The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains 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.

ERISA is sometimes used to refer to the full body of laws that regulate employee benefit plans, which are mainly in the Internal Revenue Code and ERISA itself.

Responsibility for interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.

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 Corporation, an automobile manufacturer, closed its plant in South Bend, Indiana, in 1963. Its pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions. The company created a program in which 3,600 workers who had reached the retirement age of 60 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.

In 1963, Senator John L. McClellan (D) of Arkansas began an investigation through the Permanent Investigations Senate Subcommittee into labor leader George Barasch, alleging misuse and diversion of $4,000,000 of union benefit funds. After three years the investigation had failed to find any wrongdoing, but had resulted in several proposed laws, including McClellan's October 12, 1965 bill setting new fiduciary standards for plan trustees. Additionally, due much in part to his "dismay" over Barasch's sole control over union benefit plan funds, Senator Jacob K. Javits (R) of New York also introduced bills in 1965 and 1967 increasing regulation of welfare and pension funds to limit the control of plan trustees and administrators and to address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bills were opposed by business groups and labor unions, which sought to retain the flexibility they enjoyed under pre-ERISA law. Provisions from all three bills ultimately evolved into the guidelines enacted in ERISA. In the years since 1974, ERISA has been amended repeatedly.

Coverage

Pension 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 in the private sector 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 also regulates the manner in which a pension plan may pay benefits. For example, a defined benefit plan must pay a married participant's pension as a "joint-and-survivor annuity" that provides continuing benefits to the surviving spouse unless both the participant and the spouse waive the survivor coverage.

The Pension Benefit Guaranty Corporation was established by ERISA to provide coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants. Later amendments to ERISA require an employer who withdraws from participation in a multiemployer pension plan with insufficient assets to pay all participants' vested benefits to contribute the pro rata share of the plan's unfunded vested benefits liability.

There are two main types of pension plans: defined benefit plans and defined contribution plans. Defined benefit plans provide retirees with a certain level of benefits based on years of service, salary and other factors. Defined contribution plans provide retirees with benefits based on the amount and investment performance of contributions made by the employee and/or employer over a number of years.

Health benefit plans

Likewise, 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.

ERISA has led to tension with reforms which partner with the states, such as the Patient Protection and Affordable Care Act. There have been several significant amendments to ERISA concerning health benefit plans:

  • The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides some employees and beneficiaries with the right to continue their coverage under an employer-sponsored group health benefit plan for a limited time after the occurrence of certain events that would otherwise cause termination of such coverage, such as the loss of employment.
  • The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits a health benefit plan from refusing to cover an employee's pre-existing medical conditions in some circumstances. It also bars health benefit plans from certain types of discrimination on the basis of health status, genetic information, or disability.

Other relevant amendments to ERISA include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.

about 60% of insured employees in the US were in self-funded plans subject to ERISA. During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees limited or eliminated those benefits. ERISA does not provide for vesting of health care benefits in the way that employees become vested in their accrued pension benefits. Employees and retirees who were promised lifetime health coverage may be able to enforce those promises by suing the employer for breach of contract, or by challenging the right of the health benefit plan to change its plan documents to eliminate promised benefits.

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, such as 65, regardless of the length of the employee's service.

Under the Pension Protection Act of 2006, employer contributions made after 2006 to a defined contribution plan must either become 100% vested after the employee has three years of employment or vests gradually over the employee's six years of employment.