ERISA, Simplified

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If you are close to retirement or just saving for retirement through your IRA or ROTH IRA, you should be aware of the act managing these pensions, known as the Employee Retirement Income Security Act, or ERISA. ERISA is a federal law that sets limits to the minimum standard for retirement and health benefit plans in a private industry. ERISA protects the benefits of participants in most private-sector pension plans in two ways; it requires companies with defined benefit pension plans to fully fund the benefits that participants have earned, and; prohibits companies from using pension funds for purposes other than to pay retiree health benefits and for paying pensions. ERISA is composed of four titles:

  • Title I regulates the dissemination of information to the plan participants
  • Title II regulates the tax laws related to employee benefits
  • Title III regulates the administrative and legal enforcement provisions of ERISA
  • Title IV created the Pension Benefit Guaranty Company (PBGC), an insurance program that provides insurance coverage to certain types of pension plans.

ERISA was passed in 1974 by President Gerald Ford on Labor Day as a solution to The Welfare and Pension Plans Disclosure Act of 1958, which required public disclosure of pension plan finances. The government had assumed that workers’ pensions would not be misused by plan sponsors- they were proved wrong, thanks to Studebaker Automobile Company. The first bills were drafted in the early 70’s by both the House and Senate Labor committees to regulate the private pension system.

What ERISA Protects

ERISA protects retirement, health and other welfare benefit plans. ERISA does not require employers to provide pension plans or welfare benefit plans, but they do require those that do, to meet certain requirements. Those that choose to offer pension plans must explain who is covered and what their rights are, how long a person has to work to be entitled to a pension, and how much must be set aside each year to pay for future pensions. Those three categories include things like life, disability and apprenticeship plans.

Those that qualify for ERISA protection include employer-sponsored retirement plans that are a defined benefit (DB) plan or a defined contribution (DC) plan, also called an individual account plan. The main difference between the two is that, with one, you put your own money down and with the other, you don’t. A defined benefit plan is funded by your employer, rather than from a portion of your paycheck. They are more costly for your employers, too, so they aren’t as common anymore.  With a defined contribution plan, you are putting your own money into the account, such as a 401(k). Industry experts say a DB plan is great to take advantage of, but, only in tandem with a DC plan. Today, 30 percent of companies offer a combination of both, while only 10 percent offer just the DB plan. If given the choice, it’s best to go with a DC plan, because the DB plan alone won’t likely be enough to allow you to live comfortably once you retire.

Limitations to ERISA

There are plans that ERISA will not cover. Those exempt from ERISA include the following:

  • Governmental Plans- Includes federal, state, state subdivision, and agency
  • Church Plans
  • Compliance Plans- Maintained to meet workers’ compensation laws, unemployment laws, or disability insurance laws
  • Foreign Plans- Any plan maintained outside of the United States
  • Excess Benefit Plans- A plan maintained by an employer created to provide benefit in excess of certain limitations.
  • Partial exemptions to unfunded plans that provide deferred compensation to highly compensated management employees.

Here is a great retirement resource for those interested in learning more about retirement simplistically, or, you may visit the Department of Labor website.

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