Employee Retirement Income Security Act

ERISA does not require employers to provide benefits to their employess, but if an employer chooses to have a plan, ERISA regulates that plan. ERISA requires that an employee benefit plan be established and maintained by an employer. The plan must be in writing, and it must be communicated to employees. The plan must be operated for the exclusive benefit of employees or their beneficiaries, and ERISA generally requires that plan assets be held in a trust.

To protect the interests of plan participants, ERISA requires significant reporting and disclosure in the administration and operation of employee benefit plans. For example, a typical pension plan will have to file reports with the IRS and the Department of Labor, and it will have to provide a summary plan description and a summary annual report to each participant.

In addition, ERISA imposes significant participation, coverage, vesting, benefit accrual, and funding requirements on private retirement plans. For example, a retirement plan generally may not require, as a condition of participation, that an employee complete a period of service extending beyond either age twenty-one or one year of service. Also, a plan may not exclude employees from participation just because they have reached a certain age (e.g., age sixty-five). Employees can be excluded for other reasons, however. For example, a plan might be able to cover only those employees working at a particular location or in a particular job category. Under the minimum coverage rules, however, a retirement plan must usually cover a significant percentage of the employer's work force. Alternatively, a plan may be able to satisfy the minimum coverage rules if it benefits a certain class of employees, as long as it does not discriminate in favor of the employer's highly compensated employees.

Retirement plans must also meet certain minimum vesting requirements. A worker's retirement benefit is said to be vested when the worker has a nonforfeitable right to receive the benefit. For example, under the five-year cliff-vesting schedule, an employee who has completed at least five years of service must have a nonforfeitable right to 100 percent of his or her accrued benefit. Alternatively, under three-to-seven-year graded vesting, an employee must have a nonforfeitable right to 20 percent of her or his accrued benefit after three years of service, 40 percent after four years of service, and so on up to 100 percent after seven years of service. These are minimum vesting requirements, and a plan is free to use a faster vesting schedule, or even to provide for immediate vesting.

ERISA also imposes rules on how benefits accrue under retirement plans. These rules help ensure that retirement benefits accrue at certain minimum rates, and they keep employers from skewing ("backloading") benefits in favor of their long-service employees. For example, each plan must comply with at least one of three alternative minimum-benefit accrual rules. Under the so-called 3 percent rule, for example, a worker must accrue, for each year of participation (up to 33 and 1/3 years) at least 3 percent of the normal retirement benefit that would be received if she or he stayed with the employer until age sixty-five.

Retirement plans must also meet certain minimum funding standards. These rules help ensure that the money needed to pay the promised benefits is set aside in a trust fund where it can earn income until it is used to pay benefits when the employee retires. ERISA also imposes extensive fiduciary responsibilities on employers and administrators of employee benefit plans. These parties in interest must manage the plan for the exclusive benefit of workers and their beneficiaries, and they must act prudently, diversify plan investments, and follow the plan provisions. Failure to meet these responsibilities is a breach of duty that can result in personal liability.

In addition, ERISA's prohibited-transaction rules prevent parties in interest from engaging in certain transactions with the plan. For example, an employer usually cannot sell, exchange, or lease any property to the plan. A person who participates in a prohibited transaction is subject to a 15 percent excise tax, which is increased to 100 percent unless the transaction is reversed.

Title IV of ERISA created the Pension Benefit Guaranty Corporation (PBGC) and a plan-termination insurance program. Defined benefit plans generally pay annual termination insurance premiums to the PBGC. In the event an underfunded plan terminates (e.g., because the employer went out of business), the PBGC will guarantee payment of pension benefits to the participants (up to a maximum limit, in the year 2001, of $40,705 per year, per participant).

ERISA also provides for various judicial remedies. For example, plan participants or beneficiaries can sue plans and plan administrators to recover benefits, enforce rights, or clarify future rights to plan benefits. ERISA also permits the secretary of labor to bring lawsuits to enforce ERISA's fiduciary responsibility rules.

One of the central objectives of ERISA was to federalize pension and employee-benefit law. In particular, Section 514 provides that the provisions of Titles I and IV of ERISA "shall supersede any and all State laws as they may now or hereafter relate to any employee benefit plan." The courts have generally interpreted this preemption language broadly; for example, to prevent states from requiring ERISA-covered health care plans to provide specific benefits (i.e., chiropractic or psychiatric benefits). Similarly, the courts have relied on this language to prevent plaintiffs from bringing state tort and tort-related causes of action against employee benefit plans.