ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself.
Responsibility for the interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.
In 1967, Senator Jacob Javits proposed legislation that would address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bill was opposed by business groups and labor unions, both of whom sought to retain the flexibility they enjoyed under pre-ERISA law.
A turning point in the history of ERISA came in 1970, when NBC broadcast Pensions: The Broken Promise, an hour-long television special that showed millions of Americans the consequences of poorly funded pension plans and onerous vesting requirements. In the following years, Congress held a series of public hearings on pension issues and public support for pension reform grew significantly.
Under ERISA, pension plans must provide for vesting of employees' pension benefits after a specified minimum number of years. ERISA requires that the employers who sponsor plans satisfy certain minimum funding requirements.
ERISA also regulates the manner in which a pension plan may pay benefits. For example, a defined benefit plan must pay a married participant's pension as a "joint-and-survivor annuity" that provides continuing benefits to the surviving spouse unless both the participant and the spouse waive the survivor coverage.
The Pension Benefit Guaranty Corporation was established by ERISA to provide coverage in the event that a terminated defined benefit pension plan does not have sufficient assets to provide the benefits earned by participants. Later amendments to ERISA require an employer who withdraws from participation in a multiemployer pension plan with insufficient assets to pay all participants' vested benefits to contribute the pro rata share of the plan's unfunded vested benefits liability.
There have been several significant amendments to ERISA concerning health benefit plans:
During the 1990s and 2000s, many employers who promised lifetime health coverage to their retirees have limited or eliminated those benefits. ERISA does not provide for vesting of health care benefits in the way that employees become vested in their accrued pension benefits. Employees and retirees who were promised lifetime health coverage may be able to enforce those promises by suing the employer for breach of contract, or by challenging the right of the health benefit plan to change its plan documents in order to eliminate those promised benefits.
As of 2007, employees' benefits in a defined benefit pension plan must become vested at 100% after five years or under a seven-year graded-vesting schedule (20% a year for each year of service beginning with the third year of service and ending with 100% after seven years).
Under the Pension Protection Act of 2006, employer contributions made after 2006 to a defined contribution plan must become vested at 100% after three years or under a six-year graded-vesting schedule (20% a year for each year of service beginning with the second year of service and ending with 100% after six years). Different rules apply with respect to employer contributions made before 2007. Employee contributions are always 100% vested.
Before the Pension Protection Act (PPA), a defined benefit plan maintained a "funding standard account", which was charged annually for the cost of benefits earned during the year and credited for employer contributions. Increases in the plan's liabilities due to benefit improvements, changes in actuarial assumptions, and any other reasons were amortized and charged to the account; decreases in the plan's liabilities were amortized and credited to the account. Every year, the employer was required to contribute the amount necessary to keep the funding standard account from falling below $0 at year-end.
In 2008, when the PPA funding rules go into effect, single-employer pension plans will no longer maintain funding standard accounts. The funding requirement under PPA is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called "at-risk status").
The PPA has different funding requirements for multiemployer pension plans, which preserve most of the pre-PPA funding rules including the funding standard account. Under PPA, increases and decreases in the plan's liabilities will be amortized, but the amortization period for benefit improvements adopted after 2007 will be shortened. As with single-employer plans, multiemployer pension plans that are significantly underfunded are subject to restrictions. The restrictions, which may limit the plan's ability to improve benefits or require the plan to reduce employees' benefits, vary depending whether a pension plan's funding status is termed "endangered", "seriously endangered", or "critical". The restrictions accompanying each deficient funding status are progressively more severe as funding status worsens.
ERISA Section 514 preempts all state laws that relate to any employee benefit plan, with certain, enumerated exceptions. The most important exceptions — i.e. state laws that survive despite the fact that they may relate to an employee benefit plan — are state insurance, banking, or securities laws, generally applicable criminal laws, and domestic relations orders that meet ERISA's qualification requirements.
A major limitation is placed on the insurance exception, known as the "deemer clause", which essentially provides that state insurance law cannot operate on employer self-funded benefit plans. The Supreme Court has created another limitation on the insurance exception, in which even a law regulating insurance will be pre-empted if it purports to add a remedy to a participant or beneficiary in an employee benefit plan that ERISA did not explicitly provide.
ERISA contains an exemption specifically regarding the Hawaii Prepaid Healthcare Act, which was enacted by that state a few months before ERISA was signed into law. As a result, private employers in Hawaii are bound by the rules of that state law in addition to ERISA. The exemption also freezes the law in its original 1974 form, meaning the Hawaii legislature is not able to make non-administrative amendments without Congressional approval.
Title I also includes the pension funding and vesting rules described above.
It also created the Joint Board for the Enrollment of Actuaries, which licenses actuaries to perform a variety of actuarial tasks required of pension plans under ERISA. The Joint Board administers two examinations to prospective Enrolled Actuaries. After an individual passes the two exams and completes sufficient relevant professional experience, she or he becomes an Enrolled Actuary.
In a standard termination, all accrued benefits under the plan become 100% vested. The plan must purchase annuity contracts for all participants. If the plan permits the payment of lump sums, employees may be offered the choice of a lump sum payment or an annuity.
If any assets remain in the plan after a standard termination has been completed, the provisions of the plan control their treatment. In some plans, the excess assets revert to the employer; in other plans, the excess assets must be used to increase participants' benefits.
If the PBGC finds that a distress termination is appropriate, the plan's liabilities are calculated and compared with its assets. Depending on the difference between the two values, the termination may be treated as if it had been a standard termination or as if it had been initiated by the PBGC.
A termination initiated by the PBGC is sometimes called an involuntary termination.
The benefits paid by the PBGC after a plan termination may be less than those promised by the employer. See Pension Benefit Guaranty Corporation for details.
Now, most pension plans have the same protection as an ERISA anti-alienation clause giving these pensions the same protection as a spendthrift trust. The only remaining unprotected areas are the SIMPLE IRA and the SEP IRA. The SEP IRA is functionally similar to a self-settle trust, and a sound policy reason would exist to not shield SEP IRAs, but many financial planners argue that a rollover (or direct transfer) from a SEP IRA to a rollover IRA would give those funds protected status, too.