Employee Benefit Plans


DEPARTMENT OF LABOR

[Graphic Omitted] SMALL BUSINESS HANDBOOK
Retirement and Health Benefit Standards
Employee Benefit Plans

Updated: November 1997

Employee Retirement Income Security Act (ERISA),
(29 USC §1001 et seq., 29 CFR 2509 et seq.)

Who is Covered

The provisions of Title I of ERISA cover most private sector employee benefit plans. Employee benefit plans are voluntarily established and maintained by an employer, an employee organization, or jointly by one or more such employers and an employee organization. Pension plans--a type of employee benefit plan--are established and maintained to provide retirement income or to defer income until termination of covered employment or beyond. Other employee benefit plans are called welfare plans and are established and maintained to provide health benefits, disability benefits, death benefits, prepaid legal services, vacation benefits, day care centers, scholarship funds, apprenticeship and training benefits, or other similar benefits.

In general, ERISA does not cover plans established or maintained by governmental entities or churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans.

Basic Provisions/Requirements

ERISA sets uniform minimum standards to assure that employee benefit plans are established and maintained in a fair and financially sound manner. In addition, employers have an obligation to provide promised benefits and satisfy ERISA's requirements for managing and administering private pension and welfare plans. The Department's Pension and Welfare Benefits Administration (PWBA), together with the Internal Revenue Service (IRS) , carries out its statutory and regulatory authority to assure that workers receive the promised benefits. The Department has principal jurisdiction over Title I of ERISA, which requires persons and entities who manage and control plan funds to:

  • Manage plans for the exclusive benefit of participants and beneficiaries;
  • Carry out their duties in a prudent manner and refrain from conflict-of-interest transactions expressly prohibited by law;
  • Comply with limitations on certain plans' investments in employer securities and properties;
  • Fund benefits in accordance with the law and plan rules;
  • Report and disclose information on the operations and financial condition of plans to the government and participants;
  • Provide documents required in the conduct of investigations to assure compliance with the law.

The Department also has jurisdiction over the prohibited transaction provisions of Title II of ERISA. However, the IRS administers the rest of Title II of ERISA, as well as the vesting, participation, nondiscrimination and funding standards of Title I of ERISA.

Reporting and Disclosure

Any individual or organization affected by ERISA may request an advisory opinion or information letter regarding the interpretation or application of the statutory provisions (or the implementing regulations, interpretive bulletins or exemptions) within the Department’s jurisdiction. ERISA Procedure 76-1, 41 Federal Register 36281 (August 27, 1976), sets forth the procedures governing the advisory opinion process.

Part 1 of Title I requires the administrator of an employee benefit plan to furnish participants and beneficiaries with a summary plan description (SPD), describing in understandable terms, their rights, benefits and responsibilities under the plan. Plan administrators are also required to furnish participants with a summary of any material changes to the plan or changes to the information contained in the summary plan description. Copies of these documents are not required to be automatically filed with the Department, but must be furnished to the Department on request.

In addition, the administrator generally must file an annual report (Form 5500 Series) each year containing financial and other information concerning the operation of the plan. Plans with 100 or more participants file the Form 5500. Plans with fewer than 100 participants file the Form 5500-C/R; the form 5500-C at least every third year and the Form 5500-R, an abbreviated report, in the two intervening years. Plan administrators must furnish participants and beneficiaries with a summary of the information in the annual report.

Certain pension and welfare benefit plans may be exempt from the requirement to file an annual report. For example, welfare benefit plans with fewer than 100 participants that are fully insured or unfunded within the meaning of the Department’s regulation at 29 CFR 2520.104-20 are not required to file an annual report.

The Department’s regulations governing these reporting and disclosure requirements are set forth beginning at 29 CFR 2520.101-1.

Fiduciary Standards

Part 4 of Title I sets forth standards and rules governing the conduct of plan fiduciaries. In general, persons who exercise discretionary authority or control over management of a plan or disposition of its assets are "fiduciaries" for purposes of Title I of ERISA. Fiduciaries are required, among other things, to discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. In discharging their duties, fiduciaries must act prudently and in accordance with documents governing the plan, to the extent such documents are consistent with ERISA. Certain transactions between an employee benefit plan and "parties in interest," which include the employer and others who may be in a position to exercise improper influence over the plan, are prohibited by ERISA and may trigger civil monetary penalties under Title I of ERISA. Most of these transactions are also prohibited by the Internal Revenue Code ("Code"). The Code imposes an excise tax on "disqualified persons" -- whose definition generally parallels that of parties in interest -- who participate in such transactions.

Exemptions

Both ERISA and the Code contain various statutory exemptions from the prohibited transaction rules and give the Departments of Labor and Treasury, respectively, authority to grant administrative exemptions and establish exemption procedures. Reorganization Plan No. 4 of 1978 transferred the authority of the Treasury Department over prohibited transaction exemptions, with certain exceptions, to the Labor Department.

The statutory exemptions generally include loans to participants, the provision of services necessary for operation of a plan for reasonable compensation, loans to employee stock ownership plans, and investment with certain financial institutions regulated by other State or Federal agencies. (See ERISA section 408 for the conditions of the exemptions.) Administrative exemptions may be granted by the Department on a class or individual basis for a wide variety of proposed transactions with a plan. Applications for individual exemptions must include, among other information:

  • A detailed description of the exemption transaction and the parties for whom an exemption is requested;
  • Reasons a plan would have for entering into the transaction;
  • Percentage of assets involved in the exemption transaction;
  • The names of persons with investment discretion;
  • Extent of plan assets already invested in loans to, property leased by, and securities issued by parties in interest involved in the transaction;
  • Copies of all contracts, agreements, instruments and relevant portions of plan documents and trust agreements bearing on the exemption transaction;
  • Information regarding plan participation in pooled funds when the exemption transaction involves such funds;
  • Declaration, under penalty of perjury by the applicant, attesting to the truth of representations made in such exemption submissions;
  • Statement of consent by third-party experts acknowledging that their statement is being submitted to the Department as part of an exemption application.

The Department's exemption procedures are set forth at 29 CFR 2570.30 through 2570.51.

Enforcement

ERISA confers substantial law enforcement responsibilities on the Department. Part 5 of ERISA Title I gives the Department authority to bring a civil action to correct violations of the law, gives investigative authority to determine whether any person has violated Title I, and imposes criminal penalties on any person who willfully violates any provision of Part 1 of Title V.

Health Insurance Portability and Accountability Act of 1996

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. 104- 191,was enacted on August 21, 1996. HIPAA amended ERISA to provide for, among other things, improved portability and continuity of health insurance coverage provided in connection with employment. The HIPAA portability provisions relating to group health plans and health insurance coverage offered in connection with group health plans are set forth under a new Part 7 of Subtitle B of Title I of ERISA. These provisions include rules relating to preexisting conditions exclusions, special enrollment rights, and prohibition of discrimination against individuals based on health status- related factors.

Continuation of Health Coverage

Continuation of health care provisions were enacted as part of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and are codified in Part 6 of Title I of ERISA. These provisions apply to group health plans of employers with 20 or more employees on a typical working day in the previous calendar year. COBRA gives participants and beneficiaries the right to maintain, at their own expense, coverage under their health plan that would be lost due to a triggering event, such as termination of employment at a cost that is comparable to what it would be if they were still members of the employer's group. Plans must give covered individuals an initial general notice informing them of their rights under COBRA and describing the law. The law also places notification obligations upon plan administrators, employers, and qualified beneficiaries with regard to certain “qualifying events.” In most instances of employee death, termination, reduced hours of employment, entitlement to Medicare, or bankruptcy, it becomes the employer's responsibility to provide a specific notice to the plan administrator. The plan administrator must then notify the qualified beneficiaries the opportunity to elect continuation coverage.

The Department's regulatory and interpretive jurisdiction over the COBRA provisions is limited to the COBRA notification and disclosure provisions.

Jurisdiction of the Internal Revenue Service

The IRS has regulatory and interpretive responsibility for all provisions of COBRA not under the Department's jurisdiction. In addition, ERISA provisions relating to participation, vesting, funding and benefit accrual, contained in parts 2 and 3 of Title I, are generally administered and interpreted by the Internal Revenue Service.

Assistance Available

PWBA has numerous general publications designed to assist employers and employees in understanding their obligations and rights under ERISA. A list of PWBA booklets and pamphlets is available by writing to: Publications Desk, PWBA, Division of Public Affairs, Room N-5656, 200 Constitution Ave., NW, Washington, DC 20210. Many of these documents are available via PWBA’s homepage.

Individualized assistance is offered by PWBA’s national and field offices for persons seeking information and assistance on benefits and rights under employee benefit plans. PWBA also issues advisory opinions and information letters in response to requests from individuals and organizations. Advisory opinions apply the law to a specific set of facts, while information letters merely call attention to well-established principles on interpretations. Further information about these programs is contained in PWBA’s booklet on “Customer Service Standards.”

In addition, employee benefit plan documents and other materials are available from the PWBA Public Disclosure Room. This facility may be used to view and to obtain copies of materials on file. Materials include: summary plan descriptions, Form 5500 Series reports, Master Trust reports, 103-12 Investment Entity Reports, Common or Collective Trust or Pooled Separate Account direct filings, Apprentice and Other Training Plans notices, "Top Hat" plan statements, advisory opinions, exemptions, announcements and transcripts of public hearings and proceedings.

The PWBA Public Disclosure Room is open to the public Monday through Friday, from 8:30 a.m. to 4:30 p.m. Copies of materials are available at a cost of 15 cents per page by ordering in person or writing to: PWBA Public Disclosure Room, U.S. Department of Labor, Room N-5638, 200 Constitution Ave., NW, Washington, DC 20210. Given the complexity of ERISA requirements, employers may wish to seek the assistance of an attorney, CPA firm, investment or brokerage firm, and other employee benefit consultants in complying with the law.

Penalties

PWBA has authority under ERISA Section 502© to assess civil penalties for reporting violations and prohibited transactions involving a plan. A penalty of up to $1,000 per day may be assessed against plan administrators who fail or refuse to comply with annual reporting requirements. Section 502(I) gives the agency authority to assess civil penalties against parties in interest who engage in prohibited transactions with welfare and nonqualified pension plans. The penalty can range from five percent to 100 percent of the amount involved in a transaction. A parallel provision of the Code directly imposes an excise tax against disqualified persons, including employee benefit plan sponsors and service providers, who engage in prohibited transactions with tax-qualified pension and profit sharing plans. Finally, the Department is required under Section 502(l) to assess mandatory civil penalties equal to 20 percent of any amount recovered with respect to fiduciary breaches resulting from either a settlement agreement with the Department or a court order as the result of a lawsuit by the Department.

Relation to State, Local and Other Federal Laws

Part 5 of Title I provides that the provisions of ERISA Titles I and IV supersede State and local laws which "relate to" an employee benefit plan. ERISA, however, saves certain state and local laws from ERISA preemption, including state insurance regulation of multiple employer welfare arrangements (MEWAs). MEWAs generally constitute employee welfare benefit plans or other arrangements providing welfare benefits to employees of more than one employer, not pursuant to a collective bargaining agreement.

In addition, ERISA's general prohibitions against assignment or alienation of pension benefits do not apply to qualified domestic relations orders. Plan administrators must comply with the terms of orders made pursuant to State domestic relations law and award all or part 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). In addition, group health plans covered by ERISA must provide benefits in accordance with the applicable requirements of qualified medical child support order issued under State domestic relations laws.

       

U.S. Department of Labor

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