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ERISA 101

There are numerous federal and state laws governing or affecting employee benefits; however one of the most misunderstood is the Employee Retirement Income Security Act ("ERISA"). 

ERISA applies to any plan, fund, or program maintained and established by an employer or by an employee organization for the purpose of providing participants or their beneficiaries with medical, accident, disability, retirement, and other benefits.  The test courts have used to identify whether an ERISA plan or program exists is whether a reasonable person could identify intended benefits, identifiable beneficiaries, the source of funding, and the procedure for applying for and collecting benefits.  While there are numerous exceptions regarding various types of benefit arrangements, the main exceptions to ERISA relate to governmental and church employers. 

The purposes of ERISA are to (i) make the law governing employee benefits uniform across all 50 states, and (ii) protect the interests of employees relative to promised benefits.  In order to give effect to the purposes of ERISA, the statute contains provisions, which expressly state that ERISA preempts state law.  In other words, state laws that conflict with, or run contrary to, ERISA are not enforceable.  In addition, to protect the interests of employees, ERISA imposes strict duties, or fiduciary duties, on individuals and entities that administer and sponsor employee benefit plans. 

If ERISA applies, then two fundamental principles apply.  First, the plan must be in writing and identify which employees are eligible to participate, explain vesting and accrual rules (if a retirement or deferral of income plan), explain the plan benefit to which an eligible employee is entitled, explain the process for applying for and receiving a benefit, explain the process for challenging a denial to a plan benefit, and other language required by statute. 

Second, those persons or entities that administer or sponsor the plan, or ERISA fiduciaries, have certain duties, which they must comply with.  Generally, ERISA fiduciaries must administer plans in accordance with their terms, and act in the best interest of plan participants and their beneficiaries. 

ERISA fiduciaries are subject to certain disclosure requirements.  For example, employers that sponsor ERISA plans must provide to participants a summary plan description ("SPD").  An SPD is intended as a summary of the written plan document, which explains in reasonably clear terms, eligibility, the plan benefit, the claims review process, a participant's rights under ERISA, and other terms.  Upon a request by a participant, an ERISA fiduciary must also provide the participant with plan documents.  Failure to do so in a timely manner could result in a statutory penalty of $110/day for each day the documents are not provided.  Additionally, depending on the type of ERISA plan, Department of Labor filing requirements apply.  Many ERISA plans, which are subject to the Internal Revenue Code, are also subject to Internal Revenue Service filing requirements.  Failure to file the applicable form could result in large penalties.

In addition to complying with ERISA disclosure requirements, ERISA fiduciaries are prohibited from engaging in what ERISA refers to as "prohibited transactions". Generally, the prohibited transaction rules preclude ERISA fiduciaries from engaging in activities or transactions with regard to plan assets or with regard to the plan that may provide a benefit to the ERISA fiduciary, or may have an adverse effect on plan participants. 

Participants have rights under ERISA to sue ERISA fiduciaries for plan benefits and for breach of fiduciary duties.  Under certain circumstances, ERISA fiduciaries can be held personally liable for their actions.  In addition, penalties imposed by the Department of Labor for non-compliance can be large. ERISA permits the plan, ERISA fiduciaries, and employers to carry insurance to cover potential liability arising out of breach of fiduciary duties, which in many instances is advisable.  For more information relating to ERISA and ERISA fiduciary duties, you can visit the Department of Labor site at http://www.dol.gov/dol/topic/health-plans/index.htm. 

FLORENCE M. VINCENT, an attorney with the VanCott law firm, assists clients with the review and drafting of employee benefit plan documents to ensure compliance with federal (ERISA and Internal Revenue Code) and state law. She also conducts due diligence for stock purchase and asset deal agreements relative to employee benefit issues. She can be reached at 801.237.0474 or at fvincent@vancott.com.  For more information, visit http://www.vancott.com/.