Employee Retirement Income Security Act (ERISA) Overview

For any employer that offers a retirement or health plan, the Employee Retirement Income Security Act (ERISA) is more than just a set of federal rules—it’s a safeguard against costly missteps, lawsuits, and compliance headaches. ERISA sets the ground rules for how benefit plans must be managed, ensuring employees’ interests are protected and employers know exactly what’s expected of them.

Understanding ERISA: Definition and Purpose

ERISA, the Employee Retirement Income Security Act of 1974, is the federal law designed to safeguard plan participants and their beneficiaries. By setting a baseline of standards for retirement and health plans, ERISA ensures that employers manage and fund benefits responsibly, communicate clearly with participants, and honor the promises they’ve made.

ERISA establishes minimum rules for participation, vesting, benefit accrual and plan funding, imposes fiduciary duties on anyone who manages or controls plan assets, requires clear, timely disclosures so participants understand their rights and benefits, and offers legal remedies if plan sponsors or fiduciaries breach their obligations.

What ERISA Covers

Most private-sector retirement and welfare benefit plans fall under ERISA’s umbrella, including:

• Defined benefit plans (traditional pensions)
• Defined contribution plans (401(k), 403(b), 457, ESOPs)
• Welfare benefit plans (health, disability)

ERISA’s Key Provisions and Requirements

Disclosures and Participant Communication

Clear, timely disclosures are the backbone of ERISA compliance. Three key documents keep participants informed:

• Summary Plan Description (SPD): Provides eligibility rules, benefit formulas, claim procedures, and participant rights. Must be provided to new participants within 90 days of becoming eligible.

• Summary Annual Report (SAR): Highlights of Form 5500 filing with financial data and participant counts. Must be distributed within nine months after plan year end.

• Summary of Material Modifications (SMM): Documents any changes to plan terms or benefit structures. Required within 210 days after the plan year in which changes were adopted.

Participation, Vesting, and Benefit Accrual Standards

ERISA sets baseline rules for plan participation:

Eligibility Requirements:

• Minimum age: 21
• Minimum service: 1 year

Vesting Schedules:

• Cliff vesting: 100% vested after 5 years of service
• Graded vesting: 20% after 3 years, increasing by 20% each year until 100% at 7 years

Plan Funding and Contribution Limits

Defined Contribution Plan Limits (2024):

• Elective deferral limit: $23,000 per participant
• Catch-up contributions (age 50+): additional $7,500
• Overall annual addition limit: 100% of compensation up to $69,000

Required Minimum Distributions (RMDs):

• Must begin by April 1 following the year participants turn 73
• Failure to take RMDs triggers a 25% excise tax on the undistributed amount

Who Must Comply with ERISA?

Plan Sponsors’ Obligations

Plan sponsors (usually employers) have key responsibilities including:

• Drafting and maintaining plan documents
• Distributing participant notices on time
• Filing Form 5500 annually

Plan Administrators and Fiduciaries

ERISA defines specific fiduciary roles:

• 3(16) Plan Administrator: Handles day-to-day operations and participant communications
• 3(38) Investment Manager: Takes responsibility for selecting and overseeing plan investments
• Named Fiduciary: Holds ultimate authority for administration decisions

ERISA Fiduciary Responsibilities

ERISA places strict fiduciary duties on anyone who exercises discretion over plan management or assets. These duties include:

Duty of Loyalty and Exclusive Benefit Rule

Fiduciaries must act solely for the financial well-being of plan participants and beneficiaries. Personal interests or attempts to minimize employer costs cannot influence plan decisions.

Duty of Prudence and Investment Oversight

Fiduciaries must act with the care, skill, and diligence a prudent professional would use. This includes:

• Conducting regular investment performance reviews
• Comparing fund returns to relevant benchmarks
• Monitoring and benchmarking all plan expenses
• Documenting decision-making processes

Delegation to Third-Party Service Providers

ERISA allows fiduciaries to delegate certain functions to qualified service providers, but requires prudent selection and ongoing monitoring of these providers.

ERISA Reporting and Disclosure Requirements

Form 5500 Series Annual Reporting

Every ERISA plan must file Form 5500 (or 5500-SF for smaller plans) to report financial condition, investments, and operations. The filing deadline is the last day of the seventh calendar month after the plan year ends.

Participant-Level Disclosures

ERISA requires sponsors to provide participants with:

• Annual fee disclosures showing plan-level administrative fees and investment expense ratios
• Quarterly benefit statements (for 401(k)-style plans) showing account balances, vested percentages, and investment options

Prohibited Transactions and Exemptions

ERISA prohibits certain dealings between retirement plans and “parties in interest” (employers, fiduciaries, service providers). Common prohibited transactions include:

• Sale or lease of property between plan and employer
• Loans to parties in interest
• Use of plan assets for employer benefit
• Excessive service fees

The Department of Labor offers class exemptions for routine transactions and individual exemptions for unique situations that serve participant interests.

Enforcement, Penalties, and Litigation

ERISA is enforced through:

• DOL investigations triggered by participant complaints, Form 5500 discrepancies, or targeted audits
• Civil and criminal penalties including fines, excise taxes, and potential jail time
• Participant lawsuits for breach of fiduciary duty, with courts able to order restitution and award attorney fees

Recent Legislative Changes

SECURE Act (2019)

The SECURE Act introduced significant changes:

• Encouraged lifetime income options in retirement plans
• Raised the RMD age from 72 to 73
• Updated fiduciary guidance for in-plan annuities

ERISA Considerations for Small Businesses

Small businesses can benefit from offering 401(k) plans through:

• Improved recruitment and retention
• Startup Plan Tax Credit (up to $5,000 per year for three years)
• Tax-deductible contributions

Key considerations include selecting the right provider, managing audit requirements once the plan reaches 100 participants, and controlling administrative costs through automation and bundled services.

Common ERISA Violations to Avoid

• Improperly denying or delaying benefit claims
• Engaging in prohibited transactions with plan assets
• Failing to follow the written plan document
• Missing disclosure deadlines
• Inadequate fiduciary oversight of investments and service providers

Next Steps for Compliance

1. Review Plan Documents: Ensure all documents reflect current rules and recent legislative changes
2. Audit Communication Calendar: Map out all disclosure deadlines and delivery methods
3. Conduct Fiduciary Reviews: Regularly evaluate investment performance and service provider arrangements
4. Validate Annual Filings: Establish processes for accurate, timely Form 5500 submissions
5. Strengthen Governance: Clearly define fiduciary roles and maintain documentation of prudent decision-making

Professional support can help navigate ERISA’s complexities. Retirement Capital specializes in ERISA compliance, fiduciary services, and turnkey retirement plan administration. Visit https://retirementcap401kadministration.com/ to learn how we can help you maintain a secure, compliant retirement plan while you focus on growing your business.