeopardy must be reported to the Pension Benefit Guaranty Corporation (PBGC).
For example, if a company implements a restructuring plan that liquidates the profitable assets while leaving the pension plan under-funded, the PBGC may become involved to determine if the plan intended to defraud the company's creditors. If the PBGC determines the plan's irregularities were intentional, it may order the company to take full responsibility for the pension plans.
Note that the PBGC only oversees the funding of defined benefit pension plans, (i.e., those plans whose benefits are actuarially determined). Most new plans are, however, defined contribution plans.
Record Keeping Requirements
Summary plan description. You're required to retain the summary plan description for six years.
Form 5500. As with any tax return, you should retain these forms for at least three years.
Penalties for Violating ERISA
You may be subject to civil penalties for reporting violations and prohibited transactions. For example, a penalty of up to $1,000 per day may be assessed against a plan administrator who fails or refuses to comply with annual reporting requirements. Other penalties apply for those engaging in prohibited transactions with welfare and nonqualified pension plans. This penalty can range from 5% to 100% of the amount involved in the transaction.
Excise Taxes
The Internal Revenue Code also imposes excise taxes for failing to meet certain requirements or for undertaking certain transactions:
Failing to meet minimum funding standards for certain retirement plans: 10% tax (5% in the case of multi-employer plans) on the amount of the accumulated funding deficiency. This tax is imposed each year a deficiency exists. [Code Sec. 4971]
Nondeductible contributions to qualified retirement plans: 10% of the nondeductible contributions. [Code Sec. 4972]
Prohibited transactions for qualified pension and profit-sharing plans: An initial tax of 15% of the amount involved. If the prohibited transaction isn't corrected within the tax period, 100% of the amount involved. [Code Sec. 4975]
Welfare benefit plans that provide a disqualified benefit: 100% of the disqualified benefit. [Code Sec. 4976] A disqualified benefit means (1) a post-retirement medical benefit or post-retirement life insurance benefit provided to key employees if a separate account is set up by the employer and payment doesn't come from that account, (2) any post-retirement medical benefit that (unless excepted) would discriminate in favor of certain highly compensated employees, and (3) any portion of a welfare benefit fund reverting to the employer.
There is a mandatory civil penalty of 20% of any amount recovered with respect to fiduciary breaches resulting from either a settlement agreement with the DOL or a court order as a result of a lawsuit filed by the DOL.
For a more information regarding COBRA and how it may affect your company contact
Almond Valley Insurance Services, Inc. or visit the
Department of Labor online.
