Order Code 95-926 EPW
Updated January 15, 2004
CRS Report for Congress
Received through the CRS Web
Regulating Private Pensions:
A Brief Summary of ERISA
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Summary
The
Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406)
protects the interests of participants and beneficiaries in private-sector employee benefit
plans. It was passed in response to instances in which employers had failed to prudently
manage pension funds, had terminated pension plans without sufficient assets to pay the
benefits employees had earned, or had created impediments to earning a pension, such
as onerous age and service requirements. ERISA covers a number of fringe benefits
provided by employers, but most of its provisions deal with pension plans. Pension
plans sponsored by the federal, state, and local governments, or by churches generally
are exempt from ERISA. (This report will be updated for amendments to ERISA.)
Minimum Standards. ERISA does not require employers to provide pensions,
but those that do must meet minimum standards in regard to who can participate, how
long a person has to work to be entitled to a pension, and how much funding must be set
aside each year by the employer to assure payment of pensions when due. ERISA also
created the
Pension Benefit Guaranty Corporation (PBGC) to guarantee the payment of
pensions in case a financially ailing sponsor terminates a defined benefit pension with
insufficient funds to pay promised benefits. (A
defined benefit plan is one that promises
a future pension based on a formula that typically takes into account length of service and
annual earnings.) All firms that sponsor a defined benefit pension must pay insurance
premiums to the PBGC. The current premium is $19 per participant per year.
ERISA requires plan sponsors to handle funds prudently and in the best interest of
participants and beneficiaries. Plan participants must be informed of their rights and of
changes in the plan’s financial status. Plan participants may exercise their rights under
the law without harassment or interference, may appeal if they are denied benefits, and
may sue in federal court to recover benefits due. ERISA has been amended over the years
to provide greater protection to survivors and spouses of pension plan participants, to
accelerate sound pension funding, to bolster the financial integrity of the PBGC, to ensure
that plan participation is broadly based and does not discriminate in favor of highly
compensated individuals or owners, and to shorten the tenure needed for benefit
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entitlement (vesting). Defined benefit plans generally may not require more than 5 years
of service for pension credits to vest. Employees generally must be fully vested in
employer contributions to a
defined contribution plan (like a 401(k) plan) in no more than
3 years.
Internal Revenue Code Provisions. Congress added minimum standards for
pension plans to the Internal Revenue Code at the same time it passed ERISA. To qualify
for tax preferences, pension plans must meet not only the standards set by ERISA but
additional tax code requirements as well.
These tax rules include limits on plan
contributions and benefits, special rules for “top heavy” plans that benefit primarily highly
compensated individuals and/or business owners, and uniform rules for plan distributions.
Preemption of State Laws. ERISA preempts state laws affecting all employee
benefit plans. Besides pensions, these other benefits (often called “welfare benefits”)
include employer-provided health insurance and life insurance, disability benefits, prepaid
legal plans, and apprenticeship and training programs. ERISA preempts state insurance
law only for employers that
self-insure, which is a common practice among large
employers. Health, life, or disability insurance purchased through an insurance company
remains subject to state insurance laws. Many small employers purchase health insurance
through insurance companies because they are too small to accept the risk of self-insuring.
Welfare Benefit Plans. Welfare benefit plans are subject to ERISA’s fiduciary
standards if money is set aside to fund those benefits, and they must comply with
ERISA’s reporting and disclosure requirements if they cover at least 100 participants.
Welfare plans also are subject to claims and enforcement standards. However, there are
no minimum participation, vesting, or funding standards, nor are welfare benefits insured
by the PBGC.
Administration. Responsibility for enforcing ERISA is shared by the Department
of Labor and the Internal Revenue Service.
Fiduciary standards, and requirements for
plan
reporting and
disclosure are administered through the Department of Labor.
Requirements for plan
participation,
vesting, and
funding are enforced by the Internal
Revenue Service.
Additional References
CRS Report RL31507,
Employer Stock in Retirement Plans: Investment Risk and
Retirement Security, Patrick J. Purcell
CRS Report 97-1014,
ERISA Primer: Its Origin and Development, by Ray Schmitt.
CRS Report RL30122,
Pensions and Retirement Savings Plans: Sponsorship and
Participation, by Patrick J. Purcell.
CRS Report RL30196,
Pension Issues: Cash Balance Plans, by Patrick J. Purcell.
CRS Report 94-506,
Private Pension Plan Standards: A Summary of ERISA, by Ray
Schmitt.