EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)



The Employee Retirement Income Security Act of 1974 (ERISA) is a U.S. federal law that regulates most private sector employee benefit plans, including 401(k) plans, profit-sharing plans, simplified employee pension (SEP) plans, and Keogh plans. Originally intended to address the problem of embezzlement from plan funds by trustees, ERISA sets minimum standards to ensure that such plans are established and maintained in a fair and financially sound manner. The law obligates employers to provide plan participants with the benefits they are promised, and establishes strict penalties for those who fail to do so. It also sets forth vesting requirements—time periods over which employees gain full rights to the money invested by employers on their behalf. ERISA governs most employer-sponsored pension plans, but does not apply to those sponsored by businesses with less than 25 employees.

ERISA outlines a number of requirements for administrators of employee benefit plans. For example, those who manage plan funds are required to manage them in the exclusive interest of plan participants and beneficiaries. In other words, employers are not allowed to use retirement funds set aside by employees for their own purposes. ERISA also requires plan administrators to avoid transactions that would create a conflict of interest, and to respect limitations on the percentage of employee benefit plan funds that can be invested in employer securities.

ERISA also sets rules governing the disclosure of information about the financial condition of benefit plans to participants and to the U.S. government. For example, administrators are required to furnish participants with a summary plan description (SPD) covering their rights and benefits under the plan. In addition, employers must file Form 5500 annually with the Internal Revenue Service to report the financial condition and other information about the operation of the plan. ERISA provides for civil and criminal penalties of up to $1000 per day for failing or refusing to comply with these annual reporting requirements.

In 1996, ERISA was amended by Health Insurance Portability and Accountability Act (HIPAA) to improve the continuity of health insurance coverage for employees who terminate their employment with a company. The amendment prohibits employers from discriminating against employees on the basis of health status and sets rules regarding preexisting conditions. For more information about the provisions of ERISA, see the Department of Labor Web site at http://www.dol.gov.

FURTHER READING:

Anastasio, Susan. Small Business Insurance and Risk Management Guide. U.S. Small Business Administration, n.d.

Blakely, Stephen. "Pension Power." Nation's Business. July 1997.

Clifford, Lee. "Getting Over the Hump before You're Over the Hill." Fortune. August 14, 2000.

Crouch, Holmes F. Decisions When Retiring. Allyear Tax Guides, 1995.

"Five Steps to a Great Retirement." Money. November 1, 1999.

Infante, Victor D. "Retirement Plan Trends." Workforce. November 2000.

Janecek, Lenore. Health Insurance: A Guide for Artists, Consultants, Entrepreneurs, and Other Self-Employed. Allworth Press, 1993.

Martin, Ray. Your Financial Guide: Advice for Every Stage of Your Life. Macmillan, 1996.

Szabo, Joan. "Pension Tension." Entrepreneur. November 2000.

SEE ALSO: Pension Plans



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