Regulating Private Pensions: A Summary of ERISA

CRS Report for Congress
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Regulating Private Pensions:
A B rief Su mmary o f ERISA
Specialist i n Social Legislation
Domestic Social Policy Division
The Employee R e t i r e ment Income S ecurity Act o f 1974 (ERISA, P .L. 93-406)
prot ect s t he i n t erest s o f p art i ci p ant s and b enefi ci ari es i n pri v at e-sect or em pl oyee benefi t
plans. It was p assed i n response t o i nstances in which employers had failed t o p rudently
manage pension funds, h ad terminated pensio n p lans without sufficient assets to pay t he
benefits employees had earned, or had creat ed i m p edi m ent s t o earni ng a p ensi on, such
as onerous age and service requirements. ERISA covers a number of fringe benefits
provided by employers, but most of its provisions deal with pensio n plans. P ension
plans s ponsored by the federal, s tate, and lo cal governments, or by churches generally
are ex empt from ERISA. (This report will be updated for amendments to ERIS A.)
Minimum S tandards. ERIS A d o e s n o t require employers t o p rovide pensions,
but those t hat d o m ust m eet minimum s tandards i n regard t o who can pa r t i c i p ate, how
long a p erson h as to work to be entitled t o a pension, and how much funding must be set
asi d e each year by t h e em p l o yer t o assure paym e n t o f p ensi ons when due. E R IS A al so
creat ed t h e Pension Benefit Guaranty C orporation (P BGC ) t o gu arant ee t he paym ent o f
pensions in case a financi ally ailing s ponsor terminates a d efined benefit p ension with
insufficient funds to pay p romised benefits. (A defined benefit plan is one that promises
a future p ension based o n a formula t hat t yp i cally takes i nto account length of service and
annual earnings.) All firms t hat s ponsor a d efined benefit p ension must pay i ns u r a n c e
premiums to the P BGC. The current premium i s $19 per participant per year.
ERIS A requires p lan s ponsors t o h andle funds prudently and i n t he best interest of
participants and beneficiaries . P lan participants must be informed of thei r rights and of
changes i n t he plan’s financial s tatus. Plan participants may ex ercise t heir rights under
t h e l aw without harassment o r i nterference, may appeal if they are d enied b enefit s , a n d
may s ue in federal court t o recover b enefits due. E RISA has b een amended over t he years
to provide greater protection t o s urvivors an d s p ouses of pension plan participants, t o
accelerate s ound pension funding, t o bolster the f inancial integrity of the P BGC, to ensure
that plan participation i s broadly based and does not discriminat e i n favor of h i gh ly
compensated i ndividuals or owners, a n d t o short en t he t enure n eeded for b enefi t

Congressional Research Service ˜ The Library of Congress

entitlement (ves ting). Defined benefit plans generally may not require more than 5 years
of service for pension c red i t s t o vest. Employees generally must be fully vested in
employer contributions to a defined contribution plan (like a 401(k) plan) i n n o m ore t han


Internal Reve nue Code Provisions. Congress added minimum s tandards for
pension plans to the Internal R evenue Code at the s am e time it passed ERISA. To qualify
for t ax preferences, p ensi on pl ans m ust meet not only t he standards s et by ERIS A but
additional t ax code requirements as well. Thes e t ax rules i n c l ude limits on plan
contributions and benefits, special rules for “t op heavy” plans t hat b enefit primarily high ly
compensated i ndividuals and/or business o wners, and uniform rules for plan dist ributions.
P r e e m ption o f S ta te La w s . ERIS A preem pts s tate laws affecting all em ployee
benefit p lans. Besides pensions, t hese other b enefi t s (oft en cal l ed “wel f a r e b enefi t s ”)
include employer-provided health insurance and life i nsurance, disability benefits, prepaid
legal p lans, and apprenticeship and training programs. ERISA preempts s tate insurance
law only for employers t hat self-insure, which is a common practice a m o n g large
em ployers. Health, life, or disability insurance purchas ed through an i nsurance company
rem ai n s s ubj ect t o st at e i nsurance l aws. M any s m al l em pl oyers purchase h eal t h i n surance
t h rough i nsurance com p ani es b ecause t h ey are t oo sm al l t o accept t he ri sk of sel f-i nsuri n g.
Welfare Benefit Plans. W el fare b enefi t pl ans are subj ect t o ER IS A’s fi duci ary
standards i f m on ey i s set aside to fund those benefits, and they must comply with
ERIS A’s reporting and disclosure requirements i f t hey cover a t l e a s t 100 participants.
W el fare p l ans al so are s ubj ect t o cl ai m s and enforcem ent s t andards. However, t h ere are
no minimum participation, vesting, or funding st andards, nor are welfare benefits insured
Administration. Responsibility for enforcing ERIS A i s s hared b y t he Department
of Labor and t he In ternal Revenue Service. Fiduciary standards, and requirements for
plan reporting and disclosure are administered t hrough t he Departm ent of Labor.
Requirements for plan participation, vest i n g ,and funding are enforced by the Internal
Additional References
CRS Report R L31507, Employer Stock i n Retirement Plans: Investment Risk and
Ret i r ement S ecuri t y, P at ri ck J . P u rcel l
CRS Report 97-1014, ERISA Pri mer: It s Ori g i n and Devel opment , by R ay Schmitt.
CRS Report R L30122, Pensions and Retirement Savings Plans: Sponsorshi p and
Participation, b y P at ri ck J . P u rcel l .
CRS Report R L30196, Pension Issues: C ash Balance Plans , b y P at ri ck J . P u rcel l .
CRS Report 94-506, Private Pension Plan Standards: A Summary of ERISA,byRay