| Full title | An Act to provide for pension reform. |
|---|---|
| Acronym | ERISA |
| Enacted by the | 93rd United States Congress |
| Citations | |
| Public Law | Pub.L. 93-406 |
| Stat. | 88 Stat. 829 |
| Codification | |
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| Major amendments | |
| Relevant Supreme Court cases | |
The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93-406, 88 Stat. 829, enacted September 2, 1974) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:
ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself.
Responsibility for the interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.
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The history of ERISA can be said to have begun in 1961 when President John F. Kennedy created the President's Committee on Corporate Pension Plans. The movement for pension reform gained some momentum when the Studebaker Corporation, an automobile manufacturer, closed its plant in 1963; the pension plan was so poorly funded that Studebaker could not afford to provide all employees with their pensions. The company created three groups. Group 1 consisted of 3,600 workers who reached the retirement age of 60. They got full pension benefits. Group 2 consisted of 4,000 workers, aged 40–59, who had ten years with Studebaker. They got lump sum payments that roughly equated to 15% of the actuarial value of their pension benefits. Group 3 was a residual group of 2,900 workers with no vested pension rights. They got nothing.
In 1967, Senator Jacob Javits proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and labor unions, both of whom sought to retain the flexibility they enjoyed under pre-ERISA law.
A turning point in the history of ERISA came on September 12, 1972, when NBC broadcast Pensions: The Broken Promise, an hour-long television special that showed millions of Americans the consequences of poorly funded pension plans and onerous vesting requirements. In the following years, Congress held a series of public hearings on pension issues and public support for pension reform grew significantly.
ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2, 1974 — Labor Day. In the years since 1974, ERISA has been amended repeatedly.
ERISA does not require employers to establish pension plans. Likewise, as a general rule, it does not require that plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan once it has been established.
Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements.
ERISA also regulates the manner in which a pension plan may pay benefits. For example, a defined benefit plan must pay a married participant's pension as a "joint-and-survivor annuity" that provides continuing benefits to the surviving spouse unless both the participant and the spouse waive the survivor coverage.
The Pension Benefit Guaranty Corporation was established by ERISA to provide coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants. Later amendments to ERISA require an employer who withdraws from participation in a multiemployer pension plan with insufficient assets to pay all participants' vested benefits to contribute the pro rata share of the plan's unfunded vested benefits liability.
ERISA does not require that an employer provide health insurance to its employees or retirees, but it regulates the operation of a health benefit plan if an employer chooses to establish one.
There have been several significant amendments to ERISA concerning health benefit plans:
Other relevant amendments to ERISA include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.
During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees limited or eliminated those benefits.[1][2] ERISA does not provide for vesting of health care benefits in the way that employees become vested in their accrued pension benefits. Employees and retirees who were promised lifetime health coverage may be able to enforce those promises by suing the employer for breach of contract, or by challenging the right of the health benefit plan to change its plan documents in order to eliminate those promised benefits.
Before ERISA, some defined benefit pension plans required decades of service before an employee's benefit became vested. It was not unusual for a plan to provide no benefit at all to an employee who left employment before the specified retirement age (e.g. 65), regardless of the length of the employee's service.
Under the Pension Protection Act of 2006, employer contributions made after 2006 to a defined contribution plan must become vested at 100% after three years or under a 2nd-6th year gradual-vesting schedule (20% per year beginning with the second year of service, i.e. 100% after six years). (ref. 120 Stat. 988 of the Pension Protection Act of 2006.) The Technical Explanation of H.R.4, of the PPA, Page 156 Vesting Rules, states that the PPA amends both the ERISA and Code. Different rules apply with respect to employer contributions made before 2007. Employee contributions are always 100% vested.
Under ERISA, minimum funding requirements were established for defined benefit plans. By their nature, defined contribution plans are always fully funded, even if the employee has not yet become vested in the employer contributions.
Before the Pension Protection Act of 2006 (PPA), a defined benefit plan maintained a "funding standard account", which was charged annually for the cost of benefits earned during the year and credited for employer contributions. Increases in the plan's liabilities due to benefit improvements, changes in actuarial assumptions, and any other reasons were amortized and charged to the account; decreases in the plan's liabilities were amortized and credited to the account. Every year, the employer was required to contribute the amount necessary to keep the funding standard account from falling below $0 at year-end.
In 2008, when the PPA funding rules went into effect, single-employer pension plans no longer maintain funding standard accounts. The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called "at-risk status").
The PPA has different funding requirements for multiemployer pension plans, which preserve most of the pre-PPA funding rules including the funding standard account. Under PPA, increases and decreases in the plan's liabilities will be amortized, but the amortization period for benefit improvements adopted after 2007 will be shortened. As with single-employer plans, multiemployer pension plans that are significantly underfunded are subject to restrictions. The restrictions, which may limit the plan's ability to improve benefits or require the plan to reduce employees' benefits, vary depending whether a pension plan's funding status is termed "endangered", "seriously endangered", or "critical". The restrictions accompanying each deficient funding status are progressively more severe as funding status worsens.
ERISA Section 514 preempts all state laws that relate to any employee benefit plan, with certain, enumerated exceptions. The most important exceptions — i.e. state laws that survive despite the fact that they may relate to an employee benefit plan — are state insurance, banking, or securities laws, generally applicable criminal laws, and domestic relations orders that meet ERISA's qualification requirements.
A major limitation is placed on the insurance exception, known as the "deemer clause", which essentially provides that state insurance law cannot operate on employer self-funded benefit plans. The Supreme Court has created another limitation on the insurance exception, in which even a law regulating insurance will be pre-empted if it purports to add a remedy to a participant or beneficiary in an employee benefit plan that ERISA did not explicitly provide.[1]
The result is that the only remedy available to a covered person who has been denied benefits or dropped from coverage altogether is to seek an order from a federal judge (no jury trial is permitted) directing the Plan (in actuality the insurance company that underwrites and administers it) to pay for "medically necessary" care. If a person dies before the case can be heard, however, the claim dies with him or her, since ERISA provides no remedy for injury or wrongful death caused by the withholding of care.
Even if benefits are improperly denied, the insurance company cannot be sued for any resulting injury or wrongful death, regardless of whether it acted in bad faith in denying benefits. Insurers operating ERISA plans enjoy several immunities not available to other types of insurance companies. ERISA preempts all conflicting state laws, including state statutes prohibiting unfair claims practices and causes of action arising under state common law for insurance bad faith.[3] There is no right to a jury trial in ERISA benefits actions.[4] Although Americans normally take for granted the right to testify on their behalf, plaintiffs have no right to present live testimony in ERISA bench trials, in which the judge simply reads through the documents which formed the record originally before the ERISA plan administrator and performs de novo review.[5] Finally, punitive damages are not allowed in actions for ERISA benefits.[6]
It has been argued that in the case of health benefits, the effect of all of this may paradoxically have been to leave plan participants worse off than if ERISA had not been enacted.[7]
Many persons included among the some 47 million people presently without health care coverage in the United States are former ERISA "subscribers", insurance terminology for Plan beneficiaries, who have been denied benefits-usually on the ground that the prescribed care is not medically necessary or is "experimental"-or dropped from coverage, often because they have lost their jobs due to the very illness for which care was denied.
Many consumer and health care advocates have called for a "restoration of the freedom of contract enforcement," to the 75% of Americans insured under these work place group plans-in effect, a repeal of the ERISA pre-emption. Permitting these insured persons access to customary state remedies (98% of all civil disputes are resolved in state courts) would, they contend, result in a substantial reduction in arbitrary denial of care benefits, simultaneously alleviating a major burden on state Medicaid systems and clogged federal court dockets.
ERISA contains an exemption specifically regarding the Hawaii Prepaid Health Care Act (Hawaii Revised Statutes Chapter 393), which was enacted by that state a few months before ERISA was signed into law. As a result, private employers in Hawaii are bound by the rules of that state law in addition to ERISA. The exemption also freezes the law in its original 1974 form, meaning the Hawaii legislature is not able to make non-administrative amendments without Congressional approval.[8][9]
Title I protects employees' rights to their benefits. The following are some of the ways in which it achieves that goal:
Title I also includes the pension funding and vesting rules described above.
The United States Department of Labor's Employee Benefits Security Administration ("EBSA") is responsible for overseeing Title I, promulgating regulations implementing and interpreting the statute as well as conducting enforcement. Plan fiduciaries and plan participants may also bring certain civil causes of action in Federal Court.
The current Assistant Secretary of Labor for Employee Benefits and head of the Employee Benefits Security Administration is the Hon. Phyllis Borzi, who was confirmed on July 10, 2009[1]. Past Assistant Secretaries include the Hon. Bradford P. Campbell, the Hon. Ann L. Combs and the Hon. Olena Berg-Lacy.
Title II amended the Internal Revenue Code (IRC). The changes include the following:
Title III outlines procedures for co-ordination between the Labor and Treasury Departments in enforcing ERISA.
It also created the Joint Board for the Enrollment of Actuaries, which licenses actuaries to perform a variety of actuarial tasks required of pension plans under ERISA. The Joint Board administers two examinations to prospective Enrolled Actuaries. After an individual passes the two exams and completes sufficient relevant professional experience, she or he becomes an Enrolled Actuary.
Title IV created the Pension Benefit Guaranty Corporation (PBGC) to insure benefits of participants in underfunded terminated plans. It also describes the procedures that a pension plan must follow in order to terminate.
An employer may terminate a single-employer plan under a standard termination if the plan's assets equal or exceed its liabilities. If the assets are less than the liabilities, the employer must contribute the amount necessary to fully fund the plan. A standard termination is sometimes referred to as a voluntary termination because the employer has chosen to terminate the plan.
In a standard termination, all accrued benefits under the plan become 100% vested. The plan must purchase annuity contracts for all participants. If the plan permits the payment of lump sums, employees may be offered the choice of a lump sum payment or an annuity.
If any assets remain in the plan after a standard termination has been completed, the provisions of the plan control their treatment. In some plans, the excess assets revert to the employer; in other plans, the excess assets must be used to increase participants' benefits.
An employer may terminate a single-employer plan under a distress termination if the employer demonstrates to the PBGC that:
If the PBGC finds that a distress termination is appropriate, the plan's liabilities are calculated and compared with its assets. Depending on the difference between the two values, the termination may be treated as if it had been a standard termination or as if it had been initiated by the PBGC.
PBGC may initiate proceedings to terminate a single-employer plan if it determines that:
A termination initiated by the PBGC is sometimes called an involuntary termination.
The benefits paid by the PBGC after a plan termination may be less than those promised by the employer. See Pension Benefit Guaranty Corporation for details.
A multiemployer plan may be terminated in one of three ways:
In 2005, Public Law 109-8 [2] amended the Bankruptcy Code, by exempting most organized retirement plans, even those not subject to ERISA, and accorded them protected status, claimable as exempt property by a debtor declaring bankruptcy under the U.S. Bankruptcy Code.
Now, most pension plans have the same protection as an ERISA anti-alienation clause giving these pensions the same protection as a spendthrift trust. The only remaining unprotected areas are the SIMPLE IRA and the SEP IRA. The SEP IRA is functionally similar to a self-settle trust, and a sound policy reason would exist to not shield SEP IRAs, but many financial planners argue that a rollover (or direct transfer) from a SEP IRA to a rollover IRA would give those funds protected status, too.
Portions of ERISA are codified in various places of the United States Code, including 29 U.S.C. ch.18, and Internal Revenue Code sections § 219 and § 408 (relating to the Individual Retirement Account) and sections § 410 through § 415, and § 4971, § 4974 and § 4975. A cross-reference between the sections of the ERISA law and the corresponding sections in the U.S.Code can be found at http://www.harp.org/erisaxref.htm.