- ERISA sets the federal standards for voluntary pension and health plans for the private sector.
- Penalties for non-compliance keep going up and can be costly.
- Certain incentive and bonus plans may be regulated by ERISA.
Big government fan or no, you have to admit that companies might not be inclined to worry about workers’ retirement without some federal minimum standard. On the flip side, employees might not find a job that doesn’t offer any retirement benefits beyond the bare minimum very attractive.
So what is ERISA?
ERISA, the Employee Retirement Income Security Act of 1974, set the federal minimum standards for a majority of voluntary pension and health plans in the private sector. It is meant to protect the participants of these plans from losing benefits during and after employment.
ERISA sets the requirements for communication about the plans as well as minimum standards for participation, vesting, benefit accrual, and funding. For those managing the plans, ERISA enforces fiduciary responsibility and the establishment of a grievance process, among other things.
ERISA does not govern retirement plans established or maintained by government agencies and entities, or by churches for employees. It also doesn’t cover plans maintained to comply with workers’ comp, unemployment, or disability laws.
Starting a retirement plan for your employees
Retirement benefits can be part of an attractive employment package, encouraging employee retention and longevity. Starting a retirement plan for your small business need not be complicated or expensive. There are companies that help implement and administer plans, providing possible tax advantages for you and your employees.
Penalties for non-compliance with ERISA were recently increased and can run to a minimum of $16,000 per incident.
The Department of Labor provides an interactive tool on its website to answer questions about small business retirement options. You can also visit www.ChoosingARetirementSolution.org, from the Department of Labor and AICPA.
Helpful tips about ERISA compliance
ERISA, like many federal laws and programs, can be confusing—but you get no slack for making mistakes. Penalties for non-compliance with ERISA were recently increased and, depending on the infraction, can run to $2,000 per day or a minimum of $16,000 per incident.
That’s precisely why it’s worth taking special care to avoid some common problems:
- The “plan administrator” has full responsibility for compliance with ERISA. If no administrator is designated, the burden falls to the plan’s sponsor, the employer.
- Nearly all ERISA group health plans must have a summary plan description (SPD), including plans with medical benefits, health FSAs, HRAs, and some voluntary programs.
- All covered participants must receive SPDs automatically, even former employees on COBRA. If the participant dies or becomes incapacitated, the automatic SPDs must go to the spouse and dependents or another designated representative or guardian.
- The SPD must be understandable to the average employee; plan benefits, limits, exceptions, and restrictions must be plain, or the employer can be cited and fined.
- The SPDs must be sent using a “reasonable” distribution method ensuring participants receive them. The employer must know its employees’ communication capabilities and adapt to them.
- SPD distribution must take place within 90 days for new participants and 120 days for new plans. After that, they must be provided at least every five years for material changes, or every ten years if no changes have been made.
ERISA has seen numerous changes over the years, particularly as new benefits enter the scene. For example, the Affordable Care Act introduced some added questions regarding the proper division of labor between the states and the federal government for health policy.
However, with proper administration and compliance, the benefits of offering an ERISA compliant plan outweigh the administrative costs.
Incentive programs and ERISA
If your incentive or bonus program makes payments or delivers stocks within two and a half months of the end of the year in which a participant becomes vested, it is most likely governed by Internal Revenue Code Section 409A, not by ERISA.
If an incentive plan provides for accumulations, multi-year periods, and mandatory deferrals, it may be subject to ERISA regulations. Consulting with a knowledgeable attorney is recommended.
Providing health and retirement benefits is not necessarily required, depending on the size of your business. However, offering these benefits is a proven way to attract and retain talented employees.
If you choose to do so, it’s best to implement a formal ERISA plan. Thus, you can ensure compliance with federal law and receive the advantages of discretion and flexibility not available with informal plans that may be subject to state regulation.