Even if you don’t know what ERISA means, you’ve likely seen it the word when doing research into how to plan for retirement. Fear not, though, because it’s pretty simple. ERISA is a law designed to help protect you and your money as you look towards your golden years.
What Is ERISA?
Passed in 1974, ERISA stands for the Employee Retirement Income Security Act. It set “minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.” Essentially, the law is designed to protect people who are participating in retirement and health insurance plans through their employer. ERISA protects you if you work at any private company offering health or retirement plans.
The government entity that enforces ERISA is the Employee Benefits Security Administration (EBSA.) EBSA is part of the Department of Labor (DOL.)
What Protections Does ERISA Offer?
There are a number of protections that ERISA offers to employees, mostly related to health plans and retirement plans.
For one, it requires that the company provide its employees who participate in plans with information about funding and what features the plan offers. It also sets standards for how companies can regulate participation in the plan, including defining how long a company can require its employees to work before joining the plan. It also details whether or not your spouse has the right to part of your pension if you were to die.
Another rule set forth by ERISA is requiring that the people who are in control of managing the plan’s assets be fiduciaries for those participating in the plan. Fiduciaries are legally required to act in the best interest of investors. They can be held financially responsible for making up for any losses the plan takes if they don’t. Participants have the right to sue for breach of fiduciary duties and to get their benefits under ERISA. The law also protects benefits if a plan is terminated.
What Are the Rules ERISA Sets Out?
ERISA governs exactly what requirements your company can set out governing participation in employer-sponsored retirement plans, including both defined benefit plans (like a traditional pension plan) and defined contribution plans (like a 401(k) plan). Companies can place limits on who can and can’t participate in their retirement plans but only within the parameters set out by ERISA.
Normally an employer can require that an participants be at least 21. It can also require one year of service. However companies can’t discriminate for other age-based issues. For example, a company cannot block older employees from joining because they are near retirement.
The law also governs how your company can adjust the benefit you receive when you retire. For defined benefit plans, the company can change the amount of money you accrue in future years, but it cannot reduce the amount of benefit you’ve already earned. In other words, your earned benefits for future months can be reduced from $100 a month to $50 a month, but your company can’t take away from the benefit you’ve already accrued.
There are also rules about when you’re able to withdraw funds from your retirement plan. You have the right to any money you put into your retirement plan immediately. There may be some restrictions on actually taking the money out, though. The story is different, though, when it comes to money contributed to your retirement plan by your employer.
In a defined benefit plan, employers have two options when it comes to vesting in employer-funded pension payments. They can have a five-year cliff where employees become fully vested after five years of service. Alternatively, plans can use a graduated vesting schedule. Here, employees are at least 20% vested after three years, 40% after four years, 60% after five years, 80% after six years and 100% vested after seven years of service. Similar vesting schedules are also available to employers contributing to employees 401(k) or other defined contribution plans.
What Has Been Added to ERISA?
The Consolidated Omnibus Reconciliation Act (COBRA) passed in 1985. This provision ensures that if you lose health insurance coverage because your employment ends, you can extend it. You’ll pay 100% of the premium, including anything the company used to pay, plus an administrative fee.
The second addition is the Health Insurance Portability and Accountability Act (HIPAA.) Passed in 1996, this revision to ERISA extended new protections to those getting their health insurance through their employer. HIPAA limits exclusions for pre-existing conditions. It also protects employees and dependents from discrimination based on health status. Employees also have the right to purchase health coverage after COBRA eligibility is up.
The Bottom Line
ERISA is a law that governs how companies can behave in administering health and retirement plans offered to employees. EBSA, a part of the Department of Labor, enforces the law. Employees can contact a DoL office to file complaints under ERISA. Lawyers who specialize in ERISA cases can also help.
Retirement Investing Tips
- Consider getting help from a financial professional. If you’re starting to think about retirement, consider finding a financial advisor to help you figure out how to get there. SmartAsset can help you find a financial advisor in your area with our free financial matching service. First you’ll answer a brief questionnaire about your financial situation and goals. Then we’ll match you with up to three advisors nearby who suit your needs.
- Factor in Social Security benefits. Knowing exactly how much money you’ll have in retirement is key, so don’t forget about the money you’ll be getting from the government each month. You can use a free Social Security calculator to determine how much you can expect to receive from the government benefit.
- Use a checklist. Our retirement planning checklist can help you figure out what you still need to do to get ready for retirement. It includes steps like taking inventory of your assets, If you have a lot of items unchecked, start thinking about what you can do to get on track.
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