What is ERISA?

The Employee Retirement Income Security Act (ERISA) is a federal law that sets the ground rules for how private-sector employers must manage their employee benefits plans. Enacted in 1974, ERISA covers health plans, life insurance, disability insurance, and other welfare benefits plans. There are currently 139 million people enrolled in an ERISA health insurance plan, up from 136 million in 2015.

Think of ERISA as a safety net for your employees’ benefits. It ensures that the promises made in your benefits plans aren’t just empty words, but legally binding commitments. ERISA sets minimum standards for these plans, protecting the interests of plan participants and their beneficiaries.

History and purpose of ERISA

Before ERISA, the world of employee benefits was a bit unreliable. Some employers made grand promises about pensions and health benefits, only to leave their employees high and dry when it was time to pay up. In fact, the automaker Studebaker's 1963 bankruptcy and subsequent pension fund collapse left roughly 4,000 workers without their pensions, which inspired ERISA.

That’s why federal lawmakers created ERISA—to protect employees from mismanagement and abuse of their benefits plans. ERISA’s primary goals are to ensure that employees receive the benefits they were promised (and help pay for) and to provide them with important information about their plans. It also establishes standards of conduct for plan fiduciaries and provides appropriate remedies and access to federal courts.

What employers need to know about ERISA

If you’re an HR professional, then ERISA is your constant companion in the benefits world. If you offer any type of employee benefits plan, then you’re likely subject to ERISA regulations. This means you have specific responsibilities and obligations under the law. Failure to comply with ERISA regulations could result in hefty fines, loss of tax benefits, and even criminal charges in extreme circumstances.

What does ERISA require?

ERISA requires you to provide participants with plan information, including important details about plan features and funding. It sets standards of conduct for plan managers and other fiduciaries. It also requires plans to establish a grievance and appeals process for participants.

Here are some of ERISA’s concrete requirements:

• Reporting and disclosure: ERISA mandates that plan administrators provide participants with specific information about their plans. This includes a summary plan description (SPD), which is like a user manual for your benefits plan. Companies with 100 or more covered lives also need to file an annual report, Form 5500, with the Department of Labor for both your health plan and retirement plan. This shouldn’t be overlooked, as businesses can be fined up to $15,000 for a late or incorrect filing of Form 5500.
• Fiduciary responsibilities: Under ERISA, anyone who exercises discretionary authority over a plan’s management or assets is considered a fiduciary. This means they must act solely in the best interest of plan participants and beneficiaries. It’s a big responsibility, as fiduciaries can be held personally liable for breaches of their responsibilities.
• Vesting: For pension plans, ERISA sets minimum standards for when an employee’s right to their benefit becomes non-forfeitable. This prevents employers from pulling the rug out from under long-term employees.
• Funding: ERISA establishes minimum funding requirements for pension plans. This is to confirm that the money promised to employees for their retirement will actually be there when they need it.

The importance of ERISA for health benefits

While ERISA is often associated with retirement plans, it also plays an important role in health benefits. ERISA health plans must provide participants with specific information about plan features and funding. This transparency helps employees understand their coverage and make informed decisions about their healthcare.

ERISA also provides important protections for health plan participants. It prohibits plans from discriminating against participants and beneficiaries based on health status. It also includes provisions for continuation of health coverage (COBRA) and special enrollment rights.

Navigating compliance issues with ERISA

Staying compliant with ERISA can be challenging, especially when it’s your first time. The law is complex, and the stakes for noncompliance are high.

One of the biggest challenges is keeping up with changes to the law. ERISA has been amended multiple times since its inception, including major changes through the Affordable Care Act (ACA).

Consider the following strategies to stay on top of ERISA compliance:

1. Regular audits: Conduct internal audits of your ERISA plans at least annually.
2. Employee education: Ensure your entire HR team (and any other fiduciary) understands its ERISA responsibilities.
3. Documentation: Maintain meticulous records of all plan-related decisions and actions.
4. Expert consultation: Consider working with ERISA attorneys or consultants for complex issues.
5. Technology solutions: Implement software that's designed to track ERISA compliance requirements.
6. Ongoing training: Provide regular ERISA training for your HR staff and plan administrators.
7. HR networking: Staying connected to peers in the HR space can help you stay informed. For example, the Nava HR Slack Community has a channel dedicated to compliance.

By proactively addressing compliance, you can minimize the risks and ensure your benefits plans continue to serve your employees. Remember, ERISA compliance is an ongoing process, not a one-time task. Even if the law stays the same, certain changes to employer health plans (like funding arrangements) can change their ERISA responsibilities. Stay vigilant, adapt to changes, and prioritize transparency in all of your benefits plan communications.

Self-funding and ERISA

When an employer transitions from a fully insured medical plan to a self-funded medical plan, their ERISA responsibilities expand significantly. Because the employer assumes more direct control and risk for the plan, they effectively become the plan sponsored and administrator.

Administering an ERISA-compliant health plan can be a full-time job in itself, which is why many companies will hire a third-party administrator (TPA). While TPAs can handle many of the day-to-day administrative tasks required by ERISA, including claims processing and eligibility management, it’s important to note that the ultimate responsibility for compliance still rests with the plan’s sponsor.

Employers should consult ERISA attorneys, benefits consultants, or TPAs to ensure they understand and meet their expanded responsibilities when moving to a self-funded plan.