by Patti Dunham, M.A., MBA SPHR
The Employee Retirement Income Security Act (ERISA), legislation that sets uniform standards to assure that employee benefit plans are established and maintained in a fair and financially sound matter, turned 30 in September of this year. And, unlike many other pieces of legislation, the law that was hurriedly pushed through congress to avoid getting backlogged behind the Nixon impeachment trial has fundamentally remained unchanged in its 30 years.
ERISA, most definitely, is a complex series of rules that have become the cornerstone of employee benefit plans today. Although in place for 30 years, you will have a hard time finding an HR professional who doesn’t shiver at the mere mention of the word. With typical legal language and it’s affiliation with the Internal Revenue Code, it’s easy to quickly become intimidated when ensuring we are in compliance. The following outlines some of the general requirements surrounding ERISA and what you should be aware of when ensuring compliance.
ERISA, in general, applies to a wide variety of employee benefit plans, typically welfare plans. Examples of the types of plans that fall under the legislation include: medical, disability, death, pension, profit-sharing, stock and bonus plans. To determine if a plan is covered, it is necessary to review the guidelines on plan coverage. These guidelines are tricky but the general requirements are that (1) it is a plan, fund, or program that is (2) established or maintained by an (3) employer or employee organization for the (4) purpose of providing specified benefits to participants or their beneficiaries. Remember, unfunded benefit or payroll practices such as vacation, holidays, PTO, etc. are not included. Group-type voluntary insurance programs in which the employer makes no contributions are also excluded.
Responsibilities under ERISA vary depending on the type of the plan involved. Pension plans are subject to all of the rules, while welfare benefit plans must only meet the rules on reporting and disclosure, fiduciary responsibility, prohibited transaction and benefit claims procedures.
Reporting. Administrators of covered plans must file summary plan descriptions (SPDs), Summaries of Material Modifications (SMMs), and annual reports, including Form 5500 for each plan.
Disclosure. Certain information must be communicated to plan participants so that they can be informed about their rights under the plan. These include SPDs, updated SPDs, SMMs, Summary annual reports (SARs), and notice of claim denials if a claim has been denied. Communications must be sent to employees in a method likely to result in full distribution, not merely a “posting”. It also must be easily understood by the average participant. ERISA also requires notification of continuation of benefits under COBRA, an explanation of ESOPs and other stock benefits, and the posting of all required state employment laws.
Fiduciary Responsibility. Plan fiduciaries have the responsibility of reviewing covered plans to ensure financial compliance. Fiduciary trouble areas typically involve:
- Not paying employee contributions on time
- Not administering the plan according to the document (i.e. loans, testing, etc.)
- Not monitoring investment alternatives
- Not updating plan documents and SPDs when required
- Inaccurate 5500 report filing
Benefit Claim Denials. An administrator who denies a participant’s claim for benefits has legal obligations and must provide information about the denial as well as the appeal process. Anyone who has medical coverage who has had a claim denied has probably seen the disclosure on the explanation of benefits that covers this requirement.
Well, the easy answer is "it’s the law". If an organization is convicted of violating ERISA’s reporting and disclosure requirements, the company can face up to a fine of $100,000 and/or 10 years in prison. Not such a great thing. The more significant answer is the benefit that it provides to your employees and participants in these plans. Although there is always room for improvement, ERISA requirements have forced us to greatly improve our benefit communications. Employees feel more informed and clear about the benefit plans in which they are participating.
As we look back to the beginning of ERISA, it is alleged that the seed for ERISA legislation was the 1963 failure of the Studebaker Company. That failure left thousands of long service employees without their promised pensions. More currently we look at the Enron failure and the threats to the Pension Benefit Guarantee Corporation (PBGC). The PBGC has potentially significant liabilities with under-funded plans as a result of the downturns in the stock market and certain industries. We see plan trustees failing in their fiduciary responsibilities in events such as theft and/or misuse that end up in the courts and in prison. As ERISA turns 30, we can definitely see she has more bite than in her earlier years. Serious consequences for non-compliance and a 24% increase in DOL audits surrounding ERISA compliance show us that this is not just another birthday. Be aware of the ERISA requirements and be sure to work with your insurance broker and/or attorney to ensure compliance with this much celebrated piece of legislation.
Patti Dunham is a Sr. Human Resources Consultant with Strategic Human Resources, Inc. If you have any questions feel free to contact her at:
Patti@StrategicHRInc.com.
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