INTRODUCTION TO THE ERISA COURSE

THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA)

INTRODUCTION TO THE ERISA COURSE

Welcome to the ERISA course. The purpose of this course is to arm you, the insurance adjuster and insurance agent, with relevant and adequate knowledge on matters pertaining to ERISA. At the end of this ERISA course, you should be capable of understanding the basics of ERISA.

Please be guided that the contents of this course should only serve as guidance and an overview of the course. All the materials covering ERISA cannot be exhaustively covered under the course due to its dynamic nature. You are therefore encouraged to use supplementary materials on the topic to equip yourself further.

The content of the course shall be as hereunder:

  1. Introduction
  2. History of Pension Plans and ERISA
  3. Administration of ERISA
  4.  
  5. Requirements for Disclosure, Reporting, and Recordkeeping
  6. Review of ERISA and other Regulations
  7. Case law review

Introduction

Individuals participating in retirement and health plans established voluntarily in private industry are protected under the Employee Retirement Income Security Act of 1974 (ERISA), which is a federal law that establishes minimum standards for most voluntarily established retirement and health plans in private industry. It is found in the United States Code, Section 1001 et seq., and the accompanying regulations at 29 C.F.R. Part 2509 et seq. ERISA is a labor and tax law that applies to private enterprises regardless of their size. It makes it possible to give both pension and welfare benefits while receiving preferential tax treatment. The majority of ERISA’s key restrictions apply exclusively to pension and profit-sharing plans. Employee benefit plans are governed by the federal law, which takes precedence over state laws, with the exception of specific subjects such as state insurance, banking, and securities regulations, and divorce property settlement decisions issued by state courts. An employee benefit plan can be either a pension plan (which offers retirement benefits) or a welfare benefit plan (which provides other types of employee benefits such as health and disability benefits). The majority of ERISA’s requirements pertain to pension plans. The Employee Retirement Income Security Act (ERISA) does not force businesses to offer pensions or welfare benefit programs, but those that do must adhere to the Act’s criteria. ERISA establishes requirements that pension plans must achieve in the below areas:

  • The persons that must be covered i.e participation.
  • The length of time a person must work before being eligible for a pension i.e vesting, and
  • The amount of money that must be set away each year to pay future pensions  i.e funding.

Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciary standards are established that require employee benefit plan funds to be handled prudently and in the best interests of participants. In addition, it requires plans to notify participants of their rights under the plan, including information about the plan’s financial condition, and it grants plan participants the ability to sue in federal court to recover benefits that they have earned under the plan. The Pension Benefit Guaranty Corporation (PBGC) was established by ERISA to ensure that plan participants get promised benefits, up to a statutory limit, in the event that a plan terminates due to a lack of sufficient assets to pay promised benefits. As a means of encouraging companies to create pension plans, the Congress has provided certain tax deductions and deferrals to qualifying pension plans. Plans must meet certain standards with respect to pension plan contributions, benefits, and distributions in order to qualify for tax favors under the Internal Revenue Code (IRC), and there are particular rules for plans that predominantly benefit highly compensated employees or business owners.

The Employee Retirement Income Security Act of 1974 (ERISA) establishes a comprehensive federal framework for the regulation of private-sector employee pension and welfare benefit plans.

ERISA comprises a number of measures aimed at protecting the interests of plan participants and beneficiaries in employee benefit programs. Reporting and disclosure, participation, vesting, and benefit accrual, and funding, are all covered by these safeguards. ERISA also governs plan fiduciaries’ responsibilities and other aspects of plan management. ERISA specifies a number of requirements that a plan must follow in order to qualify for preferential tax treatment, as well as rules on plan termination.

ERISA’s aims and objectives include but are not limited to:

•           Protect employees’ and beneficiaries’ rights in employee benefit plans.

•           Require employers and their representatives to adhere to particular conduct requirements.

•           Require employers to report to the federal government and make disclosures to participants.

History of Pension Plans and ERISA

The railroad sector was the first to offer employer-sponsored pension systems in the United States, which began in the late nineteenth century. Pensions were viewed as presents in recognition of long service during the period, rather than as a kind of remuneration that was protected by law. Pension benefits were paid from employers’ yearly revenue, and the benefits were occasionally decreased or cancelled if the company paying the pension became unprofitable or went bankrupt.

Pensions and profit-sharing plans were granted preferential income tax status for the first time by Congress in the 1920s. Because only a small percentage of households paid income taxes at the time, these tax relief did not immediately promote the expansion of the private pension system.

A number of particular standards for “tax-qualified” pension plans were specified in the Revenue Acts of 1938 and 1942. These standards included the requirement that benefits and contributions not be discriminatory in favor of highly compensated employees.

Tax qualification means that the employer can deduct the amount contributed to the plan, the earnings on the pension trust fund are tax-free until dispersed, and covered employees are not required to pay income tax on the employer’s contributions to the plan. Employers are permitted to integrate their pension benefit formulae with Social Security benefits in order to partially offset the considerably more generous income replacement rates that Social Security provides to low-wage workers.

Pensions and other deferred compensation agreements were excluded from wartime wage controls during World War II (1941-1945). Employers who were unable to provide greater wages as a result of these restrictions could boost workers’ overall compensation by providing new or increased pension benefits. Pensions were also subject to collective bargaining in the 1940s as declared by the federal court, and employers were required to include pensions among the benefits for which unions may bargain. Furthermore, the expansion of the income tax to include more households, as well as the implementation of higher marginal income tax rates, increased the value of pension tax benefits to workers. During the 1950s and 1960s, both of these trends led to a greater acceptance of employer-sponsored pensions.

Due to an increase in the number and size of private pension plans during the 1950s and 1960s, an increase in the number of instances in which employers or unions attempted to use the assets of these plans for purposes other than the payment of benefits to retired workers and their surviving dependents also increased. The Welfare and Pension Plans Disclosure Act6 was approved by Congress in 1958, and it compelled the public disclosure of pension plan financial information.

Advocates for the Act hoped that more openness in pension funding would prevent funds held in trust for workers’ pensions from being misappropriated by plan sponsors, as had been the case in the past. The termination of the Studebaker automobile company’s underfunded pension plan in 1963, which resulted in the loss of pension benefits for several thousand employees and retirees, prompted Congress to begin contemplating legislation to protect the security of pension benefits in the private sector.

Legislation to regulate the private pension system was drafted in early 1970s, by the House and Senate labor committees. In 1972, the Senate Labor and Public Welfare Committee released a report on a pension bill. Most private pension plans benefited from the preferential tax status provided to them under the Internal Revenue Code, the Senate Finance Committee therefore also asserted its jurisdiction since up to that point, the legislation had been treated solely as a labor problem. ERISA comprised elements developed by the House and Senate labor committees, the House Ways and Means Committee, and the Senate Finance Committee when passed by Congress in 1974.

The Employee Retirement Income Security Act (ERISA) was passed by the House of Representatives on February 28, passed by the Senate on March 4, and signed into law by President Gerald Ford on September 2, 1974. Over the years, Congress has revised ERISA to provide better protection to survivors and spouses of pension plan participants, improve pension funding practices, strengthen the finances of the Pension Benefit Guarantee Corporation (PBGC), change the limits on tax-deductible pension plan contributions, and make sure that tax-favored plans are broadly based and do not unjustly favor a firm’s owners and other highly compensated employees.

Prior to the passage of the Employee Retirement Income Security Act of 1974, an employer could terminate an unfunded pension plan without being liable for any extra pension contributions. Unless the pension plan had adequate assets to settle all claims, participants had no legal recourse to demand that employers utilize company assets to continue paying the plan. According to ERISA, companies with defined benefit pension plans are required to fully cover the benefits that participants have accrued. Companies are prohibited from utilizing pension money for reasons other than paying pensions and providing retiree health benefits. It also restricts the age and length of service conditions that employers can impose on participants in order for them to be eligible for a pension. ERISA also requires all private-sector sponsors of defined benefit pension plans to acquire insurance from the Pension Benefit Guaranty Corporation. The Act was the result of several legislations addressing the labor and tax components of employee benefit plans.

Administration of ERISA

The Department of the Treasury, the Department of Labor Employee Benefits Security Administration, and the Pension Benefit Guaranty Corporation (PBGC) are all responsible for enforcing the Employee Retirement Income Security Act (ERISA). The Internal Revenue Service, which is part of the Department of the Treasury, is in charge of ensuring that plan participation, vesting, and funding rules are met. Regulations governing fiduciary standards and obligations for reporting and disclosure of financial information are governed by the Department of Labor. The Pension Benefit Guarantee Corporation (PBGC) handles the pension benefit insurance program.

The United States Department of Labor administers Title I of the Employee Retirement Income Security Act of 1974, which encompasses directions for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement. Title I of ERISA, was enacted in response to public fear that funds of private pension plans were being mishandled and exploited.

Before to a 1978 reorganization, the U.S. Department of Labor and the Internal Revenue Service shared responsibility for the administration of the parallel sections of Title I of ERISA and the tax code respectively. According to this new organizational structure, the United States Department of Labor is in charge of reporting, disclosure, and fiduciary standards while the Internal Revenue Service is in charge of participation, vesting, and funding issues. The United States Department of Labor, on the other hand, has the authority to intervene in any incident that has a major impact on the rights of participants, regardless of who is ultimately supposed to be in charge.

The Internal Revenue Service (IRS) is in charge of administering Title II of ERISA which changed the Internal Revenue Code to mimic many of the Title I provisions. Title III is focused on jurisdictional issues as well as the coordination of enforcement and regulatory actions carried out by the United States Department of Labor and the Internal Revenue Service (IRS). The Pension Benefit Guaranty Corporation (PBGC) administers Title IV, which handles the insurance of defined benefit pension schemes.

As earlier stated, the Employee Retirement Income Security Act (ERISA) administration is divided among: the United States Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) (PBGC).

The Department of Labor is tasked with significant law enforcement obligations under the Employee Retirement Income Security Act (ERISA). The department has the authority to bring a civil action to correct violations of the law, and it also has the authority to conduct investigations to determine whether anyone has violated Title I that deals with Protection of Employee Rights. Any person who willfully violates any provision of Part 1 of Title I will be subject to criminal penalties.

The Employee Benefits Security Administration (EBSA) has the jurisdiction to impose civil fines for reporting violations. Plan administrators who fail or refuse to comply with annual reporting requirements may be subject to a penalty of up to $2,063 per day. Parties in interest who engage in prohibited transactions with welfare and nonqualified retirement plans are subject to civil penalties under Section 502(i) which the agency has the power to assess. The amount of the penalty can range from 5 to 100 percent of the amount of the transaction concerned.

Disqualified persons, such as employee benefit plan sponsors and service providers, who participate in prohibited transactions with tax-qualified retirement plans are subject to an excise tax under a parallel section of the Internal Revenue Code which may be directly imposed on them. Under Section 502(l), the Department of Labor is required to assess mandatory civil penalties equal to 20 percent of any amount recovered in regard to fiduciary breaches as a result of either a settlement agreement with the Department of Labor or a court order resulting from a lawsuit brought by the Department of Labor.

Coverage by ERISA

ERISA applies to the vast majority of private employers, including for-profit and nonprofit organizations of every size. All benefit plans sponsored by private employers or employee organizations (e.g., labor unions), including self-insured and fully insured plans, are subject to the provisions of ERISA, provided that the plan provides retirement, health care, or other ERISA-listed benefits. ERISA applies to the following types of plans:

  • Defined benefit pension plans.
  • Defined contribution pension plans.
  • Group health and medical insurance such as PPO, HDHP, HMO, POS, etc.
  • Dental and vision plans.
  • Health Flexible Spending Accounts (FSAs).
  • Health Reimbursement Accounts (HRAs).
  • Prescription drug plans.
  • Disability plans.
  • Life and accident insurance plans.
  • Wellness Programs.
  •  Employee Assistance Programs (EAPs).

ERISA covers wellness programs and EAPs that provide medical care.

Under most circumstances, group health plans established or maintained by governmental entities, churches for their employees, or those plans maintained only to comply with applicable workers’ compensation, unemployment compensation, or disability legislation are exempt from the provisions of ERISA. Furthermore, plans maintained outside of the United States principally for the benefit of nonresident aliens, as well as underfunded excess benefit plans, are not covered by ERISA. ERISA does not apply to the following types of plans:

  • Plans by the government (federal, state, city, school district, etc.).
  • Plans for the church (unless the plan chooses to be covered under ERISA).
  • Workers’ compensation, unemployment insurance, or statutory disability benefit plan.
  • Health Savings Accounts (HSAs).
  • Section 125 premium-only plans.
  • Plans for nonresident alien employees that are maintained outside of the United States.
  • Voluntary plans
  • Payroll practices funded benefits

Certain voluntary insurance plans may be exempt from the provisions of the ERISA.

In order to be considered exempt under the voluntary plan safe harbor provisions of ERISA, all of the following conditions must be fulfilled:

• The plan must be fully voluntary.

• No contributions from employers should be permitted.

• The plan must not permit the employer to endorse it.

The employer must be barred from accepting any consideration other than reimbursement of administrative expenses.

Certain benefits payments are free from ERISA regulation under the payroll practice exception if they are paid entirely out of the employer’s general assets. Overtime pay, unfunded sick pay, paid medical leave, and income replacement benefits, and short-term disability or salary continuation plans, are some of the benefits aforementioned.

Qualified Retirement Plans Types and Hybrid plans

Employer-sponsored retirement plans are classified under ERISA and the Internal Revenue Code as either defined benefit (DB) plans or defined contribution (DC) plans.

Definition of defined benefit plans: a defined benefit plan defines either the benefit that will be paid to a plan participant or the mechanism by which the benefit will be determined. The contributions made to the plan by the plan sponsor fluctuate from year to year, depending on the plan’s funding requirements at the time of the contribution. Benefits are frequently calculated on the basis of average income and years of service. For example, the benefit could be specified as 1.5 percent of the average of the employee’s greatest five years of compensation multiplied by the number of years the employee has been in service. Upon reaching 30 years of service, a participant would be eligible for a benefit equal to 45 percent of his or her “high-five” average salary. Some defined benefit plans, particularly those that include workers who are members of unions, pay a flat benefit each year of service. Suppose the benefit is defined as $30 per month for each year of service, and the monthly pension payout after 30 years of service is $900.

According to ERISA, defined benefit plans must be fully financed. The assets kept in the pension trust must be capable to cover the benefits that plan participants have accrued throughout the course of the plan’s existence. The investment risk associated with the assets held by the plan is borne by the employer. If the value of the plan’s assets decreases, or if the plan’s liabilities increase, the plan sponsor is required to make additional contributions to the pension trust fund. The qualified defined benefit (DB) plan’s assets are shielded from creditors’ claims while the plan’s sponsor is in bankruptcy, and defined contribution (DB) plan benefits are covered by the Pension Benefit Guaranty Corporation up to specific levels.

A defined contribution plan is one in which the contributions, but not the benefits, are established in advance. In a defined contribution plan (also known as “an individual account” plan), there is an individual account for each participant. The amount contributed to the account as well as any income, expenses, and investment gains or losses are all deducted from the account to determine the amount of benefits received. Under DC plans, the investment risk is borne by the employee. DC plans are not covered by the PBGC.

When the Employee Retirement Income Security Act of 1974 (ERISA) was passed, the vast majority of employer-sponsored retirement plans were defined benefit plans. Until the mid-1980s, the number of defined benefit plans continued to expand. After that, the number of DB plans began to decline, while the number of DC plans began to rise.  The increased cost of maintaining DB plans as a result of ERISA’s stricter funding requirements, as well as the greater attractiveness of DC plans as a result of Section 401(k) of the tax code being added by the Revenue Act of 1978, have all been suggested as possible explanations for these trends. Rising global competition that increased pressure on companies to reduce costs, and a more mobile workforce has preferred the portability of benefits earned under DC plans are also some of the explanations for these trends.

However, despite the fact that the rules created under ERISA have made workers’ pensions safer, some firms, particularly small businesses, appear to have concluded that the plan funding requirements of ERISA rendered defined benefit (DB) plans too expensive to keep up. Since the 1980s, the significant drop in the number of DB plans, has been primarily as a result of the termination of small plans. As of the late 1990s, defined contribution plans had surpassed defined benefit plans in the number of plans, the number of participants, and the total assets under administration.

The conversion of traditional defined benefit plans to hybrid plans, which include some features of both defined benefit and defined contribution plans, has been increasingly popular in recent years. Among these hybrid plans, the cash balance plan is the most widely used. A cash balance plan is similar in appearance to a defined contribution plan in that the accrued benefit is specified in terms of an account balance. The employer makes a contribution to the plan in the amount of a fixed percentage of pay, and pays interest on the accrued balance. A cash balance plan, on the other hand, is not an individual account that belongs to the participant. In this arrangement, assets are maintained in a common trust, and each participant’s “account balance” is just a record of the benefits that have accrued to him or her through time. Cash balance plans are classified as defined benefit plans because plan sponsors are required to give participants with benefits that are equal to or greater than the amount of their contributions to the plan plus interest.

Requirements under ERISA

ERISA establishes similar minimum standards to ensure that employee benefit plans are formed and maintained in an equitable and financially safe. Employers also have a responsibility to give promised benefits and to comply with ERISA’s standards for managing and administering private retirement and welfare programs, among other things. Title I of ERISA states that persons and entities that manage and control plan funds should:

  • Manage plans exclusively for the benefit of participants and beneficiaries.
  • Perform their duties in a prudent manner; and abstain from engaging in conflict-of-interest transactions that are expressly forbidden by law.
  • Adhere to applicable restrictions on certain plans’ investments in employer securities and property.
  • Fund benefits in compliance with applicable laws and plan rules.
  • Report and disclose information to the government and participants about the operations and financial state of plans.
  • Provide necessary documents for investigations to verify legal compliance.

ERISA-covered plans must meet some or all of the following requirements:

  • Written Plan Documents.
  • Summary Plan Description (SPD).
  • Summary of Material Modification (SMM).
  • Form 5500.
  • Form 5500-SF.
  • Summary of Annual Report (SAR).
  • Fiduciary Standards.
  • Prohibited Transactions and Exceptions

Written Plan Documents. Generally speaking, the administrator of an employee benefit plan is the individual or business who has been officially named as such in the plan’s documents. The administrator of a plan if the plan documents do not specify who will serve as administrator is either the employer who is administering the plan, or, in the case of a plan administered by more than one employer, the association, committee, joint board of trustees, or similar group representing the parties who are administering the plan. Plan administrators are required to provide plan participants with written notice of the most important facts about their retirement and health benefit plans, including plan rules, financial information, and documents on the operation and management of the plan. The plan administrator must give some of these data to participants on a regular and automatic basis, while others are available upon request, either free of charge or subject to copying fees, depending on the circumstances. It is necessary to submit the request in writing.

Plan documents options include:

  • Wrap-Around Plan Document. Incorporating the COC as part of the SPD, the Wrap-Around Plan Document creates a consolidated plan for all insured benefits. When an insurance policy, certificate, or booklet is “wrapped” around by a document that ensures compliance of the plan sponsor with ERISA, that document is referred to as the wrap document. The insurance policy, certificate, or booklet that governs the plan benefits continues to be in effect, but the Wrap Document supplements that information in order for the combined documents to be in compliance with ERISA.
  • Individual Plan containing separate Plan Document and separate SPD for every benefit.
  • Umbrella Plan, which combines all welfare benefits into a single plan with separately bundled or individual SPDs.

Summary Plan Description (SPD). When it comes to telling participants and beneficiaries about their plan and how it runs, the Summary Plan Description (SPD) is what is primarily used. Unlike the Plan Document, this SPD is a separate and unique document. It must be written for the ordinary participant and be adequately thorough to inform covered persons of their benefits, rights and responsibilities under the plan.

SPD Requirements. The SPD’s style, format, and content requirements are described in 29 C.F.R. 2520.102-2 and 2520.102-3. The information that must be included in the SPD are:

  • The name of the plan.
  • The name and address of the plan’s sponsor/ employer.
  • The federal Employer Identification Number (EIN) of the plan sponsor.
  • The name, address, and telephone number of the plan’s administrator.
  • Any other named fiduciaries’ designation, if any, who are not the plan administrator (e.g claim fiduciary).
  • The plan number for the purposes of completing ERISA Form 5500. (501, 502, 503, etc.) It is imperative that each ERISA plan be given a unique number that cannot be utilized more than once.
  • The sort of plan or a short explanation of its advantages (life, medical, dental, disability, etc.).
  • The conclusion of the plan year for the purpose of keeping the plan’s financial records, this may however be different than the insurance policy year.
  • Where the plan has a trust, each trustee’s name, title, and address of principal place of business.
  • The name and address of the plan’s agent for serving of legal process, together with a declaration that service may be made on a trustee or administrator of the plan.
  • The manner in which the plan is administered i.e administered by contract, insurer, or sponsor).
  • Qualification criteria, such as the types of qualified employees, the length of the employment waiting period, and the number of hours per week as well as the effective date of participation, which could be the next day or the first of the month following the completion of the eligibility waiting period
  • The manner in which insurer refunds (such as dividends, demutualization, and medical loss ratio (MLR) reimbursements) are distributed to participants.
  • The plan sponsor’s amendment and termination rights and procedures, as well as what happens to the plan’s assets, if any, in the event that the plan is terminated.
  • A summary of any plan terms controlling the benefits, rights, and obligations of participants under the plan in the event of plan termination, amendment or elimination of benefits. 
  • A summary of any plan terms following plan termination controlling the allocation and disposition of assets.
  • Claims procedures, which may be provided separately in a Certificate of Coverage (COC), granted that the SPD indicates in a separate document that claims procedures are provided automatically, without a fee, and time limits for lawsuits, if the plan requires them.
  • A statement that clearly identifies the situations that could result in the loss or refusal of benefits (subrogation, Coordination of Benefits, and offset provisions).
  • The review standard for benefit determinations.
  • ERISA model participants’ rights declaration
  • The sources of plan contributions, including employer and/or employee contributions, as well as the mechanism by which they are determined.
  • Interim Summary of Material Modifications (SMMs) since the last time the SPD was adopted or restated.
  • The employer’s status as a participating employer or a member of a controlled group.
  • The existence of one or more collective-bargaining agreements maintaining the plan, as well as the fact that a copy of the agreement can be obtained upon request.
  • An prominent offer of aid in a language other than English (depending on the number of participants who are literate in the same non-English language).
  • The name(s) of any insurers, if any.
  • More requirements for group health plan SPDs, such as:
  • Plan provisions and exclusions described in great detail (such as co-pays, deductibles, co-insurance, eligible expenses, network provider provisions, prior authorization and utilization review requirements, dollar limits, day limits, visit limits, and the extent to which new drugs, preventive care, and medical tests and devices are covered). Network providers links should also be supplied, and plan limits as well as any exemptions or limitations that  must be noticeable.
  • Information on COBRA, HIPAA, and other federal requirements, like the Women’s Health Cancer Rights Act, pre-existing condition exclusion, special enrollment rules, mental health parity, coverage for adopted children, qualified medical support orders, and minimum hospital stays on childbirth.
  • If applicable, the name and location of any health insurance providers.
  • An explanation of the health insurers function (such as, if the plan is insured by an insurance company or the insurance company is just providing administrative services).

Summary of Material Modification (SMM). A Summary of Material Modifications (SMM) must be provided to plan participants whenever there is a significant change to the plan that affects the plan’s design or administration. It must be distributed within 210 days of the conclusion of the plan year in which the change was made. Within 60 days of the day the change is made, the SMM must be distributed to all plan participants if the change is in regard to any major reduction in services or benefits. Reductions in the scope of services or benefits that are covered include modification or change in a plan that:

  • Terminates the benefits payable under the plan.
  • Lowers the amount of benefits payable under the plan.
  • Increases a participant’s or beneficiary’s premiums, deductibles, co-insurance, co-payments, or other sums due.
  • A health maintenance organization’s service area is reduced.
  • Adds new conditions or requirements to accessing services or benefits under the plan (e.g., preauthorization requirements).

Changes to a plan necessitate the updating of SPDs and other plan documents. Before a new SPD can be issued, the SMM provides participants with an interim statement of the plan’s changes.

Form 5500. Due to a collaboration between the Department of Labor, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation, the Form 5500 Series was developed that would allow employee benefit plans to use it to satisfy annual reporting requirements under Title I and Title IV of ERISA, as well as requirements under the Internal Revenue Code. It is also necessary to submit an accountant’s report in some plans. Plan sponsors are normally required to file the forms on the last day of the seventh month following the conclusion of their plan year. If one needs to request an extension of the Form 5500 filing deadline by two and one-half month, one can use Form 5558. It is mandatory that all Form 5500 Annual Return/Report of Employee Benefit Plan, all Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan, and any required schedules and attachments, be completed and filed electronically through EFAST2-approved third-party software or using IFILE. Information on submitting Form 5500, is found in the Department of Labor’s Reporting and Disclosure Guide.

Summary Annual Report. Administrators of defined contribution retirement plans and welfare plans must yearly furnish participants and beneficiaries with a Summary Annual Report (SAR), which is a narrative summary of the Form 5000.

Fiduciary Standards. In Part 4 of Title I, fiduciaries are held to a set of standards and rules that govern their conduct. Persons who have discretionary authority or control over the management of a plan or the disposition of its assets are considered fiduciaries for the purposes of Title I of the ERISA. The fiduciary status is determined by the functions performed for the plan, rather than by a person’s position within the plan. A plan’s fiduciaries are typically comprised of the trustee, any investment advisers, all individuals exercising discretion in the administration of the plan, all members of the plan’s administrative committee (if the plan has one), and those responsible for selecting committee officials, among other individuals. Attorneys, accountants, and actuaries, for example, are typically not considered fiduciaries when acting solely in the course of their professional duties. To determine whether an individual or a business entity is a fiduciary, it is necessary to look at whether they have exercised discretion or control over the plan.

Fiduciaries are obliged to dispense their responsibilities purely in the best interests of plan participants and beneficiaries, and for the sole purpose of giving benefits and offsetting reasonable expenses of administering the plan. Fiduciaries are required to act prudently and in accordance with the documents guiding the plan, to the extent that such documents are consistent with ERISA. The “Prudent Expert Standard” is contained in Section 404(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (ERISA)/ The requirement that the fiduciary act with the prudence of one who is “familiar with such matters” distinguishes the fiduciary from a person who acts with the general prudent person standard. When selecting advisors, employers must show due diligence in ensuring that the persons in question meet this standard of performance.

As per the Department of Labor, it has determined that there is a class of activities that are related to the formation of plans rather than their management. They are referred to as settlor functions and they include decisions about the formation, design, and termination of plans. Except in the context of multi-employer plans, these activities are not generally subject to Title I of ERISA. While the Department of Labor believes that expenses associated with settlor activities do not qualify as reasonable plan expenses, but it believes that expenses incurred in connection with the implementation of settlor decisions may qualify as reasonable plan expenses.

Settlor functions are distinct from fiduciary functions. When establishing a plan, selecting a plan design, amending or terminating a plan, an employer or the management of a sponsoring entity performs the settlor functions that are required. Although such business decisions have an impact on an employee benefits plan, these settlor functions are not governed by the fiduciary duty provisions of ERISA).

Prohibited Transaction Exemption Procedures.  As earlier highlighted, in order to eliminate misunderstanding about dual jurisdiction between the Department of Labor and IRS, Reorganization Plan No. 4 of 1978 shifted the ability to grant exemptions from the prohibited transaction requirements under the Internal Revenue Code to the Department of Labor. Due to this, the Department of Labor has the only ability to provide prohibited transaction exemptions (PTEs) involving plans that are:

  • Only covered in Title I of ERISA (welfare benefit plans like group health plans).
  • Covered only under Title II of ERISA. • (plans without employees like the nonemployee sponsored IRAs and Keoghs.
  • Covered in both Titles I and II of ERISA (pension and individual account plans such as 401(k) plans).

Prohibited Transactions. Prohibited transaction clauses restrict fiduciaries from allowing a plan to participate in certain types of transactions with persons referred to as “parties in interest” by Title I of ERISA or “disqualified persons” under the Internal Revenue Code. Plan fiduciaries should avoid engaging with persons that may be in a position to exercise inappropriate influence over plan assets, and they should avoid acting in a manner that implies self-dealing or conflicts of interest while acting on behalf of a plan, according to the banned transaction regulations.

There are two types of transactions that are not allowed to take place. The first category deals with transactions that take place between the plan and a party in interest in the plan in question. To be more specific on these transactions, a plan fiduciary may not induce a plan to participate into a transaction that directly or indirectly comprises any of the following activities:

  • Property purchase, exchange or leasing
  • Extension of credit e.g., loans
  • Goods, services or facilities provision
  • Transfer or utilization of the plan’s income or assets
  • Employer securities or employer real property acquisition and holding of that fails to meet certain conditions.

The second category of banned transactions involves fiduciary self-dealing and conflicts of interest. For instance, if a plan fiduciary leads a plan to participate in activities that may benefit the plan fiduciary or a person or company in which the fiduciary has a financial interest, the plan may be in violation of the law. Another example is when a fiduciary acts on behalf of or represents a party whose interests are in opposition to the interests of the plan.

Party in Interest/Disqualified Person. Individuals or entities with defined relationships to a plan are referred to as “parties in interest” or “disqualified persons.” Individuals who provide services to the plan (such as attorneys, accountants, or third-party administrators), employers or unions whose employees or members engage in the plan, and plan fiduciaries are some of the examples. Note that there are some distinctions between these two phrases under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The term “party in interest” under ERISA includes, among other groups, employees of the plan sponsor, whereas the term “disqualified person” under the Internal Revenue Code applies only to certain highly compensated employees.

Exemptions may be classified into two: statutory exemptions or administrative exemptions.  It is possible to rely on a statutory exemption if all of the conditions of the exemption are met. Using a service provider is permitted under the law as long as the services are required to operate the plan, and both the contract or arrangement under which the services are supplied and the compensation paid for those services are reasonable. Many plan transactions with banks, insurance firms, and other financial institutions that are necessary to the plan’s continuous operations enjoy exemption from the requirements as per the law. Plans may also provide loans to participants as another exemption.

The parties would not be required to seek an administrative exemption from the Department of Labor for the same transaction if the transaction is permitted under a statutory exemption. Additional exemptions may be granted by the department. The exemptions granted by the department can relate to transactions that are available to a class of plans or to a single plan in specific. The Department of Labor has the power to give administrative exemptions from ERISA and Internal Revenue Code’s prohibited transaction provisions for a class of transactions or for individual transactions. Three determinations must be made by the department before an administrative exemption can be granted. These are:

  • Administrative feasibility of the exemption must be present;
  • In the plan, its participants and beneficiaries’ interest; and
  •  Protective of the plan participants and beneficiaries’ rights.

To offer interested parties the opportunity to comment on the plan, the department must first publish a notice of proposed exemption in the Federal Register before granting the exemption.  It is also necessary to provide an opportunity for a public hearing if the transaction contains the possibility of fiduciary self-dealing or conflicts of interest. The exemption processes are intended to ensure that the department receives all of the relevant materials that it requires in order to make an accurate and timely determination as to whether or not an exception should be proposed in the first place.

An identified class of entities or individuals who participate in the transaction(s) defined in the exemption and who also satisfy the other conditions specified in the exemption may get exemptive relief from the prohibited transaction provisions in ERISA or the Internal Revenue Code, or both, through a class exemption.  The department published a class exemption PTE 96-62, also known as EXPRO in 1996. The EXPRO exemption is obtainable for a class of prospective transactions which satisfy the requirement provided in PTE 96-62 in addition to the authorization requirements defined in it. Should the conditions and authorization procedures be satisfied, an applicant may be able to get individual prohibited transaction relief on an expedited basis.

In order to qualify for an individual exemption, the department must establish on a case-by-case basis whether or not the specific facts represented by an applicant on a specific transaction, in addition to the conditions applicable to such a transaction back a determination by the department that the requirements for relief from the prohibited transaction provisions of ERISA and the Internal Revenue Code have been met.

Requirements for Disclosure, Reporting, and Recordkeeping

Under 29 U.S.C. 1021, the ERISA notice requirements are provided. Under the Employee Retirement Income Security Act (ERISA), both pension and welfare benefit plans are expected to comply with stringent disclosure and reporting requirements. The Reporting and Disclosure Guide, published by the Department of Labor, is relevant in such situations.

Recordkeeping Requirements. Under Section 107 of the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1027), anyone filing an employee benefit plan report (i.e., Form 5500) is required to maintain sufficient records to support all information included on the report for a period of at least six years following the date the report is filed. Plan sponsors are normally required to file Form 5500 on the last day of the seventh month following the conclusion of their plan year. Form 5500 for the welfare plan for the year is typically not filed by businesses who have less than 100 participants in the welfare plan at the beginning of that year.

Section 209 of the Employee Retirement Income Security Act (ERISA) (29 U.S.C. 1059) however has a significantly broader and more open-ended recordkeeping obligation. Section 209 requires employers to keep all documents necessary to assess benefits that an employee is entitled to or may become payable to him or her. Records that should be kept include but are not limited to:

  • Documents related to the plan, including amendments
  • Determination letters from the Internal Revenue Service (IRS).
  • Summary Plan Descriptions (SPDs) and Summary of Material Modifications (SMMs)
  • Benefit statements of participants
  • Companies’ matching and/or profit-sharing contributions as declared in company resolutions.
  • Notifications to participants.
  • All necessary schedules and attachment to Form 5500 and the Form itself.
  • Actuarial statements and valuations.
  • Age and service records that are used to determine waiting periods, eligibility, vesting, breaks in service, and benefits.
  • Records of Payroll.

Review of ERISA and other Regulations

State and local laws that “relate to” an employee benefit plan are superseded by the provisions of ERISA Titles I and IV, as specified in Section 5 of Title I. While ERISA pre-empts some state and municipal regulations, it does not pre-empt others, such as state insurance regulation of multiple employer welfare arrangements (MEWAs). Generally, MEWAs are defined as employee welfare benefit plans or other arrangements that provide welfare benefits to employees of more than one employer and are not subject to a collective-bargaining agreement.

Furthermore, under the Employee Retirement Income Security Act (ERISA), the wide prohibitions against the assignment or alienation of retirement benefits do not apply to qualifying domestic relations orders. It is mandatory for plan administrators to adhere to the terms of qualifying orders made as per the state domestic relations laws that give all or some of a participant’s benefit in the form of child support, alimony, or marital property rights to an alternative payee (spouse, former spouse, child, or other dependent). Group health plans that are subject to the Employee Retirement Income Security Act (ERISA) are required to provide benefits as per the conditions of qualified medical child support orders given under state domestic relations statutes.

Important legislation has changed the Employee Retirement Income Security Act (ERISA) and enlarged the responsibility of the Department of Labor’s Employee Benefits Security Administration (EBSA). The Retirement Equity Act of 1984, for example, lowered the maximum age an employer could require for participation in a retirement plan, extended the time a participant could be away from work without losing credit toward the plan’s vesting rules for pre-break years of service, and established spousal rights to retirement benefits through qualified domestic relations orders (QDROs) in the happening of divorce and pre-retirement survivor annuities.

The Omnibus Budget Reconciliation Act of 1986, removed the power of employers to limit participation in their retirement plans for new employees who are nearing retirement and the ability of participants over the age of 65 to have their benefits frozen. For violations of fiduciary responsibility, the Omnibus Budget Reconciliation Act of 1989 authorizes the Secretary of Labor to assess a civil penalty equal to 20% of the amount of money recovered.

With the Pension Protection Act of 2006, ERISA was significantly amended, with new provisions allowing participants in 401(k)-type plans and individual retirement accounts (IRAs) to receive fiduciary investment advice more, eliminating barriers to automatic enrollment through qualified default investment alternatives, and enhancing of pension plan funding through new notice requirements.

The Department of Labor’s responsibilities under ERISA have also been enhanced by health care legislation. A new Part 6 of Title I of ERISA offers the continuation of health care coverage for employees and their beneficiaries although for a certain period of time if some events would otherwise result in a reduction in benefits under the Consolidated Omnibus Budget Reconciliation Act of (COBRA); COBRA was signed into law in 1985.

With the passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), a new Part 7 to Title I of the Employee Retirement Income Security Act (ERISA) was created with the goal of making health care insurance coverage more portable and secure for employees. The Act also gave the Department of Labor broad new responsibilities with regard to private health plans. Due to the passage of the Newborn and Mothers’ Health Protection Act of 1996, the Mental Health Parity Act of 1996, the Women’s Health and Cancer Rights Act of 1998, the Genetic Information Nondiscrimination Act of 2008, the Mental Health Parity and Addiction Equity Act of 2008, and the Children’s Health Insurance Program Reauthorization Act, additional responsibilities have been added to the list.

The enactment of the Patient Protection and Affordable Care Act (ACA) in 2010 was a watershed moment in the history of health care reform. Some reforms pertain to but are not limited to: market reform provisions, dependent coverage, lifetime and annual benefit limits, coverage of preventative services, elimination of pre-existing condition exclusions, disclosures to plan participants, claims procedures and external review. The Affordable Care Act also gave EBSA greater enforcement ability to protect employees and employers who receive health benefits through MEWAs. As the Affordable Care Act (ACA) moves closer to full implementation, EBSA, the Department of Health and Human Services, the Department of the Treasury, and the Internal Revenue Service keep giving guidance on the various parts of this law.

Case law review

A Massachusetts statute requiring certain minimum mental healthcare benefits be provided to Massachusetts residents under a general insurance policy, an accident or sickness insurance policy, or an employee health-care plan that covers hospital and surgical expenses was addressed in Metro. Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985), on whether the statute was pre-empted by ERISA. The Supreme Court determined that the Massachusetts statute was spared from ERISA preemption under ERISA’s savings clause in ERISA 514(b)(2)(A), 29 U.S.C. 1144(b)(2)(A), through application of the test of whether common sense discloses that the law was directed at insurance and the factors in the McCarran-Ferguson Act.

A suit was brought under the Mississippi common law of bad faith in the case of Pilot Life Insurance Company v. Dedeaux, 481 U.S. 41 (1987), which was decided by the Supreme Court. As a first step, the Supreme Court determined that the common law claim was not an insurance-specific law but rather was a common law claim that extended to bad faith contract actions in general, and so could not be saved as a legislation governing insurance. Consequently, for a law to be considered regulatory of insurance, it must be targeted at the insurance industry. Furthermore, the Supreme Court considered the intent of ERISA as well as the remedies provided by ERISA, and determined that state insurance legislation that provide a remedy in addition to that provided by ERISA would be preempted.

“the detailed provisions of § 502(a) [29 U.S.C. § 1132(a)] set forth a comprehensive civil enforcement scheme that represents a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans. The policy choices reflected in the inclusion of certain remedies and the exclusion of others under the federal scheme would be completely undermined if ERISA-plan participants and beneficiaries were free to obtain remedies under state law that Congress rejected in ERISA.”

According to the Secretary of Labor’s ERISA regulations, certain payroll practices, such as regular pay, overtime pay, holiday premium pay, sick pay, and vacation pay, are exempt from ERISA preemption as payroll practices.  In accordance with Massachusetts law, an employer was required to pay a discharged employee his or her entire wages, including any holiday or vacation pay, on the date of the discharge. According to the state of Massachusetts, an employer was charged with criminal charges for neglecting to pay some employees their accumulated, unused vacation pay. The employer contended that the practice of permitting an employee to collect unused vacation constituted an employee benefit plan, and that as a result, the state legislation was preempted by the Employee Retirement Income Security Act.

It was determined by the Court in Massachusetts v. Morash (490 U.S. 107 (1989) that the Massachusetts legislation was not preempted by ERISA because it addressed the types of payroll activities that the Secretary of Labor had specifically exempted from ERISA preemption. According to the Court, the Secretary “is specifically authorized to define ERISA’s ‘accounting, technical, and trade terms,’ ERISA § 505, 29 U.S.C. § 1135,11 and to whose reasonable views we give deference”. The Court cited Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984) that stated, (“If the intent of Congress is clear, . . .  the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”  However, “if the statute is silent or ambiguous . . . the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”).  In this instance, the Secretary’s regulation was deemed to be a reasonable interpretation, and accrued vacation, like other payroll practices, was found to be exempt from the ERISA requirements.

Advocate Health Care Network v. Stapleton

The Employee Retirement Income Security Act of 1974 (ERISA) protects employees from unexpected losses in their retirement plans by requiring retirement plans that qualify for ERISA protections to put in place certain precautions that must be followed. Church plans are exempt from the Act and its provisions in order to avoid the government from becoming overly involved in religious matters through regulation.

Maria Stapleton and the other plaintiffs in this case were a group of employees working for Advocate Health Care Network (Advocate), which operates hospitals, inpatient and outpatient treatment centers throughout northern Illinois, and also members of Advocate’s retirement plan. Advocate Health Care Network (Advocate) is the defendant in this case.

Advocate was established in 1995 as a consequence of a merger between two religiously related hospital organizations (though neither system was owned or financially operated by the church with which it was affiliated). Similarly, Advocate is linked with a church; yet, despite the fact that it is neither owned or financially controlled by the church, Advocate maintains contracts with the church and “affirms [the church’s] ministry.” As the plaintiffs in this action said, the Advocate retirement plan is governed by the Employee Retirement Income Security Act of 1974 (ERISA), and as a result, Advocate has breached its fiduciary duty by failing to comply with the Act’s provisions. The defendants filed a motion for summary judgment on the grounds that the Advocate plan qualified for an ERISA exception granted to church plans.

The motion was dismissed by the district court because the court concluded that a plan developed and managed by a church-affiliated organization did not qualify as a church plan under the terms of the statute. The United States Court of Appeals for the Seventh Circuit affirmed, and this case was combined with two other cases that presented the same issue before the Supreme Court. The question before the court was whether ERISA’s exemption for church plans applies when the plan is managed by an otherwise qualifying church-affiliated entity, even though the church was not involved in the plan’s establishment. The court held that in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), the “church plan” exemption applies to plans that are managed by a qualifying church-affiliated organization, even if the organization did not establish the plan in the first place.

According to the Court, the explicit text of the legislation stated that a church plan includes a plan maintained by a church-affiliated organization in the exemption. It followed that the plain sense of the wording was that a plan maintained by a church-affiliated organization qualified for the exemption, regardless of whether the organization was responsible for its establishment. That way, the phrase that Congress chose was given full force, and it was supported by the legislative history as well. The opinion was delivered by Justice Elena Kagan on behalf of the 8-0 majority.

Justice Sonia Sotomayor’s concurring opinion stated that, while she agreed with the court’s interpretation of the statute, the outcome was troubling because it resulted in employees of large healthcare organizations that operate in nearly all respects as secular organizations being denied the protections afforded by ERISA. Because there are so many “church-affiliated” groups that show little similarity to the organizations that Congress was originally considering when it established the statutory language, it is possible that Congress will choose a different course of action in the future.

The Court settled a circuit conflict pertaining to when employers and plan fiduciaries can invoke the three-year statute of limitations period subject to Section 413(2) for an alleged breach of fiduciary duty in Intel Corp. Investment Policy Committee v. Sulyma, 140 S. Ct. 768 (2020). Employees must have become conscious of plan information in order to trigger the three-year limitations period, according to the majority ruling, and a fiduciary’s disclosure of plan information alone does not satisfy the “actual knowledge” requirement.

In the case, the plaintiff (a former employee of Intel) claimed that his retirement plans had been inappropriately overinvested in alternative investments. According to Section 413(1) of the Employment Retirement Income Security Act of 1974 (ERISA), claims for breaches of fiduciary responsibility must be filed within six years of the alleged breach or violation of duty. Section 413(2) of the Act however reduces this period to “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” Six years after the alleged breaches, the plaintiff sued, but this was more than three years after the petitioners told him about their investment decisions. Records showed that the plaintiff was given information on how his retirement funds were invested in alternative assets, but the plaintiff said he did not remember going through the information and didn’t even know that his account was invested in alternative investments at all.

At Legal writing experts, we would be happy to assist in preparing any legal document you need. We are international lawyers and attorneys with significant experience in legal drafting, Commercial-Corporate practice and consulting. In the last few years, we have successfully undertaken similar assignments for clients from different jurisdictions. If given this opportunity, The LegalPen will be able to prepare the legal document within the shortest time possible. You can send us your quick enquiry ( here )