What is ERISA (Employee Retirement Income Security Act)?

ERISA is a US federal law that sets standards for most health and retirement plans in the private sector. It doesn’t mandate these plans but regulates them once they’ve been established.

US Congress introduced the Employee Retirement Income Security Act (ERISA) in 1974 to protect the assets of workers. The tax and labor law requires qualified plans to follow rules that ensure fairness, transparency, and accountability throughout the administration process.

What are the core components of ERISA?

ERISA comprises a series of rules and guidelines for benefits administration. To comply with federal standards, providers must generally:

• Keep participants informed about their plan features and benefits
• Define the responsibilities of any administrators
• Establish criteria for participation, vesting, accrual, and funding
• Implement an appeals process for participants

ERISA also grants participants the right to sue for benefits and receive payments if their administrator terminates a plan.

If employers violate ERISA, they can incur penalties. Plan administrators may face a prison sentence in particularly serious cases.

The US Department of Labor (DOL) frequently revises and updates ERISA to ensure it reflects the current business landscape. For example, it recently added guidance about data privacy and protection as cybersecurity has become a concern.

Which types of plans does ERISA cover?

ERISA applies to the two main types of retirement plans in the US: defined benefit and defined contribution plans. It also covers most group health insurance plans.

Defined benefit plans

A defined benefit plan guarantees all participants a set monthly income upon retirement. Plan administrators can either promise an exact amount or base the total on factors like salary, tenure, and performance.

Most traditional pensions are a type of defined benefit plan. A cash balance plan also falls into this category even though retirees receive a fixed percentage of their salary rather than a set amount.

Defined contribution plans

Defined contribution plans are based on how much employees and plan administrators contribute to the retirement fund. Factors like how much retirees withdraw at once and the performance of any stock options may affect the amount they receive.

The following types of plans count as defined contribution:

• 401(k)
• 403(b)
• Employee stock ownership plans (ESOP)
• Profit sharing
• Simplified Employee Pension Plan (SEP)

Health insurance plans

ERISA encompasses most types of group health plans including:

• Health Maintenance Organizations (HMOs)
• Preferred Provider Organizations (PPOs)
• Employee Assistance Programs (EAPs)
• Health Reimbursement Arrangements (HRAs)
• Health Flexible Spending Accounts (FSAs)

Some employees may be entitled to continued coverage for a limited time after they leave work under the Consolidated Omnibus Budget Reconciliation Act (COBRA). During the period when they’re unemployed, ERISA remains in effect.

ERISA only covers people permanently living and working in the US. Employees abroad aren’t subject to its rights and protections.

Government and religious organizations aren’t required to follow ERISA either. They have separate regulations and guidelines.

How ERISA impacts employees

ERISA protects employees by ensuring administrators act in their best interest and give them total transparency over plan information. It also provides steps they can take when these protections fail.

As a result, employees have more long-term security under ERISA. They may feel less stressed about preparing for their future and better equipped to manage health conditions. When they’re satisfied with their coverage, they may feel happier and more valued at their company.

ERISA-compliant plans also tend to have tax advantages. Since employees can defer federal income tax on these plans until retirement, they will potentially pay a lower rate.

How ERISA impacts employers

Employers can foster trust throughout the company by complying with ERISA. When you demonstrate a commitment to meeting these standards, you may notice a positive impact on employee morale.

Many ERISA-compliant plans also come with tax advantages for employers. For example, you can often deduct your contributions toward workers’ 401(k) plans. Small businesses may receive tax credits to help them manage the costs of setting up health insurance and retirement plans.

However, ERISA presents employers with extra responsibilities and challenges:

Administrative burden

Compliance with ERISA demands extra time and effort from your payroll department, as you have to research and stay updated with the changing requirements.

While administering the plans, you also have to document and report on everything you offer. You then have to ensure every employee has read and understood the details.

Compliance management solutions like Deel can mitigate the risks by sourcing a range of health and retirement plans that comply with ERISA standards. Often, they come with features that alert you to compliance issues like changing laws or unsigned contracts.

See also: The Key to Continuous Compliance

Funding requirements

ERISA has minimum standards to guarantee plans cover all future obligations to participants. This requirement can place a financial strain on employers or force them to cut back on spending elsewhere.

If an employer can’t meet ERISA standards, they may be unable to offer competitive benefits plans. They may also find it harder to attract and retain the skilled workers they need.

Small businesses could consider using a professional employer organization (PEO). Providers like Deel become your legal co-employers and manage all HR, payroll, and benefits administration. Using their larger headcount as leverage, they can negotiate better deals on plans for you.

Complex payroll processes

Adapting your existing system to comply with ERISA can be challenging. You have to set up your payroll software to track plans and make any necessary deductions. Staff are likely to require training on how to manage these tasks via the platform too.

If you have a dispersed team, handling these processes becomes more complex. You may have to integrate your US payroll platform with foreign providers to share data across them. Otherwise, your team has to manually input the information in your central system.

A dedicated US payroll solution enables you to sidestep many of these issues. For example, Deel automates many aspects of the benefits administration process including enrolment, payments, and reporting. Our Global Payroll platform also gives you the option to manage US and international teams in one place.

Tips on how to ensure compliance with ERISA

Both employers and their teams can ensure compliance with ERISA by following a few steps:

ERISA compliance for employers

• Regularly review plans to check for compliance issues
• Request anonymous feedback from employees
• Provide HR and payroll teams with ongoing training about ERISA requirements
• Establish a fiduciary committee to oversee the plans and policies

ERISA compliance for employees

• Educate yourself about your rights under ERISA
• Carefully read any documents your employer provides
• Keep records of all your plan details
• Look for discrepancies in your benefits statements
• Seek legal advice if you believe your employer has violated ERISA

Simplify US employment compliance with Deel

ERISA plays an important role in the US workforce. The law protects workers’ retirement incomes and ensures benefit plans meet acceptable standards. Staying informed and proactive about requirements helps both employers and their teams leverage ERISA to stay financially secure.

Deel’s US PEO and payroll solutions can help you manage ERISA and other compliance requirements. We offer:

• Expert US tax filing and reporting
• Payroll automation including any deductions or payments
• Guidance concerning US labor, payroll, and employment laws
• Access to a range of compliant health insurance and retirement plans
• Reduced liability and more affordable plans via our PEO service
• An employee self-service portal
• Secure document storage and management

Want to see how Deel can help you streamline US benefits administration? Book a demo to learn more.