The Employee Retirement Income Security Act of 1974, or “ERISA Law,” is a law that institutes the standards for pension plans that private companies in the U.S. provide for their employees. For example, the ERISA Law contains all the tax effects that can occur during transactions involving employee benefits plans. The ERISA Law functions as a protection for those who hold pension plans, as well as their beneficiaries. To explore this concept, consider the following ERISA Law definition.
Definition of ERISA Law
- The law that sets up the standards for employee pension plans through private companies.
September 2, 1974
What is ERISA?
The meaning of ERISA law is that it is a federal law that directs how companies institute their pension plans. It is not the kind of law that requires companies to have pension plans; it only directs the companies on how to implement their pension plans once they institute them. Some exemptions exist with regard to ERISA, though those exemptions have certain standards, and many only apply to current employees, as opposed to retirees.
History of ERISA Law
The history of ERISA Law began in 1961, when President John F. Kennedy created a movement for pension reform called the President’s Committee on Corporate Pension Plans. The movement gained momentum in 1963, when the Studebaker Corporation, an automobile manufacturer, shut down because Studebaker could not afford to provide its employees with pensions.
The history of ERISA Law continued with an investigation in 1963 into labor leader George Barasch, which accused Barasch of misusing $4 million in union benefit funds. The investigation ultimately failed to turn up proof of any wrongdoing against Barasch, but during that three years, the legislature proposed several laws with regard to revamping the standards for those who held pension plans.
For instance, in 1965 and 1967, bills passed with regard to regulating both welfare and pension funds to limit control, and to address how companies were funding and reporting the funds. Business groups and labor unions opposed the bills because of the restrictions they placed on the flexibility they once enjoyed.
However, it was the provisions from these bills that ultimately evolved into the ERISA we know today. The history of ERISA Law culminated in September of 1974, when President Gerald Ford signed it into law on Labor Day. Since then, ERISA law has undergone several amendments.
Rules of ERISA
There are many rules of ERISA, as it is a rather complex topic. The rules of ERISA essentially provide guidance for plan managers so they can best protect their funds. The rules of ERISA also help assure fiduciaries are acting in the fund’s best interest, and that employees receive their benefits as promised. Some of the more typical rules of ERISA concern the following:
- Setting minimum funding requirements
- Providing information on the appeals and grievance process
- Outlining the employee’s right to sue for breach of fiduciary responsibility
Examples of ERISA Law rules also provide guidelines regarding document filing, record keeping, and the depositing of contributions, among other things.
Types of ERISA Plans
There are two types of ERISA plans that employees can enjoy: pension plans and health benefit plans.
Pension plans are one of the two types of ERISA plans. ERISA does not require employers to provide pension plans for their employees, nor does it require them to provide employees with a minimum level of benefits. What ERISA does do is regulate how the company operates its pension plans once it puts one into place.
ERISA dictates that companies must allow employees to vest in, or take money out of, their pension plans once a certain amount of time has passed. It also requires employers to meet certain minimums with regard to funding.
Health Benefit Plans
The other of the two types of ERISA plans is health benefit plans. Just like pension plans, ERISA does not require employers to provide their employees with health benefits plans. And, just like pension plans, ERISA regulates health benefits plans when employers put them in place.
Health benefits plans are one particular area of ERISA that has significantly changed over the years. Some of the more significant amendments include the Newborns’ and Mothers’ Health Protection Act and the Women’s Health and Cancer Rights Act.
One area in which ERISA varies significantly is in the fact that it does not allow employees to vest in their health benefit plans the way they can vest in their pension plans. For example, ERISA Law was unable to protect employees from their companies’ limiting or eliminating their retirement benefits in the 1990s and 2000s. However, anyone who has their lifetime health coverage revoked can sue their employer for breach of contract. They can also challenge the health benefit plan itself to change its documents going forward so no one else sees their promised benefits revoked.
ERISA Business Exemptions
Some ERISA business exemptions exist when an employee does not meet certain standards. ERISA Law examples of ERISA business exemptions include plans issued by the government or by a church.
State-level plans and plans offered by other countries for non-residents also qualify as ERISA business exemptions. Some ERISA Law examples of exemptions made as part of a company’s normal payroll can include wages, overtime, and holiday pay, as well as sick time, jury duty, and vacation time. A company can only make an exception for a current employee.
ERISA Law Example Involving Lifetime Retirement Accounts
One of the ERISA Law examples to have come before the U.S. Supreme Court is M&G Polymers USA, LLC, et al., v. Hobert Freel Tackett et al. (2015). Here, M&G Polymers bought the Point Pleasant Polyester Plant in 2000.
As part of the purchasing deal, M&G entered into a pension and insurance benefits agreement, wherein they would pay, in full, the benefit plans for their retirees. The company was to provide these benefits “for the duration of the agreement,” which the company planned to then renegotiate in three years.
However, once the agreement expired, M&G announced it would require retirees to pay into their own healthcare benefits. The retirees then collectively sued M&G and its related entities, alleging that the agreement M&G entered into with P&I created the right for their employees to enjoy lifetime healthcare benefits that they did not have to pay for.
Decision and Appeal
The District Court dismissed the case, claiming the retirees failed to state a claim, but the Sixth Circuit court of appeals reversed the District Court’s ruling, based on a decision it had made in an earlier, similar case and remanded the case back to the District Court. On remand, the District Court changed course and ruled for the retirees, which the Sixth Circuit then affirmed.
U.S. Supreme Court
When the case reached the U.S. Supreme Court, the Court sided with the retirees and upheld the Sixth Court’s decision. Said the Court:
“Perhaps tugged by its inferences, the Sixth Circuit…misapplied the illusory promises doctrine. It construed provisions that admittedly benefited some class of retirees as ‘illusory’ merely because they did not benefit all retirees. That interpretation is a contradiction in terms – a promise that is ‘partly illusory’ is by definition not illusory. And its use of this doctrine is particularly inappropriate in the context of collective-bargaining agreements, which often include provisions inapplicable to some category of employees.
The Sixth Circuit also failed even to consider other traditional contract principles, including the rule that courts should not construe ambiguous writings to create lifetime promises and the rule that ‘contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.’ (Citation omitted.)
(e) Though there is no doubt that Yard-Man and its progeny affected the outcome here, the Sixth Circuit should be the first to review the agreements under ordinary principles of contract law. (Citation omitted).”
Related Legal Terms and Issues
- Pension – Payment a person receives during retirement from an investment fund to which he or his employer has contributed to during his time of employment with that company.
- Welfare – Financial support provided by the government to those in financial need.