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Pension Plans and ERISA: Employer FAQ

Employees want good employee benefits. Employers want to offer workers good employee benefits. Health insurance, pension plans, and life insurance are incentives employers use to attract and keep top talent.

Because so many employers have benefits packages and employees move from job to job and state to state, the federal government created a plan to ensure those funds would be there when the employees retire.

This article reviews some frequently asked questions about ERISA and employer plans and duties.

What is ERISA?

The Employee Retirement Income Security Act of 1974, or ERISA, protects the retirement plans of workers so their funds will be there when they retire. ERISA requirements include health care coverage through the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Insurance Portability and Accountability Act (HIPAA). It reduced the amount of time an employee needs to work for a new company before being eligible for coverage.

ERISA sets minimum standards for pension plans in private companies. The law does not require any business to maintain a pension plan. If the company has such a plan, their policy must state:

  • When employees can participate
  • When the pension interest must vest
  • How long the worker can be on leave or disability before they lose the benefit
  • If the employee's spouse has an interest in the pension if the employee dies

How does ERISA work?

pension plan creates a fiduciary relationship between the employer and the employee. ERISA sets recordkeeping requirements for employers and plan administrators. The purpose of ERISA is to create transparency in the plan process so employees know at all times what is going on with their pensions and health insurance. ERISA outlines how employers and administrators must handle employee accounts.

  • Participants must receive regular updates about any changes to the plan features and funding. Employees must receive plan information updates automatically.
  • Sets standards for eligibility, enrollment, vesting, and funding
  • Creates minimum funding requirements
  • Holds fiduciaries personally responsible for losses if they fail to follow ERISA requirements
  • Grants plan participants the right to sue fiduciaries for breach of duty
  • Protects participants through the federal plan Pension Benefit Guaranty Corp. If the plan terminates before the employee retires, they still receive partial payment.

What employers are subject to ERISA?

Any employer who offers a qualified retirement plan to even one employee must comply with ERISA. Sole proprietorships and partnerships with no other employees are not subject to ERISA requirements. They still need to follow IRS regulations for tax benefits.

Small businesses with fewer than 100 employees can opt for other types of retirement plans. Those may have fewer paperwork requirements and smaller paperwork burdens.

The only businesses that do not have to comply with ERISA are government agencies and churches that maintain employee retirement savings plans. Employers who create plans complying with other federal laws, such as workers' compensation, are exempt.

What types of pension plans can employers use?

All pension plans are subject to ERISA guidelines. Retirement plans differ in how employers collect and disperse funds to the employee.

  • Defined benefit plans promise a specified monthly benefit at retirement. The plan may offer employees a set dollar amount per month or use a formula to calculate a sum based on the employee's wages and years of service.
  • Defined contribution plans contribute a specific amount of money each month or year to the employee's account. The employee may deduct 5% of their monthly paycheck, and the employer may match the sum to a specific amount.

Employers have several retirement savings plans to choose from when selecting pension plans. Business owners should discuss these options with their accountants and legal advisers for the best tax credits and investment options for their workers.

401(k) Plans

These are the best-known retirement plans. 401(k)s are defined contribution plans that allow employees to contribute pre-tax income to their plan. Employers can make matching contributions. These plans have annual contribution limits set by the Treasury Department.

Employees like 401(k) plans because they may use their funds before retirement. Withdrawals are available for hardship or emergencies.

Simplified Employee Pension Plans (SEP) and SIMPLE IRA Plans

An SEP was an uncomplicated retirement savings plan that allowed employers to make low-tax contributions to individual retirement accounts (IRAs). The employee set up their own IRA, and the employer contributed up to 25% of the employee's pay, to a maximum of $40,000.

In January 1997, ERISA prohibited new SEPs, although those in existence remained active. Employers may establish SIMPLE IRA plans, which have a lower payroll deduction.

Profit-sharing, stock bonus, and employee stock ownership plans (ESOPs)

Employee stock ownership plans (ESOPs) encourage eligible employees to invest in company stock. Profit-sharing and stock bonus plans allow employees to decide how much of their paycheck they want to divert to stock or other plans, such as a 401(k).

What is a safe harbor?

A group insurance or pension plan will not fall under ERISA if it meets all four of the following criteria:

  • Employees are not required to participate
  • There are no employer contributions
  • The employer does not profit from the plan
  • The employer's only participation is collecting premiums and sending them to the insurer

Safe harbor 401(k) plans allow employees to have retirement benefits but relieve small-business owners of most ERISA paperwork.

What are an employer's duties under ERISA?

The plan administrators must file paperwork with the Department of Labor and the IRS. If employers do not administer their pensions and insurance plans, their primary duty is to oversee the third-party administrator (TPA) who manages the pension.

No matter who does the paperwork, there are some critical requirements for compliance.

  • Reporting requirements: Employers must file a summary that describes the coverage and claims process with the DOL and IRS. They must also report any modifications or changes when they occur. Participants must receive quarterly benefits statements.
  • Disclosure of coverage, financial status, and other information must be provided to plan participants upon request. Participants must receive an annual fee disclosure without asking.
  • Employers must deposit employee contributions to plans within the statutory period, usually 30 days. Employers must establish procedures to pay all claims and notify employees of denied claims.

All plan participants must receive a summary plan description (SPD). This document tells employees what the plan provides, when they become eligible, how to claim benefits, and other information. Participants must receive a financial summary from the administrator every year.

The IRS and DOL take violations very seriously. Late forms can lead to fines of over $1,000 per day for each document. Continued violations can lead to disqualification of plans and loss of tax benefits.

Can employers terminate a pension plan?

Employers must establish pension plans intending them to last indefinitely. If the plan becomes insolvent or terminates for another reason, ERISA protects employees through regulation.

The DOL may disqualify a plan for ERISA violations. If an employer decides to cancel a pension plan, it must show the Pension Benefit Guaranty Corp. it has enough funds to pay all benefits owed to participants. For a "distress termination," the employer must show it cannot remain in business while the plan remains active.

Where can I ask additional questions?

Business owners should consult a local ERISA attorney for legal advice about pension plans and ERISA. Rules are strict, and compliance is a must, no matter where your business is located.

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