Understanding ERISA

Whether you’ve heard of ERISA or not, if you are a working adult there is a strong chance that this federal law has major implications for your future—namely, your retirement. ERISA stands for the Employee Retirement Income Security Act of 1974, and it impacts millions of Americans. Its most basic purpose is to set the minimum standards by which pension and health plans of private companies must operate so as to ensure the general protection of participants in employee benefit programs.

ERISA arose out of the pension crises of the 1960s and early 1970s. At this time, some private companies and unions were unable to pay on the pensions they had promised to their employees and members due to poor funding and questionable management by plan trustees. Since pensions were the primary source of retirement income for many Americans at the time – 401Ks would not exist until 1978 – their lack of funding was a true crisis for many. This clarion call for pension reform grew louder through the early 1970s and culminated in the passage of ERISA in 1974, signed on Labor Day by President Ford.

At its heart, ERISA is designed to regulate how pension plans are operated to ensure that the underfunding crises of the 1960s and 1970s do not recur. To be clear, ERISA does not require companies to offer pensions nor does it require companies that do offer pensions to provide a minimum level of benefits. It does require that those companies that do choose to implement a pension plan adhere to a minimum level of funding and provide for vesting of an employee after a certain number of years of service.

Pensions are exotic creatures these days, with the shift toward employees taking their retirement investment plans with them when they move jobs rather than staying employed with one company for their entire careers. This raises the question of whether ERISA is still relevant today since pensions appear to be going to the way of the dodo. The short answer is yes, but for a surprising reason: ERISA also regulates how employers offer health plans to employees.

It is through ERISA that COBRA health benefits are offered to employees and their beneficiaries even after employment has ended. ERISA is also the birthplace of HIPAA, the Health Insurance Portability and Accountability Act of 1996, which makes it illegal for a health plan to not cover an employee’s pre-existing condition in certain circumstances. HIPAA also makes it illegal for health plans to discriminate on the basis of disabilities, health conditions, or genetics.

So it is that non-pension workers still find ERISA relevant, as do the 40 million employees in 23,400 pension plans nationwide for whom ERISA still performs its primary function.  

If you have questions about ERISA, contact Brett Trembly. He can translate the acronyms and legalese to get you an understandable answer.