Happy Birthday, ERISA! An Overview for Employers

While America was celebrating Labor Day this year, another auspicious occasion was taking place that probably flew under most people’s radar: The Employee Retirement Income Security Act (ERISA) turned 50.

For employers, ERISA is a constant regulatory presence when choosing, launching and administering employee benefit plans. If you’ve been dealing with it for years, you might not recall or even know why the law came about or how it’s evolved. Let’s take a look. 

Brief history

The seeds of ERISA can be found in the Revenue Acts of 1921, 1926 and 1942. These laws addressed the growing trend of employer-sponsored pensions, also known as defined benefit plans.

The Revenue Acts established increasingly strict requirements — such as minimum employee coverage, employer contribution requirements and mandated disclosures — for the first qualified plans. Employers that met the qualifications for such plans could deduct pension contributions, while participants could accumulate tax-free savings and defer income taxes until taking distributions. The IRS was primarily tasked with enforcing the Revenue Acts.

In 1959, the federal government escalated its regulation of retirement plans with the Welfare and Pension Plans Disclosure Act, which was amended in 1962. It introduced the requirement that employers must file plan descriptions and annual reports. With this law, the U.S. Department of Labor (DOL) became the chief enforcer.

Yet, despite the passage of these laws, labor advocacy groups continued to decry the instability of pensions and the risks they posed to workers — many of whom depended on those funds for retirement only to see them vanish. And so, throughout the 1960s and early 1970s, the regulatory ideas that would eventually form the provisions of ERISA were developed. The law itself was finalized during the Ford administration and signed into law on Labor Day, 1974.

Purpose, titles and more 

According to the DOL’s website, “The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans.” You may note the phrase “employee benefit plans,” not “employee pension plans,” in that sentence. Indeed, over time, ERISA has expanded to include both major types of retirement plans: defined benefit plans and defined contribution plans, such as 401(k)s, which are now much more widely sponsored than pensions. ERISA also covers certain health and welfare benefit plans.

In addition, you may note the reference to Title I. In fact, the law has four Titles:

1. Title I, which generally includes the rules regarding plan reporting and disclosures, participation, vesting, accrual of benefits and funding,
2. Title II, which covers the tax treatment of plans,
3. Title III, which addresses jurisdiction, administration and enforcement, primarily assigning these responsibilities to the DOL and the U.S. Department of the Treasury, and
4. Title IV, which established and sets forth the powers and rules of the Pension Benefit Guaranty Corporation, essentially a government insurer of pension plans.

Over the years, many of the most powerful and well-known laws related to employee benefits have been enacted under or in relation to ERISA. These include the Consolidated Omnibus Budget Reconciliation Act (popularly known as “COBRA”), the Health Insurance Portability and Accountability Act and the Affordable Care Act.

One important recent development is multistate employers’ concern about the erosion of ERISA’s “preemption.” ERISA has always preempted state and local laws related to employee benefit plans, and it continues to do so. But some states have been quietly challenging this long-standing legal principle. It’s something to keep an eye on if your organization could be adversely affected.

Fundamental mandate

Ultimately, ERISA’s fundamental mandate is fiduciary responsibility — that is, plan sponsors must always act in the best interests of participants when administrating plans and managing their assets. For questions about compliance, contact your attorney. And for help identifying and managing the costs and tax impact of your organization’s benefit plans, contact us.

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