Summary of the Employee Retirement Income Security Act (ERISA)

Summary of the Employee Retirement Income
Security Act (ERISA)
April 10, 2008
Patrick Purcell
Specialist in Income Security
Domestic Social Policy Division
Jennifer Staman
Legislative Attorney
American Law Division

Summary of the Employee Retirement Income
Security Act (ERISA)
The Employee Retirement Income Security Act of 1974 (ERISA) provides a
comprehensive federal scheme for the regulation of employee pension and welfare
benefit plans offered by employers. ERISA contains various provisions intended to
protect the rights of plan participants and beneficiaries in employee benefit plans.
These protections include requirements relating to reporting and disclosure,
participation, vesting, and benefit accrual, as well as plan funding. ERISA also
regulates the responsibilities of plan fiduciaries and other issues regarding plan
administration. ERISA contains various standards that a plan must meet in order to
receive favorable tax treatment, and also governs plan termination. This report
provides background on the pension laws prior to ERISA, discusses various types of
employee benefit plans governed by ERISA, provides an overview of ERISA’s
requirements, and includes a glossary of commonly used terms.

In troduction ......................................................1
Historical Development of Pension Plans in the Unites States...........2
Origins of ERISA..............................................3
Types of Qualified Retirement Plans...............................4
Hybrid Plans..............................................5
The Revenue Act of 1978 and 401(k) Plans.....................5
Principal Types of Defined Contribution Plans.......................7
ERISA: An Overview..............................................7
ERISA Title I: Protection of Employee Benefit Rights....................7
A. Coverage..................................................7
B. Reporting and Disclosure.....................................7
1. Summary Plan Description................................8
2. Summary of Material Modifications.........................9
3. Annual Report..........................................9
4. Benefit Statements.....................................10
5. Annual Funding Notice..................................11
6. Notice of Freedom to Divest Employer Securities.............11
C. Participation Requirements...................................11
D. Benefit Accrual............................................12
1. Anti-cutback Rule......................................13
2. Benefit Accrual and Age Discrimination....................14
E. Minimum Vesting Standards..................................15
Breaks in Service.........................................17
F. Benefit Protections for Spouses...............................17
1. Preretirement Survivor Benefits...........................17
2. Postretirement Survivor Benefits..........................18
3. Qualified Domestic Relations Orders.......................18
G. Buyouts, Mergers, and Consolidations..........................19
H. Plan Funding..............................................19
1. Funding Requirements for Single-employer Plans.............20
2. Valuation of Plan Assets.................................22
3. Benefit Limitations in Underfunded Plans...................22
4. Lump-sum Distributions.................................23
5. Funding Requirements for Multiemployer Plans..............24
I. Fiduciary Responsibility.....................................26
1. Duty of Loyalty........................................27
2. Duty of Prudence......................................28
3. Duty to Diversify Investments............................29
4. Duty to Act in Accordance with Plan Documents.............30
5. Prohibited Transactions.................................31
6. Investment Advice.....................................34
7. Fiduciary Duty and Participant-Controlled Investment.........34
8. Fiduciary Liability under ERISA Section 409................36
J. Administration and Enforcement..............................37
1. Civil Enforcement under Section 502(a).....................37

2. Claims to Enforce Benefit Rights..........................38

4. Claims to Enforce Plan Provisions and “Other Equitable Relief”.41
5. Criminal Enforcement under ERISA and Other Federal Law.....43
K. Preemption of State Laws...................................45
1. Section 514...........................................45
2. Section 502...........................................48
L. Special Regulation of Health Benefits..........................49
1. COBRA..............................................49
2. HIPAA..............................................50
3. Mental Health Parity....................................51
4. Maternity Length of Stay................................51
5. Reconstructive Surgery Following Mastectomies.............51
ERISA Title II: Internal Revenue Code Provisions......................52
A. Limits on Plan Contributions and Benefits......................52
1. Defined Benefit Plan Provisions...........................52
2. Defined Contribution Plan Provisions......................53
B. Coverage and Nondiscrimination..............................54
1. Nondiscrimination Test..................................54
2. Safe Harbor Plans......................................55
C. Distributions from Qualified Plans............................56
1. Plan Loans............................................57
2. Additional Tax on Early Withdrawals......................57
3. Rollovers.............................................58
D. Integration with Social Security...............................58
E. Special Rules for “Top-heavy” Plans...........................59
ERISA Title III: Jurisdiction, Administration, and Enforcement............60
ERISA Title IV: Pension Benefit Guaranty Corporation and
Plan Termination .............................................61
A. Premiums for Single-employer Plans...........................61
B. PBGC Insurance Limit......................................62
C. Plan Terminations.........................................62
1. Standard Termination...................................62
2. Distress Termination....................................63
3. Involuntary Termination.................................63
D. Employer Liability to the PBGC..............................63
E. Reportable Events..........................................63
F. Notice Requirements.......................................64
G. Premiums for Multiemployer Pension Plans.....................64
H. Withdrawal Liability.......................................64
Glossary ........................................................66
List of Tables
Table 1. Number of Plans, Participants, and Assets by
Type of Plan, 1975-2004........................................5
Table 2. Maximum Average 401(k) Contributions for
Highly Compensated Employees.................................55

Summary of the Employee Retirement
Income Security Act (ERISA)
The Employee Retirement Income Security Act of 1974 (ERISA)1 protects the
interests of participants and beneficiaries in private-sector employee benefit plans.
Governmental plans and church plans generally are not subject to the law. ERISA
supersedes state laws relating to employee benefit plans except for certain matters
such as state insurance, banking and securities laws, and divorce property settlement
orders by state courts. An employee benefit plan may be either a pension plan (which2
provides retirement benefits) or a welfare benefit plan (which provides other kinds
of employee benefits such as health and disability benefits). Most ERISA provisions
deal with pension plans. ERISA does not require employers to provide pensions or
welfare benefit plans, but those that do must comply with its requirements. ERISA
sets standards that pension plans must meet in regard to:
!who must be covered (participation),
!how long a person has to work to be entitled to a pension (vesting),
!how much must be set aside each year to pay future pensions
ERISA sets fiduciary standards that require employee benefit plan funds be
handled prudently and in the best interests of the participants. It requires plans to
inform participants of their rights under the plan and of the plan’s financial status,
and it gives plan participants the right to sue in federal court to recover benefits that
they have earned under the plan. ERISA also established the Pension Benefit
Guaranty Corporation (PBGC) to insure that plan participants receive promised
benefits, up to a statutory limit, should a plan terminate with a lack of sufficient
assets to pay promised benefits. In order to encourage employers to establish pension
plans, Congress has granted certain tax deductions and deferrals to qualified plans.
To be qualified for tax preferences under the Internal Revenue Code (IRC), plans
must meet requirements with respect to pension plan contributions, benefits, and
distributions, and there are special rules for plans that primarily benefit highly
compensated employees or business owners.

1 P.L. 93-406, 88 Stat. 829 (Sept. 2, 1974). ERISA is codified at §§1001 to 1453 of title 29,
United States Code and in §§ 401-415 and 4972-4975 of the Internal Revenue Code.
2 See ERISA § 3(1), (29 U.S.C. § 1002), for the different types of welfare benefit plans.

Responsibility for enforcing ERISA is shared by the Department of the
Treasury, the Department of Labor, and the Pension Benefit Guaranty Corporation
(PBGC). In the Department of the Treasury, the Internal Revenue Service oversees
standards for plan participation, vesting, and funding. The Department of Labor
regulates fiduciary standards and requirements for reporting and disclosure of
financial information. The PBGC — a government-owned corporation — administers
the pension benefit insurance program.
Historical Development of Pension Plans in the Unites States
The first employer-sponsored pension plans in the United States were
established in the late 19th century in the railroad industry. At that time, pensions
were regarded as gifts in recognition of long service rather than as a form of
compensation protected by law. Pension benefits often were paid from employers’
annual revenues and sometimes were reduced or terminated if the company paying
the pension became unprofitable or went out of business.
Congress first gave pensions and profit-sharing plans preferential income tax
treatment in the 1920s. At that time, few households paid income taxes, so these tax
benefits did not immediately spur the growth of the private pension system. The
Revenue Acts of 1938 and 1942 outlined more specific requirements for
“tax-qualified” pension plans, including the requirement that benefits and
contributions not discriminate in favor of highly compensated employees. Tax
qualification means that the employer can deduct the amounts contributed to the plan,
the earnings on the pension trust fund are exempt from taxes until distributed, and
covered employees do not have to pay income tax on the employer’s contributions
to the plan.3 Employers also are allowed to “integrate” their pension benefit formulas
with Social Security benefits to partly offset the relatively more generous income
replacement rates that Social Security pays to low-wage workers.4
During the Second World War (1941-1945), pensions and other deferred
compensation arrangements were exempt from wartime wage controls. Employers
who were unable to pay higher wages due to these controls could increase workers’
total compensation by offering new or increased pension benefits. Also in 1940s, the
federal courts declared that pensions were subject to collective bargaining, and that
employers had to include pensions among the benefits for which unions could
negotiate.5 In addition, the expansion of the income tax to include more households
and the introduction of higher marginal income tax rates made the tax advantages of
pensions considerably more valuable to workers. Both of these developments led to
more widespread adoption of employer-sponsored pensions during the 1950s and


3 When a plan participant receives income from a pension plan, it is taxable income.
4 Federal law limits the extent to which pension benefits can be reduced as a result of
“integration” of the benefits with Social Security benefits. See 26 U.S.C. § 401(l).
5 Inland Steel Co. v. National Labor Relations Board, 170 F.2d 247 (7th Cir. 1948). cert.
denied, 336 U.S. 960 (1949).

Origins of ERISA
As the number and size of private pension plans grew in the 1950s and 1960s,
so did the number of instances in which employers or unions attempted to use the
assets of these plans for purposes other than paying benefits to retired workers and
their surviving dependents. In 1958, Congress passed The Welfare and Pension
Plans Disclosure Act,6 which required public disclosure of pension plan finances.
Advocates of the legislation expected that greater transparency of pension funding
would ensure that the funds held in trust for workers’ pensions would not be misused
by plan sponsors. After the Studebaker automobile company terminated its
underfunded pension plan in 1963, leaving several thousand workers and retirees
without the pensions that they had been promised, Congress began considering
legislation to ensure the security of pension benefits in the private sector.
During the early 1970s, both the House and Senate labor committees drafted
bills to regulate the private pension system. The Senate Labor and Public Welfare
Committee reported a pension bill in 1972. Up to that point, the legislation had been
handled exclusively as a labor issue, but since most private pension plans benefitted
from the favorable tax treatment accorded them under the Internal Revenue Code, the
Senate Finance Committee also asserted its jurisdiction. As passed by Congress in
1974, ERISA included elements produced by the House and Senate labor
committees, the House Ways and Means Committee, and the Senate Finance
Committee. Title I of the law, which sets standards for pension plans of employers
engaged in interstate commerce, is under the jurisdiction of the House Committee on
Education and Labor and the Senate Committee on Health, Education, Labor, and
Pensions. Title II, which makes conforming amendments to the Internal Revenue
Code for tax-qualified plans, is under the jurisdiction of the House Ways and Means
Committee and the Senate Finance Committee. The labor and tax committees share
jurisdiction over the PBGC.
ERISA was signed into law by President Gerald Ford on Labor Day, September
2, 1974. Congress has amended ERISA over the years to provide greater protection
to survivors and spouses of pension plan participants, improve pension funding
practices, strengthen the finances of the PBGC, alter the limits on tax-deductible
pension plan contributions, and to ensure that tax-favored plans are broadly based
and do not unduly favor a firm’s owners and other highly compensated employees.
Before ERISA was enacted, an employer could terminate an unfunded pension
plan without being liable for any additional pension contributions. If there were
insufficient assets in the pension plan to pay all claims, participants had no legal
recourse to demand that employers use company assets to continue funding the plan.
ERISA protects the benefits of participants in most private-sector pension plans by
requiring companies with defined benefit pension plans to fully fund the benefits that
participants have earned. The law prohibits companies from using pension funds for
purposes other than paying pensions and retiree health benefits. It also limits the age
and length-of-service requirements that firms can require participants to meet to

6 P.L. 85-836, 72 Stat. 997 (Aug. 29, 1958).

receive a pension. ERISA also requires all private-sector sponsors of defined benefit
pension plans to purchase insurance from the Pension Benefit Guaranty Corporation.
Types of Qualified Retirement Plans
ERISA and the IRC classify employer-sponsored retirement plans as either
defined benefit (DB) plans or defined contribution (DC) plans.7 A defined benefit
plan specifies either the benefit that will be paid to a plan participant or the method
of determining the benefit. The plan sponsor’s contributions to the plan vary from
year to year, depending on the plan’s funding requirements. Benefits often are based
on average pay and years of service. For example, the benefit might be defined as
1.5% of the average of the employee’s highest five years of pay multiplied by his or
her number of years of service. This would result in a benefit equal to 45% of a
participant’s “high-five” average pay after 30 years of service. Some DB plans,
particularly plans covering workers who belong to unions, pay a flat benefit per year
of service. For example, if the benefit is defined as $30 per month for each year of
service, the monthly pension benefit after 30 years of service would be $900.
ERISA requires DB plans to be fully funded. The assets held in the pension
trust must be sufficient to pay the benefits that the plan’s participants have earned.
The employer bears the investment risk for the assets held by the plan. If the assets
decrease in value, or if the plan’s liabilities increase, the plan sponsor must make
additional contributions to the pension trust fund. The assets of qualified DB plans
are exempt from creditors’ claims if the sponsor is in bankruptcy, and DB plan
benefits are insured up to certain limits by the Pension Benefit Guaranty Corporation.
A defined contribution plan is one in which the contributions are specified, but
not the benefits. A defined contribution plan (also called “an individual account”
plan) is one that provides an individual account for each participant that accrues
benefits based solely on the amount contributed to the account and any income,
expenses, and investment gains or losses to the account.8 The employee bears the
investment risk in a DC plan, and DC plans are not insured by the PBGC.
When ERISA was enacted in 1974, most employer-sponsored retirement plans
were defined benefit plans. The number of defined benefit plans continued to grow
until the mid-1980s. The number of DB plans then began to fall while the number
of DC plans increased. Analysts have suggested several possible reasons for these
trends, including rising global competition that put greater pressure on companies to
reduce costs, a more mobile workforce that preferred the portability of benefits
earned in DC plans, the higher costs of maintaining DB plans after stronger funding
requirements were put into place by ERISA, and the greater attractiveness of DC
plans after Section 401(k) of the tax code was added by the Revenue Act of 1978.9
Although the standards established under ERISA have made workers’ pensions more
secure, some employers — especially small employers — apparently decided that the

7 29 U.S.C. § 1002(34) and § 1002(35); 26 U.S.C. § 414(i) and § 414(j).
8 26 U.S.C. § 414(i).
9 P.L. 95-600, 92 Stat. 2826 (Nov. 6, 1978).

plan funding requirements of ERISA made DB plans too expensive to maintain. The
decline in the number of DB plans since the 1980s has been the result mainly of
terminations of small plans. By the late 1990s, defined contribution plans had
overtaken defined benefit plans in number of plans, number of participants, and total
assets. (Table 1.)
Table 1. Number of Plans, Participants, and Assets by Type of
Plan, 1975-2004
Defined Benefit PlansDefined Contributions Plans
Year Participants Assets Participants Assets
P l ans (thousands) (millions) P l ans (thousands ) (millions)
1975 103,346 33,004 $185,950 207,748 11,507 $74,014
1980 148,096 37,979 401,455 340,805 19,924 162,096
1985 170,172 39,692 826,117 461,963 34,973 426,622
1990 113,062 38,832 961,904 599,245 38,091 712,236
1995 69,492 39,736 1,402,079 623,912 47,716 1,321,657
2000 48,773 41,613 1,986,177 686,878 61,716 2,216,495
2004 47,503 41,707 2,106,325 635,567 64,627 2,587,152
Source: U.S. Department of Labor, Private Pension Plan Bulletin: Abstract of Form 5500 Annual
Reports, various years.
Note: Includes active participants, vested separated participants, and retired participants.
Hybrid Plans. In recent years, many employers have converted their
traditional DB plans to “hybrid” plans that have characteristics of both defined
benefit and defined contribution plans. The most common of these hybrids is the
cash balance plan. A cash balance plan looks like a defined contribution plan in that
the accrued benefit is defined in terms of an account balance. The employer
contributes an amount equal to a fixed percentage of pay to the plan and pays interest
on the accumulated balance. However, a cash balance plan is not an individual
account owned by the participant. Assets are held in a common trust, and each
participant’s “account balance” is merely a record of his or her accrued benefit.
Because plan sponsors are obligated to provide the participants with benefits that are
no less than the sum of contributions to the plan plus interest, cash balance plans are
considered to be defined benefit plans.10
The Revenue Act of 1978 and 401(k) Plans. The most common defined
contribution plans are 401(k) plans, named for the section of the IRC added by the
Revenue Act of 1978 under which they were authorized. In 1981, the IRS published
regulations for IRC §401(k). Soon after, the first 401(k) plans were established. A

10 See “Benefit Accrual and Age Discrimination” in section III for additional discussion of
hybrid plans.

401(k) plan is an “individual account plan.”11 Its defining feature is that the
employee, as well as the employer, can make pre-tax contributions to the account.
Taxes on these contributions and on investment earnings are deferred until the money
is withdrawn. Before Section 401(k) was enacted, DC plans for private-sector
employees were funded by employer contributions or by after-tax employee
contributions.12 Typically, participants in a 401(k) plan can allocate their account
balances among a menu of investment options selected by the employer or by a plan
administrator appointed by the employer. The participant’s retirement benefit
consists of the balance in the account, which is the sum of all the contributions that
have been made plus interest, dividends, and capital gains (or losses) minus fees and
expenses. Upon separating from the employer, the participant usually has the choice
of receiving these funds through a series of withdrawals or as a lump sum. Some
401(k) plans allow participants to purchase a life annuity through an insurance
company, but defined contribution plans are not required to offer annuities.13
In most 401(k) plans, the employee must elect to have contributions to the plan
deducted from his or her pay, decide how much to have deducted, and direct these
contributions among the plan’s investment options.14 The employer often contributes
either a fixed dollar amount or percentage of pay to the account on behalf of each
participant. Employer contributions are sometimes conditioned on the employee also
making contributions. In a 401(k) plan, the employer can reduce or suspend its
contributions to the plan if business conditions are unfavorable for the firm, or for
any other reason. Although 401(k) plans are the most numerous DC plans, they are
not the only kind of DC plan. (See box below.)
ERISA and the pension provisions of the Internal Revenue Code have been
amended several times since ERISA was enacted in 1974. The most significant
changes to ERISA since its original passage were enacted in the Pension Protection
Act of 2006 (P.L. 109-280).15

11 IRC §401(k) authorizes “cash or deferred arrangements,” under which an employee may
elect to have the employer make payments as contributions to a trust fund on behalf of the
employee in lieu of receiving that portion of his or her compensation in cash.
12 Salary deferral plans under IRC §403(b) and §457 predate §401(k), but these plans are
available only to employees of tax-exempt organizations and state and local governments.
13 An exception to this rule is the “money purchase plan,” which is a DC plan but also is a
pension plan established under IRC §401(a), and must offer plan participants an annuity.
14 Some firms automatically enroll all eligible employees in their 401(k) plans, so that the
default condition is for the employee to be enrolled with the option to quit the plan.
15 For more information, see CRS Report RL33703, Summary of the Pension Protection Act
of 2006, by Patrick Purcell.

Principal Types of Defined Contribution Plans
A. Qualified plans under Internal Revenue Code §401(a)
1. Money purchase pension plans
a. Traditional money purchase plans
b. Target benefit plans
c. Thrift plans (other than profit sharing plans)
2. Profit sharing plans
a. Traditional profit sharing plans
b. Thrift plans
c. Cash or deferred arrangements (IRC §401(k))
3. Stock bonus plans
a. Traditional stock bonus plans
b. Employee stock ownership plans (ESOPs)
4. Voluntary employee contributions under qualified plans
B. Tax-deferred annuities under IRC §403(b)
C. Deferred compensation plans for state and local governments and
tax-exempt organizations under IRC §457
D. Individual retirement accounts (IRAs and Roth IRAs) under IRC §408 and §408A
E. Non-qualified plans (Plans that do not qualify under the Internal Revenue Code)
Source: D. McGill and D. Grubbs, Fundamentals of Private Pensions, 6th edition.
ERISA: An Overview
ERISA consists of four titles. Title I sets out specific protections of employee
rights in pensions and welfare benefit plans. Title II specifies the requirements for
plan qualification under the Internal Revenue Code. Title III assigns responsibilities
for administration and enforcement to the Departments of Labor and Treasury. Title
IV of ERISA establishes the Pension Benefit Guaranty Corporation.
ERISA Title I: Protection of Employee
Benefit Rights
A. Coverage
ERISA covers employee pensions and welfare benefit plans established by
employers in the private sector. The law specifically exempts governmental plans16
and church plans.
B. Reporting and Disclosure
Section 2(b) of ERISA states that it is the policy of ERISA “to protect ... the
interests of plan participants and their beneficiaries by requiring disclosure and
reporting of financial and other information.” Both pension and welfare benefit plans

16 ERISA § 4, 29 U.S.C. § 1003.

can be subject to extensive reporting and disclosure requirements that can be found
under Sections 101 through 111 of ERISA.17 These sections may require disclosure
of information to plan participants and beneficiaries, as well as reporting of pension
and welfare plan information to governmental agencies. Some of the reporting and
disclosure requirements provide that certain materials must be disseminated or made
available to participants at reasonable times and places. Other requirements arise
only upon the written request of a plan participant or beneficiary or upon the
occurrence of a specific event. Reports and disclosures required by ERISA include
summary plan descriptions, annual reports, and summaries of plan modifications. In
addition, the Pension Protection Act of 2006 (PPA)18 made enhancements to the
reporting and disclosure requirements, requiring the provision of statements of a
participant’s total accrued benefits,19 an annual funding notice for single-employer
plans, as well as a notice of eligibility to divest employer securities.
1. Summary Plan Description. As a mechanism for informing plan
participants of the terms of the plan and its benefits, ERISA requires that plan20
administrators furnish to participants a summary plan description (SPD). A SPD
is a written summary of the provisions of an employee benefit plan that contains the21
terms of the plan and the benefits offered. It must be written in a manner that can
be understood by the average plan participant and be sufficiently accurate and
comprehensive to reasonably apprise participants and beneficiaries of their rights and
obligations under the plan.22
ERISA specifies what the SPD must contain.23 It must state when an employee
can begin to participate in the plan, describe the benefits provided by the plan, state
when benefits become vested, and describe the remedies available if a claim for
benefits is denied in whole or in part. If a plan is altered, participants must be
informed, either through a revised SPD, or in a separate document, called a summary

17 See ERISA § 101et. seq., 29 U.S.C. § 1021 et. seq. and accompanying regulations. Certain
types of employee benefit plans are exempt or partially exempt from the main reporting and
disclosure requirements of ERISA. These plans include unfunded or insured welfare plans
that provide benefits for a select group of management or highly compensated employees,
as well as plans that exclusively provide apprenticeship training benefits or other training
benefits. See 29 C.F.R. § 2520.104.
It should also be noted that additional reporting and disclosure provisions exist under
other sections of ERISA. See, e.g., COBRA, P.L. 99-272, 100 Stat. 82 (1986), which
requires health plans to issue notices related to continued medical insurance coverage.
ERISA § 606, 29 U.S.C. § 1166.
18 P.L. 109-280, 120 Stat. 780 (Aug. 17, 2006).
19 29 U.S.C. § 1025(a)(1).
20 ERISA § 101, 29 U.S.C. § 1021; 124 A.L.R. Fed. 355 (citing Hicks v Fleming Cos., 961
F.2d 537 (5th Cir. 1992)).
21 124 A.L.R. Fed. 355.
22 ERISA § 102(a)(1), 29 USC 1022(a)(1); See also S.Rept. 93-127, 2d Sess, (Apr. 18,


23 Hicks v. Fleming Cos., 961 F.2d 537 (5th Cir. 1992).

of material modifications (discussed below), both of which must also be given to
plan participants.
2. Summary of Material Modifications. Under Section 104(b)(1), a plan
administrator must provide a summary of any material modification (SMM) in the
terms of the plan as well as any change in information required to be included in the24
SPD. This summary must be provided, in most cases, within 210 days after the
close of the plan year in which the modification was adopted, and also must be25
furnished to the Labor Department upon request. Similar to the SPD, the materials
must be written in a manner that can be understood by the average plan participant.
While ERISA does not define “material modification” and does not specifically cover
what changes warrant an SMM,26 courts have addressed this issue.27 Courts have
held plan amendments such as the establishment and elimination of benefits are
material modifications.28 However, as courts have also pointed out, not all plan29
amendments are material modifications.
3. Annual Report. Section 103 of ERISA provides that certain employee
benefit plans must file an annual report with the Department of Labor.30 The annual
report is considered to be a primary source of information concerning the operation,
funding, assets, and investments of employee benefit plans.31 It is regarded as a
compliance and research tool for the Labor Department, and a source of information
and data for use by other federal agencies, Congress, and private groups in assessing
employee benefit, tax, and economic trends and policies.32 While the annual report

24 29 U.S.C. § 1024(b)(1), ERISA § 102(a); 29 U.S.C. § 1022(a); 29 C.F.R. § 2520.104b-3.
25 ERISA § 104(b)(1), 29 U.S.C. § 1024(b)(1); 29 C.F.R. § 2520.104a-8.
26 However, regulations provide a special rule for health plans. Subject to an exception, an
SMM shall be furnished if there is a “material reduction in covered services or benefits.”

29 C.F.R. § 2520.104b-3.

27 EMPLOYEE BENEFITS LAW (Matthew Bender 2d ed.)(2000).
28 See, e.g., Baker v. Lukens Steel Co., 793 F.2d 509 (3rd Cir. 1986)(elimination of an early
retirement benefit option was a material modification); American Fed’n of Grain Millers v.
International Multifoods Corp., 1996 U.S. Dist. LEXIS 9399 (W.D.N.Y. 1996) aff’d, 116
F.3d 976 (2d Cir. 1997) (amendment to a medical plan requiring retirees to pay a portion of
premiums considered a material modification).
29 See, e.g., Hasty v. Central States, Southeast and Southwest Areas Health and Welfare
Fund, 851 F. Supp. 1250, 1256 (N.D. Ind. 1994) (amendments more specifically providing
for a trustee’s discretionary authority under an employee benefit plan were not a material
modification because the amendments “simply clarify a power”).
30 ERISA § 103; 29 U.S.C. § 1023. Labor Department regulations exempt some plans from
the annual reporting requirement. For example, welfare benefit plans having fewer than 100
participants may be exempted if certain conditions are met. 29 C.F.R. § 2520.104-20.
31 72 Fed. Reg. 64710 (Nov. 16, 2007).
32 Id.

can also be an important disclosure document for plan participants, participants must
request a copy from a plan administrator.33
The annual report must include a detailed financial statement containing
information on the plan’s assets and liabilities, an actuarial statement, as well as
various other information, depending on the type of the plan and the number of
participants. Plan administrators must make copies of the annual report available at
the principal office of the plan administrator and at other places as may be necessary
to make pertinent information readily available to plan participants.34
The annual report must be filed within seven months after the close of a plan
year, and extensions may be available under certain circumstances.35 The annual
report is to be filed with the Department of Labor on Form 5500.36 In 2006, the DOL
published a rule requiring electronic filing of Form 5500 annual reports for plan years
beginning on or after January 1, 2008.37
4. Benefit Statements. Under Section 105 of ERISA, plan administrators
are required to periodically furnish a pension benefit statement to participants and38
beneficiaries. For defined contribution plans, a pension benefit statement must be
provided (1) every calendar quarter to participants and beneficiaries who have the
right to direct the investments of the account, or (2) once each calendar year for
participants and beneficiaries who have accounts with the plan, but do not have39
control over the investment in the account. Section 105 also provides that plan
administrators of defined benefit plans must furnish benefit statements to participants
and beneficiaries at least once every three years to any individual who has both a
non-forfeitable accrued benefit and is employed by the employer maintaining the plan
at the time the statement is furnished. Statements to participants in defined benefit
plans must also be provided upon request. Pension benefit statements must indicate
information such as amount of non-forfeitable benefits, accrued benefits, and the
earliest date on which accrued benefits become non-forfeitable. Benefit statements
covering a defined contribution plan must also include the value of each investment
to which assets have been allocated in a participant or beneficiary’s account.

33 ERISA § 104(b), 29 U.S.C.§ 1024(b).
34 ERISA § 104(b)(2), 29 U.S.C.§ 1024(b)(2). Under this section, other materials, such as
a bargaining agreement or trust agreement affecting the plan may also be made available.
35 See 29 C.F.R. § 2520.104a-5.
36 While ERISA and the Internal Revenue Code provide that other annual reports must be
filed with the PBGC and the Internal Revenue Service, these reporting requirements can be
satisfied by filing Form 5500 with the Labor Department.
37 29 C.F.R. § 2520.104a-2.
38 ERISA provides an exception to this requirement for one-participant retirement plans.
ERISA § 105; 29 U.S.C. § 1025.
39 Under this section, beneficiaries of a plan that do not fall into either category can request
a pension benefit statement from a plan administrator. ERISA § 105, 29 U.S.C. § 1025.

5. Annual Funding Notice. Defined benefit plan administrators must also
provide an annual plan funding notice.40 While in previous years funding notices
have been furnished by multiemployer plans, single-employer plans must provide this
notice beginning in 2008. The required annual notices include information about the
plan’s funding policy, assets, and liabilities; a statement of the number of
participants; and a general description of the benefits that are eligible to be41
guaranteed by the PBGC. The notice must be provided to the PBGC, plan
participants and beneficiaries, labor organizations representing such participants or
beneficiaries, and, in the case of a multiemployer plan, to each employer who has an
obligation to contribute to the plan.
6. Notice of Freedom to Divest Employer Securities. The PPA
amended the disclosure provisions of ERISA to require plan administrators to
provide participants with a notice of their eligibility to divest employer securities
held in a defined contribution plan. Section 101(m) of ERISA requires plan
administrators to provide this notice to applicable individuals at least 30 days before
the date on which the individual is eligible to divest these securities.42 The notice
must inform the participant that he or she has the right to direct divestment of the
employer securities and informed of the importance of diversifying the investment
of retirement account assets. The notice must be written in a manner that can be
understood by the average plan participant. It may be delivered in written, electronic,
or other appropriate form that is reasonably accessible to the recipient.
C. Participation Requirements
ERISA restricts the amount of time an employee can be excluded from
participating in a pension plan.43 Under ERISA Section 202(a)(1)(A), an employee
can only be excluded from an ERISA pension plan on account of age or service if the
employee is under age 21 or has not yet completed a year of service.44 The term

40 ERISA§ 101(f), 29 U.S.C. § 1021(f).
41 Information required to be on a plan’s funding notice is different, depending on whether
the plan in question is a single-employer or multi-employer plan. See ERISA § 101(f)(2)(B),

29 U.S.C. § 1021(f)(2)(B).

42 29 U.S.C. § 1021(m).
43 Section 410 of the Internal Revenue Code contains similar participation requirements. See
26 U.S.C. § 410(a). Section 410 also contains coverage rules intended to ensure that a
pension plan covers both highly compensated employees and other employees
proportionately. 26 U.S.C. § 410(b). Participation and coverage requirements must be met
in order for a plan to be considered qualified (i.e., eligible for favorable tax treatment).
44 Courts have found that ERISA’s minimum participation requirements only prevent
employers from denying participation in a plan on basis of age or length of service. These
requirements do not prevent employers from denying plan participation on any other basis.
As stated by the Third Circuit in Bauer v. Summit Bancorp, “In fact, an employer could even
exclude all persons whose names begin with the letter ‘H,’ as long as this was not deemed
to be discriminatory in application.” 325 F.3d 155, 166 n.2 (3rd Cir. 2003).

“year of service” is defined as a 12-month period during which the employee has
worked at least 1,000 hours.45
Alternatively, in the case of a plan under which a participant’s benefits are 100%
vested46 after no more than two years of service, a plan may require two years of
service prior to participating in the plan.47 Plans maintained for employees of certain
educational institutions which provide for 100% vesting after one year may condition
participation on an employee’s becoming 26 years old or completing one year of
service, whichever is later.48
Once an employee becomes eligible to participate, a plan must enroll the
employee no later than (1) the first day of the plan year or (2) six months after the
date of satisfaction of the participation requirements, whichever is earlier.49 ERISA
also prohibits pension plans from excluding employees from participation in the plan
after an employee has attained a certain age.50
D. Benefit Accrual
Section 204 of ERISA governs benefit accrual, which generally refers to the rate
at which benefits are earned by a plan participant.51 An “accrued benefit” is defined
differently for defined benefit and defined contribution plans. For defined benefit
plans, accrued benefit means an individual’s benefit determined under the plan and
expressed in the form of an annual benefit commencing at normal retirement age,
subject to exceptions.52 ERISA provides three primary methods for benefit accrual
under a defined benefit plan:

45 An employee’s eligibility to participate in a pension plan may be affected if there is a
break in the employee’s period of service. ERISA 202(b), 29 U.S.C. § 1052(b). For
example, if an employee has had a one-year break in service, a plan is not required to take
into account any previous service performed in calculating the employee’s period of service.
A one-year break in service is a 12-consecutive-month period in which the employee has not
completed more than 500 hours of service. ERISA § 203(b)(3)(A), 29 U.S.C. §


46 For information on the vesting of benefits under ERISA, see discussion under “Minimum
Vesting Standards” in section IV infra.
47 This variation is not available for 401(k) plans. Under §401(k)(2)(D), an employee with
one year of service must be allowed to elect to make pre-tax contributions to the plan.
48 ERISA § 202(a)(1)(B)(ii), 29 U.S.C. § 1052(a)(1)(B)(ii).
49 ERISA § 202(a)(4), 29 U.S.C. § 1052(a)(4).
50 ERISA § 202(a)(2), 29 U.S.C. § 1052(a)(2).
51 In DiGiacomo v. Teamsters Pension Trust Fund, 420 F.3d 220, 223 (3rd Cir. 2005),
Justice Alito, in his former position as a Third Circuit Judge, stated that accrued benefits,
“are like chalk marks beside the employee’s name ... they are conditional rights that do not
become irrevocabl[e] ... until they vest.”
52 ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A).

! Under the “133-1/3 rule,” generally, a later rate of accrual for one
year of plan participation cannot be more than 133-1/3 percent of
the rate for any other plan year.
! Under the “3% rule,” a participant must accrue at least 3% of the
participant’s anticipated normal retirement benefit in each year of
participation, up to a maximum of 33-1/3 years.
!Under the “fractional rule,” benefit accrual is focused on a worker’s
proportionate years of service under the plan. For example, if
benefits can accrue for a maximum of 40 years up to the date of the
plan’s normal retirement age (such as 65), a worker starting under
the plan at age 25 and working to age 60 would get 35/40 of the
maximum credit toward a pension.53
These tests limit the amount of “backloading,” a practice of providing a higher
benefit accrual rate for later years of service than for earlier years. “Front loading”
benefits (providing a higher accrual rate for earlier years of service than for later
years) is permitted, but decreases in the rate of benefit accrual cannot be based on the
participant’s age.
In a defined contribution plan, the participant’s accrued benefit is the balance
in his or her account.54 Participants begin accruing a benefit in a defined contribution
plan once they have met the participation requirements under the terms of the plan.55
However, if an employer makes contributions to an employee’s account, the accrued
benefit received may be treated differently for vesting purposes than the accrued
benefit from employee contributions.56
1. Anti-cutback Rule. ERISA Section 204(g) prohibits plan amendments
that eliminate or reduce benefits already accrued by plan participants.57 This58
prohibition is commonly referred to as the “anti-cutback rule.” Benefits subject to
the anti-cutback rule include basic accrued benefits, as well as any early retirement
benefits, “retirement-type” subsidies, and other optional forms of benefits that an
individual who has met certain requirements (as defined by the plan) is eligible to
receive. However, the anti-cutback rule does not prevent a plan from freezing

53 ERISA § 204(b)(1), 29 U.S.C. § 1054(b)(1), 26 U.S.C. § 411(b). See also 26 C.F.R. §


54 See ERISA § 3(23), 29 U.S.C. § 1002(23)(B).
55 See section I(C) discussing ERISA’s participation requirements.
56 See ERISA § 204(c), 29 U.S.C. § 1054(c).
57 29 U.S.C. § 1054(g).
58 Certain exceptions to the anti-cutback rule may apply. For example, ERISA allows for
a plan to reduce accrued benefits by a retroactive amendment in certain cases where a plan
is confronted with a “substantial business hardship.” ERISA § 204(g)(1), 29 U.S.C. §

1054(g)(1) (citing ERISA § 302(d)(2), 29 U.S.C. § 1082(d)(2)).

accrued benefits, reducing the rate at which benefits will accrue in the future, or
eliminating future benefit accruals altogether.
Although an accrued benefit is generally defined in monetary terms, the
Supreme Court has held that the anti-cutback rule applies not only to a particular sum
of money, but to a plan amendment which hinders a participant’s receipt of benefits.59
In Central Laborers’ Pension Fund v. Heinz,60 a retired plan participant’s benefits
were suspended by the plan following a plan amendment that prohibited participants
from engaging in the type of post-retirement employment he performed. The plaintiff
claimed that this suspension violated ERISA’s anti-cutback rule. The plan argued,
among other things, that the anti-cutback rule applies only to amendments affecting
the dollar amount the plan was obligated to pay, and that a mere suspension of
benefits did not eliminate or reduce an accrued benefit. The Court rejected this
argument and affirmed the decision of the lower court, stating that “as a matter of
common sense, a participant’s benefits cannot be understood without reference to the
conditions imposed on receiving those benefits, and an amendment placing materially
greater restrictions on the receipt of the benefit ‘reduces’ the benefit just as surely as
a decrease in the size of the monthly benefit payment.”61

2. Benefit Accrual and Age Discrimination. ERISA contains provisions62

designed to prevent age discrimination in benefit accrual. Section 204(b)(1)(H) of
ERISA prohibits a defined benefit plan from ceasing accruals or reducing the rate of
accrual on account of the employee’s age. Section 204(b)(2)(A) of ERISA provides
that for defined contribution plans, allocations to an employee’s account may not
cease, and the rate at which amounts are allocated to an employee’s account may not
be reduced on account of age.
Over the past few years, several courts have evaluated these provisions in63
determining whether cash balance plans are age-discriminatory. Discrimination has
been alleged, among other things, because of the structure of a cash balance plan,
under which employees receive both pay credits and interest credits. After the
employee terminates employment, pay credits will generally cease, but an employee
will typically continue to earn interest credits. Because a younger employee has more
time before retirement age in which to earn interest than an older employee, an

MODIFICATION, 60 Employee Benefit Plan Review 5 (2006).
60 Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004).
61 Id. at 745.
62 Age discrimination provisions are also included in the Internal Revenue Code and the Age
Discrimination in Employment Act. See IRC § 411(b)(1)(H); 29 U.S.C. § 623(i)(1).
Although the language under all three laws is not identical, these laws are intended to be
interpreted in the same manner. H. Rep. 99-727 at 378-79; P.L. 99-509, § 9204(d).
63 A cash balance plan is a “hybrid plan,” (i.e., a plan that has characteristics of both defined
benefit and defined contribution plans). Cash balance plans are defined benefit plans that
look like defined contribution plans because the employee’s accrued benefit is stated as an
account balance. In a cash balance plan, the “account balance” is a record of the benefit
accrued by the participant, but it is not an individual account owned by the participant.

accrued benefit may be greater for a younger employee. This result, some have
argued, violates the age discrimination provisions. While multiple appellate courts
have found cash balance plans not to violate the age discrimination provisions, some
district courts have held to the contrary.64
The PPA amended the benefit accrual requirements of ERISA, as well as other
federal laws, by adding new standards under which a plan can be considered
inherently non-age discriminatory.65 Under the act, a plan is not considered age
discriminatory if a participant’s entire accrued benefit, as determined under the plan’s
formula, is at least equal to that of any similarly situated, younger individual. A
“similarly situated” individual is defined as an individual who is identical to the
participant in every respect, including length of service, compensation, position, and
work history, except for age. The PPA provides that cash balance plans do not
discriminate against older workers if, among other things, benefits are fully vested
after three years of service and interest credits do not exceed a market rate of return.
In general, the new provisions regarding cash balance plans are effective for periods
beginning on or after June 29, 2005. However, cash balance plans in existence prior
to this date may still be subject to legal challenge.66
E. Minimum Vesting Standards
While benefit accrual refers to the amount of benefits earned under ERISA,
vesting occurs when a plan participant’s accrued benefit is considered to be
nonforfeitable.67 Once benefits have vested, the participant may be able to receive
the vested portion of his or her retirement benefits even if he or she leaves the job
before retirement. Vesting requirements apply only to benefits derived from employer
contributions to a plan. Participant contributions to a pension plan must be
automatically nonforfeitable to the participant.68
ERISA imposes two general vesting requirements: one depending on age and
one depending on length of service. First, under Section 203(a) of ERISA, all plans

64 IBM Pers. Pension Plan v. Cooper, 457 F.3d 636 (7th Cir. 2006), rev’ing 274 F. Supp. 2d

1010 (S.D. Ill. 2003), cert. denied, 2007 U.S. LEXIS 1140 (U.S. Jan. 16, 2007); Register v.

PNC Fin. Servs. Group, Inc., 477 F.3d 56 (3rd Cir. 2007); Drutis v. Rand McNally & Co.,

499 F.3d 608, 610 (6th Cir. 2007), but see, In re J.P. Morgan Chase Cash Balance Litig.,

460 F. Supp. 2d 479, 482 (D.N.Y. 2006).

65 ERISA § 204(b)(5), 29 U.S.C. § 1054(c); IRC § 411(b)(5); 29 U.S.C. § 623(i)(10).
66 For more information on this issue, see CRS Report RL33004, Cash Balance Plans and
Claims of Age Discrimination, by Erika Lunder and Jennifer Staman.
67 There can be confusion in understanding the difference between when benefits accrue and
when benefits vest. As articulated by the Supreme Court, accrual is “the rate at which an
employee earns benefits to put in his pension account.” Central Laborers’ Pension Fund v.
Heinz, 541 U.S. 739, 749 (2004). Vesting, on the other hand, is “the process by which an
employee’s already-accrued pension account becomes irrevocably his property.” Id.
68 Parallel vesting provisions may be found in Internal Revenue Code § 411.

must provide that the employees’ rights to their “normal retirement benefits”69 are
fully vested upon attainment of “normal retirement age.”70 While a plan may choose
a “normal retirement age” for purposes of determining when a participant’s benefits
vest, ERISA provides that this age must be the earlier of: (1) the time a participant
attains normal retirement age as specified under a plan or (2) the later of the time the
participant attains age 65 or the fifth anniversary of the time the participant
commenced participation in the plan.71
Second, ERISA’s vesting provisions also require benefits to vest based on an
employee’s years of service to the employer. Under ERISA § 203(b), a qualified
defined benefit plan must meet one of two vesting schedules.72 The first schedule is
met if a participant’s benefits are fully vested after five years of service, commonly
referred to as five-year “cliff” vesting. Alternatively, a participant’s benefits may
vest under the following graded vesting schedule:73
Years of service74Vesting percentage






Most defined contribution plans are subject to similar vesting requirements.
Exceptions include the SIMPLE 401(k) and the Safe Harbor 401(k) plans, in which
participants are immediately vested in employer contributions. For other defined
contribution plans, employers have a choice between two vesting schedules for

69 “Normal retirement benefit”, as defined by Section 3(22) of ERISA, means the greater of
an early retirement benefit offered under the plan or the benefit under the plan commencing
at normal retirement age.
70 While normal retirement age under a plan can be a specific age, it also may include
service requirements (e.g., 55 years old with at least five years of service). See also 26
U.S.C. § 411(a)(8).
71 ERISA § 3(24), 29 U.S.C. § 1002(24). It should also be noted that the Treasury
Department has recently issued regulations regarding distributions from a qualified pension
plan upon attainment of normal retirement age. See 72 Fed. Reg. 28604 (May 22, 2007), 26
C.F.R. § 1.401(a)-1(b).
72 29 U.S.C. § 1053.
73 ERISA § 203(a)(2)(A); 29 U.S.C. § 1053(a)(2)(A). See ERISA § 203(b); 29 U.S.C. §
1053(b), for requirements relating to computing a participant’s period of service. This
section provides that in computing the period of service for purposes of the vesting
requirement, all years of service must be taken into account, subject to certain exceptions
and limitations.
74 A year of service means a consecutive 12 month period during which a participant has
completed 1,000 hours of service.

employer contributions.75 Under cliff vesting, participants must be 100% vested in
employer contributions after no more than three years of service. Under graduated or
graded vesting, an employee must be at least 20% vested after two years, 40% after
three years, 60% after four years, 80% after five years, and 100% vested after six
years. Both employer matching contributions (i.e., employer plan contributions
made on behalf of an employee and on account of an employee’s elective
contributions)76 as well as employer nonelective contributions (such as profit-sharing
contributions) must vest under these rules.
Breaks in Service. ERISA protects plan participants from losing credit for
earlier service in cases in which workers leave their jobs and then return to work
within five years.77 Once an employee becomes eligible to participate in a pension
plan, all years of service with the employer during which the employer maintained
the plan (including service before becoming a plan participant) must be taken into
account for purposes of determining how much service will be counted toward
meeting the plan’s vesting requirement. In the case of a nonvested participant, years
of service before any break in service must be taken into account upon re-
employment. In a defined contribution plan, if a participant who is not 100% vested
incurs a break in service of less than five years and subsequently returns to work, all
service after returning to work must be added to the pre-break service in determining
the vested portion of the pre-break benefit. A break in service occurs in any year in
which the employee completes less than 500 hours of service. Generally, workers
will not incur a break in service for up to one year’s absence due to pregnancy,
childbirth, infant care, or adoption.78
F. Benefit Protections for Spouses
The Retirement Equity Act of 1984 (REA)79 amended ERISA to increase pension
protections for the survivors of deceased plan participants. As amended by the REA,
ERISA requires defined benefit plans and money purchase plans to provide
preretirement and postretirement survivor annuities to married employees unless a
written election to waive the survivor annuity is signed by both the employee and his
or her spouse.80 In the event of divorce, ERISA requires plan administrators to honor
qualified domestic relations orders (QDROs) issued by state courts that divide the
pension or account balance between the two parties.81 This requirement ensures that
a court order awarding a share of a vested pension benefit to the former spouse of a
divorced plan participant will be honored by the plan.

75 ERISA § 203(a)(2)(B), 29 U.S.C. § 1053(a)(2)(B).
76 See 26 U.S.C. § 401(m)(4).
77 ERISA § 203(b), 29 U.S.C. § 1053(b).
78 ERISA § 203(b)(3)(E), 29 U.S.C. § 1053(b)(3)(E).
79 P.L. 98-397, 98 Stat. 1451 (1984).
80 ERISA § 205, 29 U.S.C. § 1055, and 26 U.S.C. § 417. Payment to a married participant
in a DB plan of a single-life annuity or a lump sum requires the spouse’s written consent.
81 ERISA § 206, 29 U.S.C. § 1056. ERISA § 206(d) also provides that with the exception
of a QDRO, benefits provided by a pension plan may not be assigned or garnished.

1. Preretirement Survivor Benefits. ERISA requires defined benefit plans
to provide a survivor annuity to the spouse of a vested active participant or vested
former participant. The cost of the preretirement survivor annuity may be paid by the
employer or passed on to covered participants through reduced benefits or increased
contributions. To waive the preretirement survivor benefit, both participant and
spouse must sign a waiver form. The plan can defer payment of the survivor annuity
until the month in which the deceased participant would have reached the plan’s
earliest retirement age. Profit-sharing plans (including 401(k) plans) and stock bonus
plans must provide for automatic payment of the participant’s vested account balance
to his or her spouse upon the death of the participant unless both parties designate an
alternate beneficiary in writing. If either a profit-sharing plan or stock bonus plan
offers a life annuity option, it must provide a pre-retirement survivor annuity.
2. Postretirement Survivor Benefits. ERISA requires the default form
of benefit paid to a married participant in a defined benefit plan to be a joint and
survivor annuity that provides a life annuity to the survivor equal to at least 50% of
the joint benefit paid while the participant was living. Beginning in 2008, the PPA
requires plans to offer a 75% survivor annuity option if the plan’s survivor annuity
is less than 75%, and to offer a 50% survivor annuity option if the plan’s survivor
annuity is greater than 75%.82 Waiving the survivor benefit requires the written
consent of both the participant and spouse. The participant and spouse must have at
least 90 days ending on the annuity starting date to waive the survivor annuity. The
decision to waive the survivor annuity also can be revoked during this period.
Because a joint and survivor annuity is based on the joint life expectancy of the
participant and spouse instead of a single life, the amount of the joint annuity is lower
than it would be if it were a single-life annuity. Once a joint and survivor annuity is
in effect and the retirement annuity has commenced, the spouse to whom the
participant was married on the date that the annuity started is entitled to the survivor
annuity, even if the couple is no longer married when the participant dies.
Before the annuity begins, the employer must provide each participant with a written
notice that states:
!the terms and conditions of the qualified joint and survivor annuity;
!the right of the participant and spouse to decline the survivor annuity
and the effect of the decision;
!the rights of the spouse; and
!the right to reverse the decision and the effect of reversing it.
3. Qualified Domestic Relations Orders. The REA of 1984 amended
ERISA to allow plans to honor state court orders awarding a share of a worker’s
pension to a former spouse.83 ERISA sets forth procedures the plan administrator
must follow to determine if a court order is a qualified domestic relations order
(QDRO). Payments to the former spouse of a participant may begin when the
participant becomes eligible to retire, even if the participant is still employed.

82 ERISA § 205(d), 29 U.S.C. § 1055(d), as amended by Section 1004 of the PPA.
83 ERISA § 206, 29 U.S.C. § 1056, as amended by § 104 of the REA of 1984.

A QDRO must specify:
!the name and last known address of the participant and each person
to receive money,
!the amount or percentage of the participant’s benefits to be paid to
each person,
!the number of payments or the time period to which the order
applies, and
!each plan to which the order relates.
A QDRO generally will qualify only if it does not require the plan to:
!provide a form of benefit not otherwise provided by the plan,
!pay more benefits than it would have paid in the absence of the
order, or
!pay benefits that the plan must already pay to another beneficiary
because of an earlier QDRO.
The PPA directed the Secretary of Labor to issue regulations to clarify whether
a domestic relations order that supersedes or revises an earlier QDRO will be
considered to be qualified, and to state the conditions under which a QDRO will not
be treated as qualified because of the time at which it was issued.84
G. Buyouts, Mergers, and Consolidations
If a company is purchased by another firm, participants and beneficiaries in the
acquired company may not be denied pension benefits already earned, and PBGC
insurance protections continue to apply to those benefits. In the event of a plan
merger, consolidation, or transfer of plan assets or liabilities, the participant’s benefit
must be equal to, or greater than, the benefit to which the participant would have
been entitled had the plan been terminated immediately before the merger,85
consolidation, or transfer.
H. Plan Funding
To ensure that sufficient money is available to pay promised pension benefits
to participants and beneficiaries, ERISA sets rules that require plan sponsors to fully
fund the pension liabilities of defined benefit plans.86 These rules were substantially
modified by the PPA. The funding requirements of ERISA recognize that pension
liabilities are long-term liabilities. Consequently, plan liabilities need not be funded
immediately, but instead can be amortized (paid off with interest) over a period of

84 §1001 of the PPA.
85 ERISA § 208, 29 U.S.C. § 1058.
86 ERISA §§302 through 308 govern funding of defined benefit pension plans. (Also see 26
U.S.C. § 412, §430, §431, and §432.) Funding requirements for single-employer plans were
amended by §§101 to 116 of the PPA. Funding requirements for multiemployer DB plans
were amended by §§201 to 221 of the PPA.

years. Single-employer plans generally are required to amortize initial past service
liabilities and past service liabilities arising under plan amendments over no more
than seven years. Defined contribution plans do not promise a specific benefit, and
so these plans have no funding requirements.
ERISA requires employers that sponsor defined benefit plans to fund the
pension benefits that plan participants earn each year. This is referred to as funding
the normal cost of the plan. In addition, DB plan sponsors must amortize the cost of
any pension benefits granted to employees for past service, but for which no monies
were set aside. Furthermore, if a DB plan retroactively increases the level of benefits
by plan amendment, these new liabilities must be amortized as well. The assets of
the pension plan must be kept in a trust that is separate from the employer’s general
assets. Assets in the pension trust fund are protected from the claims of creditors in
the event that the plan sponsor files for bankruptcy.
1. Funding Requirements for Single-employer Plans. ERISA requires
companies that sponsor defined benefit pension plans to fully fund the benefits that
plan participants earn each year. If a plan is underfunded, the plan sponsor must
amortize this unfunded liability over a period of years. The PPA established new
rules for determining whether a defined benefit plan is fully funded, the contribution
needed to fund the benefits that plan participants will earn in the current year, and the
contribution to the plan that is required if previously earned benefits are not fully
funded. In general, the new rules are effective with plan years beginning in 2008, but
many provisions of the PPA will be phased in over several years.
a. Minimum funding standards for single-employer plans. Pension
plan liabilities extend many years into the future. Determining whether a pension is
adequately funded requires converting the future stream of pension payments into the
amount that would be needed today to pay off those liabilities all at once. This
amount — the “present value” of the plan’s liabilities — is then compared with the
value of the plan’s assets. An underfunded plan is one in which the value of the
plan’s assets falls short of the present value of its liabilities. Converting a future
stream of payments (or income) into a present value requires the future payments (or
income) to be discounted using an appropriate interest rate. Other things being equal,
the higher the interest rate, the smaller the present value of the future payments (or
income), and vice versa.
When fully phased in, the new funding requirements established by the PPA will
require plan assets to be equal to 100% of plan liabilities. Any unfunded liability will
have to be amortized over no more than seven years. Sponsors of severely
underfunded plans that are at risk of defaulting on their obligations will be required
to fund their plans according to special rules that will result in higher employer
contributions to the plan. Plan sponsors are allowed to use credit earned for past
contributions (called “credit balances”) to offset required contributions, but only if
the plan is funded at 80% or more. The value of credit balances must be adjusted to
reflect changes in the market value of plan assets since the date the contributions that
created the credit balances were made.
A plan sponsor’s minimum required contribution is based on the plan’s target
normal cost and the difference between the plan’s funding target and the value of the

plan’s assets. The target normal cost is the present value of all benefits that plan
participants will accrue during the year. The funding target is the present value of all
benefits — including early retirement benefits — already accrued by plan participants
as of the beginning of the plan year. If a plan’s assets are less than the funding target,
the plan has an unfunded liability. This liability — less any permissible credit
balances — must be amortized in annual installments over no more than seven years.
The plan sponsor’s minimum required annual contribution is the plan’s target normal
cost for the plan year, but not less than zero. The 100% funding target is being phased
in at 92% in 2008, 94% in 2009, 96% in 2010, and 100% in 2011 and later years. The
phase-in does not apply to underfunded plans that were required to make deficit
reduction contributions in 2007.87 Those plans have a 100% funding target in 2008.
ERISA requires plans to discount future liabilities using three different interest
rates, depending on the length of time until the liabilities must be paid.88 A short-
term interest rate is used to calculate the present value of liabilities that will come
due within five years. A mid-term interest rate is used for liabilities that will come
due in five to 20 years, and a long-term interest rate is applied to liabilities that will
come due in more than 20 years. The Secretary of the Treasury determines these
rates, which are derived from a “yield curve” of investment-grade corporate bonds
averaged over the most recent 24 months.89 The yield curve is being phased in over
three years beginning in 2007. It will replace the four-year average of corporate bond
rates established under the Pension Funding Equity Act of 2004,90 which expired on
December 31, 2005.91
b. “At risk” plans. Pension plans that are determined to be at risk of
defaulting on their liabilities must use specific actuarial assumptions to determine92
plan liabilities. A plan is deemed to be at-risk if it is unable to pass either of two
tests. Under the first test, a plan is at-risk if it is less than 70% funded under the
“worst-case scenario” assumptions that (1) the employer is not permitted to use credit
balances to reduce its cash contribution and (2) employees will retire at the earliest
possible date and will choose to take the most expensive form of benefit. If a plan
does not pass this test, it will be deemed to be at-risk unless it is at least 80% funded
under standard actuarial assumptions. This latter test will be phased in over four
years, with the minimum funding requirement starting at 65% in 2008 and rising to
70% in 2009, 75% in 2010, and 80% in 2011. If a plan passes either of these two
tests, it is not deemed to be at-risk; however, it is required to make up its funding

87 Deficit reduction contributions (DRCs) were additional contributions required of
underfunded plans prior to enactment of the PPA. The PPA eliminated DRCs after 2007.
88 ERISA § 303, 29 U.S.C. § 1083, as amended by §102 of the PPA.
89 A yield curve is a graph that shows interest rates on bonds plotted against the maturity
date of the bond. Normally, long-term bonds have higher yields than short-term bonds
because both credit risk and inflation risk rise as the maturity dates extend further into the
future. Consequently, the yield curve usually slopes upward from left to right.
90 P.L. 108-218, 118 Stat. 596 (Apr. 10, 2004).
91 The PPA extended the interest rates permissible under P.L. 108-218 through 2007 for
purposes of the current liability calculation.
92 ERISA § 303, 29 U.S.C. § 1083, as amended by §102 of the PPA.

shortfall over no more than seven years. Plans that have been at-risk for at least two
of the previous four years also will be subject to an additional “loading factor” equal
to 4% of the plan’s liabilities plus $700 per participant, which is added to the plan
sponsor’s required contribution to the plan. Plan years prior to 2008 will not count
for this determination. Plans with 500 or fewer participants in the preceding year are
exempt from the at-risk funding requirements.
c. Mortality tables.To estimate a pension plan’s future obligations, the
plan’s actuaries use mortality tables to project the number of participants who will
claim a pension and the average length of time that participants and their surviving
beneficiaries will receive pension payments. ERISA requires the Secretary of the
Treasury to prescribe the mortality tables to be used for these estimates.93 Large
plans can petition the IRS to use a plan-specific mortality table.
2. Valuation of Plan Assets. Prior to enactment of the PPA, a plan sponsor
could determine the value of a plan’s assets using actuarial valuations, which can
differ from the current market value of those assets. For example, in an actuarial
valuation, the plan’s investment returns could be “smoothed” (averaged) over a
five-year period, and the average asset value could range from 80% to 120% of the
fair market value. Averaging asset values reduces volatility in the measurement of
plan assets that can be caused by year-to-year fluctuations in interest rates and the
rate of return on investments. Averaging therefore reduces the year-to-year volatility
in the plan sponsor’s required minimum contributions to the pension plan. The PPA
narrowed the range for actuarial valuations to no less than 90% and no more than
110% of fair market value and it reduced the maximum smoothing period to two
years. Plans with more than 100 participants are required to use the first day of the
plan year as the basis for calculations of plan assets and liabilities. Plans with 100
or fewer participants can choose another date.
Plan contributions and credit balances. Within limits, plan sponsors can
offset required current contributions with previous contributions. However, these so-
called “credit balances” can be used to reduce the plan sponsor’s minimum required
contribution to the plan only if the plan’s assets are at least 80% of the funding target,
not counting prefunding balances that have arisen since the PPA became effective.94
Existing credit balances and new prefunding balances must both be subtracted from
assets in determining the “adjusted funding target attainment” percentage that is used
to determine whether certain benefits can be paid and whether benefit increases are
allowed. Credit balances also have to be adjusted for investment gains and losses
since the date of the original contribution that created the credit balance. Credit
balances must be separated into balances carried over from 2007 and balances
resulting from contributions in 2008 and later years.
3. Benefit Limitations in Underfunded Plans. ERISA places limits on
(1) plan amendments that would increase benefits, (2) benefit accruals, and (3)

93 ERISA § 303, 29 U.S.C. §1083 as amended by §102 of the PPA.
94 A credit balance in a plan at the end of the 2007 plan year is referred to as a “carryover
balance.” A credit balance created after 2007 is referred to as a “prefunding balance.”

benefit distribution options (such as lump sums) in single-employer defined benefit
plans that fail to meet specific funding thresholds.95
a. Shutdown Benefits. Shutdown benefits are payments made to employees
when a plant or factory is shut down. These benefits typically are negotiated between
employers and labor unions, and usually they are not prefunded. ERISA prohibits
shut-down benefits and other “contingent event benefits” from being paid by pension
plans that are funded at less than 60% of full funding unless the employer makes a
prescribed additional contribution to the plan. The PBGC guarantee for such benefits
is phased in over a five-year period commencing when the event occurs.96
b. Restrictions on benefit accruals. ERISA requires benefit accruals to
cease in plans funded at less than 60% of full funding. Once a plan is funded above
60%, the employer — and the union in a collectively bargained plan — must decide
how to credit past service accruals. This provision does not apply if the employer
makes an additional contribution prescribed by statute.
c. Restrictions on benefit increases. Plan amendments that increase
benefits are prohibited if the plan is funded at less than 80% of the full funding level,
unless the employer makes additional contributions to fully fund the new benefits.
Benefit increases include — but are not limited to — increases in the rate of benefit
accrual and increasing the rate at which benefits become vested.
d. Restrictions on lump sum distributions. Lump-sum distributions are
prohibited if the plan is funded at less than 60% of the full funding level or if the plan
sponsor is in bankruptcy and the plan is less than 100% funded. If the plan is funded
at more than 60% but less than 80%, the plan may distribute as a lump sum no more
than half of the participant’s accrued benefit.
e. Notice to participants. ERISA requires plan sponsors to notify
participants of restrictions on shutdown benefits, lump-sum distributions, or
suspension of benefit accruals within 30 days of the plan being subject to any of
these restrictions. The restrictions on benefits in underfunded plans are effective in

2008, but not before 2010, for collectively bargained plans.

4. Lump-sum Distributions. ERISA requires defined benefit pensions to
offer participants the option to receive their accrued benefit as a life annuity: a series
of monthly payments guaranteed for life. Many defined benefit plans also offer
participants the option to take their accrued benefit as a lump sum at the time they
separate from the employer. The amount of a lump-sum distribution from a defined
benefit pension is inversely related to the interest rate used to calculate the present
value of the benefit that has been accrued under the plan: the higher the interest rate,

95 ERISA § 206, 29 U.S.C. § 1056 as amended by §103 of the PPA.
96 In 2004, the 6th Circuit Court of Appeals ruled that the PBGC could set a plan termination
date that would prevent the agency from being liable for shutdown benefits. PBGC v.
Republic Technologies International, LLC, et al., 386 F.3d 659 (6th Cir. 2004). In March
2005, the Supreme Court declined to hear the case, leaving the Circuit Court’s decision in

the smaller the lump sum and vice versa. To protect employees’ accrued benefits,
ERISA prescribes interest rates and mortality tables to be used in determining the
minimum value of a participant’s benefit expressed as a lump sum. Before the PPA,
minimum lump-sum values were calculated using the interest rate on 30-year
Treasury bonds. As amended by the PPA, ERISA requires lump-sum payments from
defined benefit plans to be no less than the amount that would result from using the
applicable corporate bond interest rate.97 It requires plans that use an interest rate that
results in larger lump sums to treat these larger payments as a subsidy to plan
participants, which must be funded by the plan sponsor. The new rules for lump
sums are being phased in over five years, beginning in 2008.
When fully phased in, minimum permissible lump-sum distributions will be
based on a three-segment interest rate yield curve, derived from the rates of return on
investment-grade corporate bonds of varying maturities. Plan participants of
different ages will have their lump-sum distributions calculated using different
interest rates. Other things being equal, a lump-sum distribution paid to a worker
who is near the plan’s normal retirement age will be calculated using a lower interest
rate than will be used for a younger worker. As a result, all else being equal, an older
worker will receive a larger lump sum than a similarly situated younger worker. The
interest rates used to calculate lump sums will be based on current bond rates rather
than the three-year weighted average rate used to calculate the plan’s funding target.
Plans funded at less than 60% are prohibited from paying lump-sum distributions.
Plans funded at 60% to 80% can pay no more than half of a participant’s accrued
benefit as a lump-sum distribution.
The PPA also established a new interest rate floor for testing whether a lump
sum paid from a defined benefit plan complies with the benefit limitations under IRC
§415(b).98 In general, IRC §415(b) limits the annual single-life annuity payable from
a qualified defined benefit plan to the lesser of 100% of average compensation over
three years or $185,000 (in 2008). A benefit paid as a lump sum must be converted
to an equivalent annuity value for purposes of applying this limit. As amended by
the PPA, ERISA requires plans making this calculation to use an interest rate that is
no lower than the highest of (1) 5.5%, (2) the rate that results in a benefit of no more
than 105% of the benefit that would be provided if the interest rate required for
determining a lump sum distribution were used, or (3) the interest rate specified in
the plan documents.99
5. Funding Requirements for Multiemployer Plans. A multiemployer
plan is a collectively bargained plan maintained by several employers — usually
within the same industry — and a labor union. Multiemployer defined benefit plans
are subject to funding requirements that differ from those for single-employer plans.
The PPA established a new set of rules for improving the funding of multiemployer

97 ERISA § 205(g), 26 U.S.C. § 417(e), as amended by § 302 of the PPA.
98 IRC §415 sets limitations on benefits and contributions in qualified plans.
99 For more detailed information of the effect of the PPA on lump-sums, see CRS Report
RS22765, Lump-sum Distributions under the Pension Protection Act, by Patrick Purcell.

plans that the law defines as being in “endangered” or “critical” status.100 These new
requirements will remain in effect through 2014.
As amended by the PPA, ERISA requires each multiemployer plan to certify the
plan’s current funding status and project its funding status for the following six years
within 90 days after the start of the plan year. If the plan is underfunded, it has 30
days after the certification date to notify participants and eight months to develop a
funding schedule that meets the statutory funding requirements and to present it to
the parties of the plan’s collective bargaining agreement. Multiemployer plans must
amortize any increases in plan liabilities that are due to benefit increases or to
changes in the actuarial assumptions used by the plan over a period of 15 years.
The PPA increased the limit on tax-deductible employer contributions to
multiemployer plans to 140% of the plan’s current liability (up from 100%), and it
eliminated the 25%-of-compensation combined limit on contributions to defined
benefit and defined contribution plans. The PPA also allows the Internal Revenue
Service to permit multiemployer plans that project a funding deficiency within ten
years to extend the amortization schedule for paying off its liabilities by five years,
with a further five-year extension permissible. It requires the plans to adopt a
recovery plan and to use specific interest rates for plan funding calculations.
a. Requirements for underfunded multiemployer plans. The PPA
established mandatory procedures, effective through 2014, to improve the funding
of seriously underfunded multiemployer plans. A multiemployer plan is considered
to be endangered if it is less than 80% funded or if the plan is projected to have a
funding deficiency within seven years. A plan that is less than 80% funded and is
projected to have a funding deficiency within seven years is considered to be
seriously endangered. An endangered plan has one year to implement a “funding
improvement plan” designed to reduce the amount of under-funding. Endangered
plans have 10 years to improve their funding. They must improve their funding
percentage by one-third of the difference between 100% funding and the plan’s
funded percentage from the earlier of (1) two years after the adoption of the funding
improvement plan or (2) the first plan year after the expiration of collective
bargaining agreements that cover at least 75% of the plan’s active participants.
Seriously endangered plans that are less than 70% funded have 15 years to
improve their funding. They must improve their funding percentage by one-fifth of
the difference between 100% funding and the plan’s funded percentage from the
earlier of (1) two years after the adoption of the funding improvement plan or (2) the
first plan year after the expiration of collective bargaining agreements that cover at
least 75% of the plan’s active participants. A plan that is endangered or seriously
endangered may not increase benefits. If the parties to the collective bargaining
agreement are not able to agree on a funding improvement plan, a default funding
schedule applies that will reduce future benefit accruals. A multiemployer plan is not
endangered in any plan year in which the required funding percentages are met.

100 Funding requirements for multiemployer plans were amended by §§201-221 of the PPA.

A multiemployer plan is considered to be in critical status if (1) it is less than
65% funded and it has a projected funding deficiency within five years or will be
unable to pay benefits within seven years; (2) it has a projected funding deficiency
within four years or will be unable to pay benefits within five years (regardless of its
funded percentage); or (3) its liabilities for inactive participants are greater than its
liabilities for active participants, its contributions are less than carrying costs, and a
funding deficiency is projected within five years. A plan in critical status has one
year to develop a rehabilitation plan designed to reduce the amount of underfunding.
b. Reductions in adjustable benefits. In general, ERISA’s anti-cutback
rule prohibits reductions in accrued, vested benefits. The PPA relaxed the
anti-cutback rule so that multiemployer plans in critical status are permitted to reduce
or eliminate early retirement subsidies and other “adjustable benefits” to help
improve their funding status if this is agreed to by the bargaining parties. Benefits
payable at normal retirement age cannot be reduced, and plans are not permitted to
cut any benefits of participants who retired before they were notified that the plan is
in critical status. Adjustable benefits include certain optional forms of benefit
payment, disability benefits, early retirement benefits, joint and survivor annuities (if
the survivor benefit exceeds 50%), and benefit increases adopted or effective less
than five years before the plan entered critical status.
c. Disclosure requirements. As amended by the PPA, ERISA requires
multiemployer plans to send funding notices to participants within 120 days after the
end of the plan year. The Department of Labor will post information from plans’
annual reports on its website, and plans are required to provide certain information
to participants on request. For plans in endangered or critical status, the plan actuary
must certify that the funding improvement is on schedule. Annual reports must
contain information on funding improvement plans or rehabilitation plans.
Notification must be provided to participants, beneficiaries, bargaining parties, the
PBGC, and the Secretary of Labor within 30 days after the plan determines that it is
in endangered or critical status.
I. Fiduciary Responsibility
ERISA imposes certain obligations on plan fiduciaries, persons who are
generally responsible for the management and operation of employee benefit plans.
ERISA Section 3(21)(A) provides that a person is a “fiduciary” to the extent that the
person: (1) exercises any discretionary authority or control with respect to the
management of the plan or exercises any authority with respect to the management
or disposition of plan assets; (2) renders investment advice for a fee or other
compensation with respect to any plan asset or has any authority or responsibility to101
do so; or (3) has any discretionary responsibility in the administration of the
plan.102 Every plan governed by ERISA must have one or more named fiduciaries,

101 See 29 C.F.R. § 2510.3-21, which provides guidance as to when a person shall be deemed
to be rendering investment advice to an employee benefit plan.
102 Plan fiduciaries may include plan trustees, plan administrators, and a plan’s investment
managers or advisors. See Department of Labor, Fiduciary Responsibilities, available at

and these fiduciaries must be named in the plan document.103 Section 404(a)(1) of
ERISA establishes the duties owed by a fiduciary to participants and beneficiaries of
a plan. This section identifies four standards of conduct: (1) a duty of loyalty, (2) a
duty of prudence, (3) a duty to diversify investments, and (4) a duty to follow plan
documents to the extent that they comply with ERISA.104
1. Duty of Loyalty. Section 404(a)(1)(A) of ERISA requires plan fiduciaries
to discharge their duties “solely in the interest of the participants and beneficiaries”
and for the “exclusive purpose” of providing benefits to participants and beneficiaries
and defraying reasonable expenses of administering the plan.105 The duty of loyalty
applies in situations where the fiduciary is confronted with a potential conflict of
interest, for instance, when a pension plan trustee has responsibilities to both the plan106
and the entity (such as the employer or union) sponsoring the plan.
However, just because an ERISA fiduciary engages in a transaction that
incidentally benefits the fiduciary or a third party does not necessarily mean that a107
fiduciary breach has occurred. One case to address this idea is Donovan v.
Bierwirth, a case under which pension plan trustees, who were also corporate
officers, were responsible for deciding whether they should tender shares of company
stock in order to thwart a hostile takeover attempt.108 The trustees not only decided
against tendering the stock, but also decided to purchase additional company stock
for the pension plan. In finding that the trustees had breached their fiduciary duties,
the court in Donovan noted that it is not a breach of fiduciary duty if a trustee who,
after careful and impartial investigation, makes a decision that while benefitting the
plan, also incidentally benefits the corporation, or the fiduciaries themselves.
However, fiduciary decisions must be made with an “eye single to the interests of the109
participants and beneficiaries.” The court articulated that the trustees have a duty
to “avoid placing themselves in a position where their acts as officers and directors
of the corporation will prevent their functioning with the complete loyalty to
participants demanded of them as trustees of a pension plan.”110

102 (...continued)
103 ERISA § 402(a), 29 U.S.C. § 1102(a).
104 ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1).
105 This section is supplemented by Section 403(c)(1) of ERISA, which provides that the
“assets of a plan shall never inure to the benefit of any employer and shall be held for the
exclusive purposes of providing benefits ... and defraying reasonable expenses of
administering the plan.” 29 U.S.C. § 1103(c)(1).
106 Craig C. Martin & Elizabeth L. Fine, ERISA Stock Drop Cases: An Evolving Standard,

38 J. Marshall L. Rev. 889 (2005).

107 Id.
108 680 F.2d 263 ( 2nd Cir. 1982).
109 680 F.2d at 271.
110 Id.

A plan fiduciary must also act with the “exclusive purpose” of “defraying
reasonable expenses of administering the plan.”111 The Department of Labor has
stated that “in choosing among potential service providers, as well as in monitoring
and deciding whether to retain a service provider, the trustees must objectively assess
the qualifications of the service provider, the quality of the work product, and the
reasonableness of the fees charged in light of the services provided.”112
On November 16, 2007, the Department of Labor issued a final regulation that
revises the Form 5500, which plans file each year to report their funding status and
other financial information that ERISA requires to be disclosed to the Department.
The regulation will require disclosure of information regarding the fees paid by the
plan to administrators, record keepers, and other service providers.113 On December
13, 2007, the Department of Labor published a proposed regulation that would
require service providers to disclose to plan fiduciaries, in advance of entering into
a contract with the plan, all fees and any other direct or indirect compensation that
the service provider would receive while under contract to the plan.114
2. Duty of Prudence. Section 404(a)(1)(B) of ERISA requires fiduciaries
to act “with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man would use in the conduct of an enterprise of a like115
character with like aims.” When examining whether a fiduciary has violated the
duty of prudence, courts typically examine the process that a fiduciary undertook in116
reaching a decision involving plan assets. If a fiduciary has taken the appropriate
procedural steps, the success or failure of an investment can be irrelevant to a duty117
of prudence inquiry.
Regulations promulgated by the Department of Labor provide clarification as
to the duty of prudence in regard to investment decisions. These regulations indicate
that a fiduciary can satisfy his duty of prudence under ERISA by giving “appropriate
consideration” to the facts and circumstances that the fiduciary knows or should

111 ERISA § 404(a)(1)(A)(ii), 29 U.S.C. § 1104(a)(1)(A)(ii).
112 U.S. Department of Labor, Employee Benefits Security Administration, Information
Letter, July 28, 1998. [].
113 72 Fed. Reg. 64731 (Nov. 16, 2007).
114 72 Fed. Reg. 70988 (Dec. 13, 2007).
115 29 U.S.C. § 1104(a)(1)(B).
116 See, e.g., GIW Industries v. Trevor, Stewart, Burton & Jacobsen, 895 F.2d 729 (11th Cir.
1990) (investment management firm breached its duty of prudence after investing primarily
in long-term, low risk government bonds and failing to take into account the liquidity needsth
of the plan); Donovan v. Mazzola, 716 F.2d 1226, 1232 (9 Cir. 1983) (court stated that test
of prudence is whether “at the time they engaged in the challenged transactions, [fiduciaries]
employed the appropriate methods to investigate the merits of the investment and to
structure the investment”).
117 See, e.g., Unisys, 74 F.3d at 434 (“[I]f at the time an investment is made, it is an
investment a prudent person would make, there is no liability if the investment later
depreciates in value”).

know are relevant to an investment or investment course of action.118 “Appropriate
consideration” includes (1) “a determination by the fiduciary that the particular
investment or investment course of action is reasonably designed, as part of the
portfolio ... to further the purposes of the plan, taking into consideration the risk of
loss and the opportunity for gain (or other return) associated with the investment,”
and (2) consideration of the portfolio’s composition with regard to diversification,
the liquidity and current return of the portfolio relative to the anticipated cash flow
requirements of the plan, and the projected return of the portfolio relative to the
plan’s funding objectives.119
3. Duty to Diversify Investments. Section 404(a)(1)(C) of ERISA requires
fiduciaries to diversify the investments of a plan “so as to minimize the risk of large120
losses, unless under the circumstances it is clearly prudent not to do so.” In
general, it is believed that fiduciaries should not invest an unreasonably large
proportion of a plan’s portfolio in a single security, in a single type of security, or in
various securities dependent upon the success of a single enterprise or upon121
conditions in a single locality.
Courts have agreed that ERISA Section 404(a)(1)(C) does not create a
diversification obligation in terms of fixed criteria, but instead requires a122
determination based on the specific facts of each individual case. In GIW
Industries, Inc. v. Trevor Stewart,123 the court concluded that the defendant
investment manager breached its duty to diversify investments by investing too
heavily in long-term government bonds. By investing 70 percent of the plan’s assets
in long-term bonds rather than short-term bonds, the firm exposed the fund to a
greater degree of risk. Expert testimony had indicated that short-term bonds or bonds
with staggered maturity dates would have minimized exposure if the bonds were sold
before maturity. The court maintained that Trevor Stewart’s investment exposed the124
fund “to greater risk of cash outflows than was prudent.”
Similarly, in Brock v. Citizens Bank of Clovis,125 the Tenth Circuit determined
that trustees of the Citizens Bank of Clovis Pension Plan breached their duty to
diversify investments by investing over 65 percent of the plan’s assets in commercial
real estate mortgages. The court maintained that the trustees’ significant investment
in one type of security exposed the plan to a multitude of risks. Moreover, the court
found that the trustees failed to establish that the investments were prudent

118 See 29 C.F.R. § 2550.404a-1.
119 Id.
120 29 U.S.C. § 1104(a)(1)(C).
121 See generally, H.R. Rep. No. 1280 at 304 (1974), reprinted in 1974 U.S.C.C.A.N. 5085.
122 155 A.L.R. Fed. 349 (2007).
123 895 F.2d 729 (11th Cir. 1990).
124 GIW Industries, 895 F.2d at 733.
125 841 F.2d 344 (10th Cir. 1988).

notwithstanding the lack of diversification. However, in Metzler v. Graham,126 the
court found that a plan trustee had not breached his duty under Section 404(a)(1)(C),
even though he had invested more than half of the plan’s assets in one piece of real
estate. While the court found that the trustee had not diversified investments, the
court concluded that the lack of diversification of the plan’s investments was prudent
under the facts and circumstances of the case.127
4. Duty to Act in Accordance with Plan Documents. Section
404(a)(1)(D) of ERISA requires fiduciaries to discharge their duties “in accordance
with the documents and instruments governing the plan insofar as such documents128
and instruments are consistent with [ERISA].” Courts have interpreted this section
to apply not only to a document or instrument that establishes a plan or maintains a129
plan, but also to other writings that have a substantive effect on the plan. These
writings have included investment management agreements, collective bargaining130
agreements, and even internal memoranda regarding the sale of plan assets.
Under Section 404(a)(1)(d), if a plan provision conflicts with ERISA, a
fiduciary is obligated to ignore the plan provision.131 Courts have evaluated this
requirement in the context of when compliance with a plan provision leads to a
breach of other fiduciary duties. The Department of Labor has argued that “if obeying
a plan provision requires the fiduciary to act imprudently and disloyally in violation
of ERISA section 404(a)(1)(A) and (B) ... the provision is not consistent with ERISA

126 Metzler v. Graham, 112 F.3d 207 (5th Cir. 1997).
127 The court in Graham maintained that the trustee’s investment was prudent under the
circumstances and thus, within the exception in Section 404(a)(1)(C). The court identified
four factors that supported the position that Graham did not “imprudently introduce a risk
of large loss by purchasing the Property.”Graham, 112 F.3d at 210. First, there was no
requirement that the plan make payments to beneficiaries until age 65, death, or disability,
and the average age of the plan participants was 37 when the property was purchased.
Remaining plan assets were available to cover projected payouts for the next twenty years.
Second, the purchase was better insulated from the possible return of high inflation: “when
the plan’s holdings consisted solely of cash and short term instruments, there was little
hedge against inflation.” Id. at 211. Third, there was a significant cushion between the
purchase price and the property’s appraised value. Finally, the trustee’s expertise in the
development of industrial property supported the conclusion that the investment was
prudent. After considering these fact\ors, the court was persuaded that the investment did
not carry a risk of large loss.
128 29 U.S.C. § 1104(a)(1)(D).
129 See Employee Benefits Guide, Matthew Bender & Company, Inc. §24.15 (2007).
130 See George A. Norwood, Who Is Entitled to Receive a Deceased Participant’s ERISA
Retirement Plan Benefits - an Ex-Spouse or Current Spouse? The Federal Circuits Have an
Irreconcilable Conflict, 33 Gonz. L. Rev. 61, 75 (1997-1998).
131 See, e.g., Cent. States v. Cent. Transp., 472 U.S. 559, 569 (1985)(stating that “trust
documents cannot excuse trustees from their duties under ERISA, and ... trust documents
must generally be construed in light of ERISA’s policies. [S]ee 29 U. S. C. §


and the fiduciary has a duty to disregard it.”132 This situation was addressed in Tittle
v. Enron,133 in which the pension plan in question required employer contributions
to be made “primarily in Enron stock.” The court in Enron held that the plan
fiduciaries had a duty to ignore this provision if it would be imprudent to follow it.134
In interpreting Section 404(a)(1)(D), courts have also held that fiduciaries do not
breach the duty to act in accordance with plan documents if their failure to follow
such documents results from erroneous interpretations made in good faith. In Morgan
v. Independent Drivers Association Pension Plan,135 the Tenth Circuit found that the
trustees of a pension plan did not violate Section 404(a)(1)(D) because their decision
to terminate the plan based on an erroneous interpretation of the effect of a new plan
funding method was both considered in good faith and based on consultation with
5. Prohibited Transactions. In addition to requiring plan fiduciaries to
adhere to certain standards of conduct, ERISA prohibits fiduciaries from engaging136
in specified transactions deemed likely to injure a pension plan. Engaging in a
prohibited transaction is a per se violation of ERISA. Thus, in evaluating a
fiduciary’s role in a prohibited transaction, it may be considered irrelevant to
examine whether the transaction would be considered prudent had it occurred137
between independent parties.
Section 406(a) of ERISA bars certain transactions between a plan and a party
in interest138 with respect to a plan. Subject to certain exemptions,139 a fiduciary must
not cause a plan to engage in any transaction with a party in interest if the fiduciary
knows or should know that the transaction is a:
!sale or exchange, or leasing, of any property;
!lending of money or other extension of credit;
!furnishing of goods, services, or facilities;
!transfer or use of any plan assets; or

132 Department of Labor Brief for Amicus, Nos. 04-1082, 03-155331 (4th Cir. 2004).
133 284 F. Supp. 2d 511, 2003 U.S. Dist. LEXIS 17492, 31 Employee Benefits Cas. (BNA)

2281 (S.D. Tex. 2003).

134 Enron at 669-70 (as cited in Department of Labor Brief for Amicus, Nos. 04-1082,

03-155331 (4th Cir. 2004)).

135 975 F.2d 1467(10th Cir. 1992).
136 Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000). The
Internal Revenue Code also contains certain prohibited transaction provisions. See 26 U.S.C.
§ 4975.
137 See, e.g., Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).
138 ERISA defines “party in interest” quite broadly to include a number of individuals who
could affect a plan or its fiduciaries. See ERISA § 3(14), 29 U.S.C. § 1002(14).
139 Exceptions to the prohibited transactions provisions may be found in Section 408 of
ERISA (29 U.S.C. § 1108).

!acquisition, on behalf of the plan, of any employer security or
employer real property in violation of ERISA § 407, which limits the
amount of employer securities and property that may be held by a
Section 406(b) prohibits certain transactions between a plan and a plan
fiduciary. A fiduciary may not:
!deal with the assets of the plan in his own interest or for his own
!act in any transaction involving the plan on behalf of a party (or
represent a party) whose interests are adverse to the interests of the
plan or the interests of its participants or beneficiaries, or
!receive any consideration for his own personal account from any
party dealing with such plan in connection with a transaction
involving the assets of the plan.140
ERISA also places a limit on the amount of investment in the sponsoring
employer’s stock and property held in a defined benefit plan. Section 407 generally
provides that a plan may not invest in securities of an employer unless they are
“qualifying employer securities.”141 Further, under this section, a plan may not
acquire or hold employer real property unless it is “qualifying employer real
property.”142 However, a plan may not acquire qualifying employer securities or
qualifying employer property, if immediately after the acquisition, the aggregate fair
market value of employer securities and employer real property held by the plan is
more than 10% of the fair market value of the assets of the plan.
The Section 407 requirements generally do not apply to defined contribution
plans, unless the plan requires a portion of an elective deferral to be invested in
qualifying employer securities or qualifying employer real property.143 However, the
PPA created new diversification requirements for qualifying employer securities held

140 29 U.S.C. § 1106(b).
141 “Qualifying employer security,” as defined in Section 407(d)(5) (29 U.S.C. § 1107(d)(5))
means an employer security which is (A) stock, (B) a marketable obligation (i.e., a bond,
debenture, note, or certificate, or other evidence of indebtedness, subject to certain
acquisition requirements described in 407(e)), or (C) an interest in a publicly traded
partnership (as defined in Section 7704(b) of the Internal Revenue Code) if it is an “existing
partnership.” See 26 U.S.C. § 7704 note. Qualifying employer securities may have to meet
additional requirements. See ERISA § 407(d)(5)(C).
142 Property may be deemed “qualifying employer real property” under Section 407(d)(4)
of ERISA (29 U.S.C. § 1107(d)(4)) if a substantial number of the parcels are dispersed
geographically; each parcel of real property and the improvements thereon are suitable (or
adaptable without excessive cost) for more than one use; without regard to whether all of
such real property is leased to one lessee; and if the acquisition and retention of such
property comply with the provisions of ERISA (subject to certain exceptions).
143 See ERISA § 407(b)(1), 29 U.S.C. 407(b)(1), which is applicable to plans that require a
portion of an elective deferral to be used to acquire qualifying employer securities,
qualifying real property, or both.

in defined contribution plans. Section 204(j) of ERISA provides that an individual
must be allowed to elect to direct a plan to divest employee contributions and elective
deferrals invested in employer securities, and reinvest these amounts in other
investment options.144 A plan must offer at least three investment options (besides
employer securities) to which an individual may direct the proceeds from the
divestment. Individuals must be allowed to diversify their employee contributions
out of employer stock as often as other investment changes are allowed, but at least
quarterly. In addition, employees who have completed three years of service must
also be allowed to diversify employer matching contributions and employer
nonelective contributions out of employer stock. This requirement is phased in over
three years for existing amounts contributed in plan years before 2007.145 The section
also provides that except as provided in regulations, plans cannot impose restrictions
on employer stock investment or diversification that are not imposed on other plan
ERISA provides for various exemptions from the prohibited transactions
provisions. Section 408(a) directs the Secretary of Labor to establish a procedure for
granting administrative exemptions for certain individuals and classes.146 The section
provides that the Secretary may not grant an exemption under this section unless it
is (1) administratively feasible, (2) in the interests of the plan and of its participants
and beneficiaries, and (3) protective of the rights of participants and beneficiaries of
the plan. The Labor Department has promulgated regulations outlining the
procedures for filing and processing prohibited transaction exemption applications.147
Section 408(b) of ERISA provides a number of statutory exemptions. These
exemptions, found in Section 408(b), include certain loans to participants and
beneficiaries (so long as certain conditions are met);148 reasonable arrangements with
parties in interest for office space or legal, accounting, or other services needed for
the establishment or operation of the plan; certain plan investments (in the form of
deposits) made in banks or in similar financial institutions whose employees are

144 29 U.S.C. § 1054(j). The requirements of this section may not apply to certain defined
contribution plans, including certain ESOPs and one-participant plans (as defined in ERISA
§ 101(i)(8)(B), 29 U.S.C. § 1021(i)(8)(B)).
145 Thus, employer contributions acquired in a plan year before January 1, 2007, may be
divested as follows: 33% in the first plan year, 66% in the second year, and 100% in the
third and following plan year. Participants who reached age 55 before the 2006 plan year
are exempt from the phasing requirement.
146 ERISA, as originally enacted, provided for both the Department of Labor and Department
of Treasury to issue prohibited transactions exemptions. This was limited in 1979 by
Reorganization Plan No. 4 of 1978 102(a), 43 Fed. Reg. 47,713 (1978). Under this
Reorganization Plan, the Treasury Department transferred almost all of its interpretive and
exemptive authority over the Internal Revenue Code’s prohibited transaction rules to the
Department of Labor. Currently, the Labor Department evaluates virtually all of the
applications for administrative exemptions.
147 See 29 C.F.R. § 2570.30 et. seq.
148 ERISA § 408(b)(1), 29 U.S.C. § 1108.

covered by the plans; as well as the purchase of life insurance, health insurance, or
annuities from a qualifying insurer who is the employer maintaining the plan.

6. Investment Advice. Prior to the PPA, ERISA’s prohibited transaction149

restrictions were believed to have discouraged the provision of investment advice.
Because it was perceived that “[v]irtually any transaction could fall within one of
these [prohibited transaction] categories,” individuals were reluctant to provide
investment advice to plan participants.150 The PPA amended both ERISA and the
Internal Revenue Code to add a statutory prohibited transaction exemption with
regard to providing investment advice. This exemption allows fiduciaries to provide
investment advice without fear of fiduciary liability under the prohibited transaction
Section 408(g)(1) of ERISA, as added by Section 601(a)(2) of the PPA, states
that the act’s prohibited transaction restrictions shall not apply to transactions
involving investment advice if such advice is provided by a fiduciary adviser
pursuant to an “eligible investment advice arrangement.” An “eligible investment
advice arrangement” is defined as an arrangement that either
(1) provides that any fees (including any commission or other
compensation) received by the fiduciary adviser for investment advice or
with respect to the sale, holding, or acquisition of any security or other
property for purposes of investment of plan assets do not vary depending
on the basis of any investment option selected, or
(2) uses a computer model under an investment advice program meeting
the requirements of Section 408(g)(3) in connection with the provision of
investment advice by a fiduciary adviser to a participant or beneficiary.
To be considered an “eligible investment advice arrangement,” an arrangement
must meet other requirements identified in subsequent paragraphs of Section 408(g).
These requirements include the following: the express authorization of the
arrangement by a plan fiduciary other than the person offering the investment advice
program, any person providing investment options under the plan, or any affiliate of
either; the performance of an annual audit of the arrangement by an independent
auditor; compliance with various disclosure requirements; the writing of participant
notifications in a clear and conspicuous manner; and the maintenance of any records
showing compliance with the relevant provisions of Section 408(g) for not less than
six years. If investment advice is provided through the use of a computer model,
such model must also meet certain specified requirements.151

149 See H.Rept. 107-262 pt. 1, at 12-13 (2001).
150 Id. at 12 (2001).
151 See ERISA § 408(g)(3)(B), 29 U.S.C. § 1108(g)(3)(B). For additional information on
Investment Advice under the PPA, see CRS Report RS22514, Investment Advice and the
Pension Protection Act of 2006, by Jon O. Shimabukuro.

7. Fiduciary Duty and Participant-Controlled Investment. Under
Section 404(c) of ERISA, if a defined contribution plan permits a participant or
beneficiary “to exercise control over the assets in his account,” a fiduciary will not
be liable for any loss which may result from the participant’s or beneficiary’s
investment choices. However, in order for a fiduciary to be immune from liability,
a plan must meet certain requirements.152 Labor Department regulations describe two153
basic requirements for a plan to be considered a “404(c) plan.” First, a plan must
provide the participant or beneficiary the opportunity to exercise control over the154
assets in the individual’s account. Individuals must, among other things, have a
“reasonable opportunity to give investment instructions” as well as “the opportunity
to obtain sufficient information to make informed decisions” about investment
alternatives under the plan.155
Second, a plan must allow a participant or beneficiary to choose from a “broad156
range of investment alternatives.” A participant or beneficiary is deemed to have
access to this range of alternatives if, among other things, the individual has the
opportunity to “materially affect” the potential return and the degree of risk on the
portion of the individual account with respect to which he is permitted to exercise157
control. In addition, a participant or beneficiary must be given a choice of at least
three investment alternatives, each of which is diversified, has different risk and
return characteristics, and which, in the aggregate, enable the participant to achieve
a portfolio with risk and return characteristics that are “normally appropriate” for the158
participant or beneficiary.

152 Under Section 404(c), plan fiduciaries are only shielded from liability for losses “which
result from” a participant or beneficiary’s investment choices. A 404(c) plan fiduciary still
remains liable for other fiduciary obligations. For example, a plan fiduciary still must select
appropriate investment alternatives from which plan participants may choose, and monitor
the performance of these investments. The Department of Labor, in promulgating
regulations for ERISA §404(c), emphasized this point:
... the act of designating investment alternatives ... in an ERISA Section 404(c) plan
is a fiduciary function to which the limitation on liability provided by Section 404(c) is not
applicable. All of the fiduciary provisions of ERISA remain applicable to both the initial
designation of investment alternatives and investment managers and the ongoing
determination that such alternatives and managers remain suitable and prudent investment
alternatives for the plan. Therefore, the particular plan fiduciaries responsible for
performing these functions must do so in accordance with ERISA. 57 Fed. Reg. 46906 (Oct.

13, 1992).

153 29 C.F.R. § 2550.404c-1. This section is hereinafter referred to as “the 404(c)
154 29 C.F.R. § 2550.404c-1(b)(i).
155 29 C.F.R. § 2550.404c-1(b)(2)(B).
156 29 C.F.R. § 2550.404c-1(b)(ii).
157 Id.
158 29 C.F.R. § 2550.404c-1(b)(3). Because employer stock is not a diversified investment,
it cannot be one of the three “core” investment options required by ERISA Section 404(c).

In addition, in order for a fiduciary to be immune from liability under Section
404(c), a participant or beneficiary must not only have the ability to exercise control
of plan assets, but must also have taken the opportunity to “exercise independent
control” with respect to the investment of assets in the individual’s account. The
404(c) regulations provide guidance as to when a participant or beneficiary will be
deemed to have exercised control over plan assets,159 as well as certain circumstances
under which a participant or beneficiary’s exercise of control will not be considered
8. Fiduciary Liability under ERISA Section 409. Plan fiduciaries may
be personally liable if the fiduciary breaches a responsibility, duty, or obligation161
under ERISA. Section 409 of ERISA provides that a fiduciary may be liable to a
plan for any losses resulting from such breach and may be responsible for forfeiting162
to the plan any profits that have been made through the improper use of plan assets.
Besides this monetary relief available, a court may also award “equitable and
remedial relief” as it deems appropriate.
In addition, Section 409(b) provides that a fiduciary is not liable with respect to
a breach of fiduciary duty “if such breach was committed before he became or after
he ceased to be a fiduciary.” Courts have found that fiduciaries are not liable for
losses caused by an imprudent investment made prior to when the individual assumed163
fiduciary responsibility. Still, a fiduciary may have an obligation to rectify

158 (...continued)
See section I(I) supra for discussion of diversification requirements on certain defined
contribution plans that hold employer securities.
159 29 C.F.R. § 2550.404c-1(c)(1). The 404(c) regulations specify that a participant or
beneficiary will be deemed to have exercised control with respect to the exercise of voting,
tender, and other rights related to an investment, provided that the participant or beneficiary
had a reasonable opportunity to exercise control in making the investment.
160 29 C.F.R. § 2550.404c-1(c)(2). Circumstances under which a participant or beneficiary’s
control will not be considered independent include situations where the individual is subject
to improper influence by a plan fiduciary or plan sponsor with respect to a transaction, or
where a plan fiduciary has concealed “material non-public facts” regarding the investment,
unless such disclosure would violate federal or state law.
161 ERISA § 409, 29 U.S.C. § 1109. For a discussion of actions that may be brought under
ERISA in the event of fiduciary breach, see the “Administration and Enforcement” section
162 29 U.S.C. § 1109. Section 409 works in conjunction with Section 502 of ERISA,
ERISA’s primary civil enforcement provision. See supra section I(I) on “Fiduciary Duty.”
Section 502(a)(2) allows for a civil action to be brought “by the Secretary, or by a
participant, beneficiary, or fiduciary for appropriate relief under §409.”
163 EMPLOYEE BENEFITS LAW (Matthew Bender 2d ed.)(2000). (citing Aull v. Cavalcade,

988 F. Supp. 1360 (D. Colo. 1997); Davidson v. Cook, 567 F. Supp. 225 (E.D. Va. 1983),

aff’d, 734 F.2d 10, (4th Cir. 1984), cert. denied, 469 U.S. 899 (1984)).

breaches of fiduciary duty committed by a previous fiduciary and may be liable if he
or she fails to take remedial action.164
J. Administration and Enforcement
One of the primary goals in enacting ERISA was to “protect ... the interests of
participants and ... beneficiaries” of employee benefit plans, and assure that
participants receive promised benefits from their employers.165 To this end, ERISA
“provid[es] for appropriate remedies, sanctions, and ready access to the Federal
courts.”166 ERISA contains an “integrated enforcement mechanism”167 that is also
“essential to accomplish Congress’ purpose of creating a comprehensive statute for
the regulation of employee benefit plans.”168 An integral part of the civil enforcement
scheme is ERISA Section 502, which allows both private parties as well as
government entities to bring various civil actions to enforce provisions of ERISA.169
1. Civil Enforcement under Section 502(a). Section 502(a) authorizes
civil actions under ERISA as well as the remedies available to a successful plaintiff.
Civil actions under Section 502(a) include the following actions that may be brought
by a participant or a beneficiary, or, in some cases, a plan fiduciary or the Secretary
of Labor, to:
!redress the failure of a plan administrator to provide information
required by ERISA’s reporting and disclosure requirements or
COBRA requirements (Section 502(a)(1)(A));

164 See, e.g., Morrison v. Curran, 567 F. 2d 546 (2nd Cir. 1977)(court evaluated an improper
use of plan assets made prior to ERISA; court opined that “trustee’s obligation to dispose
of improper investments within a reasonable time is well established at common law” and
that “ ERISA can hardly be read to eviscerate this duty”). See also McDougall v. Donovan,
552 F. Supp. 1206, 1212 (D. Ill. 1982). But see Beauchem v. Rockford Prods. Corp., 2004
U.S. Dist. LEXIS 2091 (D. Ill. 2004)(In dismissing a claim against defendant co-fiduciaries,
court stated that “[a]llowing a fiduciary to be liable for failing to correct a breach committed
by prior fiduciaries would destroy the protection of section [409](b)”).
While not addressed in this report, a fiduciary may also be responsible for an act of a
co-fiduciary under Section 405 of ERISA. This section contains various circumstances under
which a fiduciary can be liable for a breach of responsibility made by another fiduciary. 29
U.S.C. § 1105.
165 See ERISA § 2, 29 U.S.C. § 1001.
166 ERISA § 2(b), 29 U.S.C. § 1001(b). See also Aetna Health Inc. v. Davila, 542 U.S. 200,

208 (2004).

167 Russell, 473 U.S., at 147.
168 Aetna Health Inc. v. Davila, 542 U.S. at 208.
169 29 U.S.C. § 1132. ERISA’s enforcement scheme extends beyond civil actions. Other
methods of enforcement include tax disqualification and criminal sanctions.

!recover benefits due to a participant or beneficiary under the terms
of his plan, to enforce his rights or to clarify his rights to future
benefits under the terms of the plan (Section 502(a)(1)(B));
!receive appropriate relief due to breaches of fiduciary duty (Section


!enjoin any act or practice which violates ERISA or the terms of the
plan, as well as to obtain other appropriate equitable relief to redress
such violations (Section 502(a)(3));
!collect civil penalties (Section 502(a)(6)).170
The Supreme Court has found the enforcement scheme under Section 502(a) to
contain “exclusive” federal remedies. Accordingly, Section 502(a) may preempt state
law under the jurisdictional doctrine of “complete preemption.” As the Supreme
Court has reasoned, Congress may so completely preempt a particular area that “any
civil complaint raising [a] select group of claims is necessarily federal in
character.”171 In other words, complete preemption can occur “when Congress
intends that a federal statute preempt a field of law so completely that state law
claims are considered to be converted into federal causes of action.”172 Under the
doctrine of complete preemption, a state claim that conflicts with a federal statutory
scheme may be removed to federal court.173 In the context of ERISA, if a state law
claim is considered within the scope of ERISA’s 502(a) civil enforcement provisions,
the state law claim is completely preempted. Under these circumstances, a plaintiff
is limited to bringing a claim under Section 502 of ERISA and may only receive the
remedies available under the federal statute.174

170 See Section 502(a) (29 U.S.C. 1132(a)) for additional civil actions authorized by ERISA.
See 502(c)(29 U.S.C. § 1132(c)) for circumstances under which the Secretary of Labor may
assess a civil penalty.
171 Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58, 63-4 (1987).
172 Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 543 (8th Cir. 1996) (citing
Taylor, 481 U.S. 58 at 65; Avco Corp. v. Aero Lodge No. 735, Intern. Ass’n of Machinists
and Aerospace Workers, 390 U.S. 557 (1968).
173 The procedure for determining whether a case will be moved from state court to federal
court is governed by Section 1441(a) of the Federal Rules of Civil Procedure (FRCP).
Under FRCP § 1441(a), any civil action brought in state court may be removed to federal
district court if the defendants can show that the federal district court has original
jurisdiction. 28 U.S.C. § 1441(a). Courts follow the “well-pleaded complaint rule,” which
allows the plaintiff to determine whether an action is heard in state or federal court. The
plaintiff is able to choose his forum because “[i]t is long settled law that a cause of action
arises under federal law only when the plaintiff’s well-pleaded complaint raises issues of
federal law.” Taylor, 481 U.S. at 63. The fact that the defendant’s defense arises under
federal law is not enough to move the case to federal court. However, under the doctrine
of complete preemption, a state claim may be removed to federal court if Congress has
completely preempted a particular area.
174 See section I(K) of this report for a broader discussion of preemption, including

Courts have frequently examined the scope of the remedies available under
Section 502(a), in light of preemption and other factors. Questions have arisen as to
which plaintiffs are eligible to bring a Section 502(a) claim and what remedies are
available to them. The following discussion addresses how the Supreme Court has
evaluated various claims under Section 502.
2. Claims to Enforce Benefit Rights. Section 502(a)(1)(B) of ERISA
authorizes a plaintiff (i.e., a participant or a beneficiary in an ERISA plan) to bring
an action against the plan to recover benefits under the terms of the plan, or to
enforce or clarify the plaintiff’s rights under the terms of the plan. Under this section,
if a plaintiff’s claim for benefits is improperly denied, the plaintiff may sue to recover
the unpaid benefit. A plaintiff may also seek a declaration to preserve a right to175
future benefits or an injunction to prevent a future denial of benefits.
In terms of monetary remedies, Section 502(a)(1)(B) provides that a successful
plaintiff may receive the benefits the plaintiff would have been entitled to under the
terms of the plan. Compensatory or punitive damages are not available. In addition,
as Section 502 of ERISA is considered to contain “exclusive” federal remedies,
Section 502(a)(1)(B) has been held to preempt state or common law causes of action
that may provide for more generous remedies than what is available under ERISA.
The preemption of these state law claims has been controversial, as it can
significantly impact plaintiffs relative to their opportunity to recover various types
of damages under state law. The question of which state law claims are preempted
by ERISA 502(a)(1)(B) has been controversial and has received significant attention
from the courts.
The Supreme Court in Pilot Life v. Dedeaux176 evaluated whether a state law
claim for wrongful denial of benefits was preempted by Sections 514 and 502 of177
ERISA. The plaintiffs in Pilot Life claimed that the denial of disability benefits by
insurers of ERISA-regulated plans violated a Mississippi common law relating to bad
faith. In finding the state law claim preempted by Section 502, the Court reasoned
that the civil enforcement provisions of 502(a) of ERISA are intended to be the
“exclusive vehicle” for actions asserting improper processing of a claim for benefits.
Further, in explaining why state law claims (and remedies) were not available, the
Court explained:
... the provisions of 502(a) set forth a comprehensive civil enforcement scheme
that represents a careful balancing of the need for prompt and fair claims
settlement procedures against the public interest in encouraging the formation of
employee benefit plans ... the policy choices reflected in the inclusion of certain
remedies and the exclusion of others under the federal scheme would be

174 (...continued)
discussion of Section 514 of ERISA, ERISA’s express preemption provision.
175 Jayne E. Zanglein, Susan J. Stabile, 31 JOURNAL OF PENSION PLANNING AND
COMPLIANCE 1 (2005).
176 Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 43 (1987).
177 See section I(L) for a discussion of ERISA § 514, ERISA’s express preemption provision.

undermined if ERISA-plan participants and beneficiaries were free to obtain178
remedies under state law that Congress rejected in ERISA.
In Aetna Health Inc. v. Davila,179 two individuals sued their insurance carriers,
claiming the carriers violated the Texas Health Care Liability Act when they failed180
to exercise ordinary care in denying benefit coverage. The insurance carriers
removed the cases to the federal district court and argued that Section 502(a)(1)(B)
of ERISA completely preempted the respondents’ causes of action.
At issue for the Supreme Court was whether the individual’s causes of action
were preempted by Section 502(a) of ERISA and, thus, removal to federal court was
proper. Respondents argued, among other things, that their state law claim for
violating the “duty of ordinary care” arises independently of any duty imposed under
ERISA. However, the Court disagreed, finding that “respondents bring suit only to
rectify a wrongful denial of benefits promised under ERISA-regulated plans and do
not attempt to remedy any violation of a legal duty independent of ERISA.” The
Court, relying on its decision in Pilot Life, among other cases, explained that a state
cause of action that “attempts to authorize” a larger remedy than ERISA Section

502(a) does not place it outside of an ERISA claim.181

3. Claims to Redress Breaches of Fiduciary Duty. Section 502(a)(2)

of ERISA authorizes the Secretary of Labor, a participant, a beneficiary, or a plan
fiduciary to bring a civil action caused by a breach of fiduciary duty under Section
409 of ERISA. That section makes a plan fiduciary personally liable for breaches
against an ERISA plan, and a breaching fiduciary must make good to the plan “any
losses to the plan resulting from a breach” and restore to the plan any profits made
from using the assets of the plan in improper ways.182 It also subjects such a
fiduciary to other relief as a court may deem appropriate, including removal of the
One controversial issue with respect to breach of fiduciary duty claims under
ERISA has been that while an individual plaintiff (e.g., a plan participant) may bring
a civil action under Section 502(a)(2), the Supreme Court has found that any recovery183
must “inure ... to the benefit of a plan as a whole.” In Massachusetts Mutual Life
Insurance Co. v. Russell,184 the Supreme Court evaluated whether a plan beneficiary
could bring a civil action for monetary damages against a plan fiduciary who had
been responsible for the improper processing of a benefit claim. The plaintiff, who
was disabled with a back injury, sought to recover damages after her employer’s
disability committee terminated (and later reinstated) her disability benefits. The

178 Pilot Life, 481 U.S. at 54.
179 Aetna Health Inc. v. Davila, 542 U.S. 200 (2004).
180 Id.
181 Id.
182 ERISA § 409, 29 U.S.C. § 1109.
183 Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 (1985).
184 Id.

Court rejected the beneficiary’s claim, explaining that ERISA Section 409 did not
authorize a beneficiary to bring a claim against a fiduciary for monetary damages.185
Based on the text of Section 409 and the legislative history of ERISA, the court
opined that relief for an individual beneficiary was not available under Section 409;
a plaintiff could only recover losses on behalf of the plan.
The Supreme Court’s 2008 decision in LaRue v. DeWolff, Boberg & Associates
addressed whether Section 502(a)(2) authorizes a participant in a defined
contribution plan to sue a plan fiduciary and recover losses to the plan, if the losses
only affected an individual’s plan account.186 In LaRue, a participant in a 401(k) plan
requested that plan administrators change an investment in his individual account.
The plan administrators failed to make this change, and the individual’s account
suffered losses of approximately $150,000. LaRue brought an action under Section
502(a)(2) alleging that the plan administrator breached his fiduciary duty by
neglecting to properly follow the investment instructions. The Court held for the
plan participant, finding that “although §502(a)(2) does not provide a remedy for
individual injuries distinct from plan injuries, that provision does authorize recovery
for fiduciary breaches that impair the value of plan assets in a participant’s individual
account.” In the decision, Justice Stevens, writing for the majority, distinguished
LaRue from the Russell case in two ways. First, the Court explained that the type of
fiduciary misconduct occurring in La Rue violated “principal statutory duties”
imposed by ERISA that “relate to the proper plan management, administration, and
investment of fund assets.”187 Conversely, in Russell, the fiduciary’s breach (i.e., a
delay in processing a benefit claim) fell outside of these principal duties.188
Second, the Court found that in Russell, the emphasis placed on protecting the
“entire plan” from fiduciary breach under Section 409 applies to defined benefit
plans, which were the norm at the time of the case.189 However, as the Supreme
Court noted in LaRue, defined contribution plans are more popular today, and the
“entire plan” language in Russell does not apply to these plans. The Court explained
that for defined benefit plans, fiduciary misconduct would not affect an individual
entitlement to a benefit unless the misconduct detrimentally affected the entire plan.
By contrast, “for defined contribution plans ... fiduciary misconduct need not threaten
the solvency of the entire plan to reduce benefits below the amount that participants

185 In its decision the Court noted that it declined to decide “the extent to which section 409
may authorize recovery of extracontractual compensatory or punitive damages from a
fiduciary by a plan. 473 U.S. 134, 144 n. 12 (1985). See also Mertens v. Hewitt Assocs., 508
U.S. 248 (1993) (in a dissenting opinion, Justice White observed that courts are split on
whether punitive damages may be recovered under ERISA 502(a)(2)). Mertens, 508 U.S.
at 273 n.6 (White, J., dissenting)).
186 LaRue v. DeWolff, Boberg & Associates, 2008 LEXIS 2014 (2008).
187 Id. at 9 (quoting Russell, 473 U.S. at 142).
188 In addition, as the Court points out, unlike LaRue, the plaintiff in Russell received all the
benefits to which she was entitled.
189 While the plan at issue in Russell was a disability plan rather than a defined benefit plan,
the Court applied the logic in Russell to defined benefit plans. See id. at 12-13.

would otherwise receive.”190 The Court went on to note that “whether a fiduciary
breach diminishes plan assets payable to all participants and beneficiaries, or only to
persons tied to particular individual accounts, it creates the kinds of harms that
concerned the draftsmen of §409.”191

4. Claims to Enforce Plan Provisions and “Other Equitable Relief”.

Section 502(a)(3) of ERISA permits a participant, beneficiary, or fiduciary, to bring
a civil action to enjoin any act or practice which violates ERISA or the terms of the
plan, or obtain “other appropriate equitable relief”192 due to an ERISA violation.
Section 502(a)(3) of ERISA has been referred to as a “catchall” provision — claims
that may not be brought under other Sections of 502, but are nevertheless violations
of ERISA or the plan, can be brought under this section.193 The Supreme Court in
Varity v. Howe found that individual relief under Section 502(a)(3) is available.194
However, courts have struggled with the scope and meaning of the term “other
appropriate equitable relief”in Section 502(a)(3). This issue has been considered one
of the most controversial areas of ERISA jurisprudence.195 The controversy has often
arisen in cases in which plaintiffs had sought monetary relief for ERISA Section

502(a)(3) violations.

The Supreme Court first evaluated the meaning of “equitable relief” in Mertens
v. Hewitt Associates.196 In this case, plan participants brought an action under
Section 502(a)(3) seeking monetary relief after the plan actuary failed to make proper
actuarial assumptions in calculating plan assets. Participants claimed that this error
contributed to plan underfunding, and subsequently, to the plan’s defaulting on
promised retirement benefits. The Court found that the monetary relief the

190 Id. at 12.
191 Id. Although all of the Justices agreed on the outcome of the LaRue case, they disagreed
as to the reasoning behind it. See LaRue 2008 U.S. LEXIS 2014, 17 (2008) (Roberts, J.
concurring) and 2008 U.S. LEXIS 2014, 20 (Thomas, J. concurring). For additional
discussion of this case, see CRS Report RS22827, Liability of Plan Fiduciaries under
ERISA: LaRue v. DeWolff, Boberg & Associates, by Jennifer Staman.
192 Courts sometimes determine whether the relief a plaintiff seeks is legal or equitable.
Colleen Murphy, Money as a “Specific” Remedy, 58 Ala. L. Rev. 119, 134 (2006). This
distinction dates back to the “days of the divided bench,” when England (and subsequently
the United States) maintained separate courts of law and courts of equity. See generally
Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 212 (2002). One important
way these courts differed from each other was the remedies available to plaintiffs.
Historically, the most common remedy in the courts of law was money. Id. at 135. The most
common remedy in the courts of equity was an order for an individual to do something or
refrain from doing something, such as with an injunction. Id. The scope of remedies
available at law and at equity have been the subject of debate. While there is no longer this
divided court system, courts may still evaluate a claim based on this dichotomy.
193 See Varity Corp. v. Howe, 516 U.S. 489 (1996).
194 Id.
195 Roy F. Harmon III, ‘Equitable Relief’ Claims under ERISA Section 502(a)(3), 20
Benefits Law Journal 33 (2007).
196 508 U.S. 248 (1993).

participants sought was nothing other than compensatory damages, and held, in a 5-4
decision, that ERISA Section 502(a)(3) did not authorize suits for compensatory
damages against a non-fiduciary. In explaining why these damages were not
available, the Court articulated that “equitable relief” with respect to Section

502(a)(3) is relief that was “typically available in equity,” such as injunction,

mandamus, or restitution. While it had been argued that the relief petitioner sought
was considered equitable under the common law of trusts, the Court rejected this
argument. It explained that while “legal” remedies may have been available to
plaintiffs in a court of equity, this idea did not “define the reach” of Section
502(a)(3), and that what was available under Section 502(a)(3) were the more
“traditional” forms of equitable relief.197
The Supreme Court applied the reasoning of Mertens in another decision
interpreting Section 502(a)(3), Great West Life & Annuity Insurance Co. v.
Knudson.198 In this case, a group health plan sought reimbursement from a plan
beneficiary for amounts the plan had paid after the beneficiary was severely injured
in an automobile accident. After the accident, the beneficiary brought an action
against the automobile manufacturer and others, and she received a settlement. The
plan claimed it was entitled to the settlement amount based on a provision in the plan
requiring plan participants to reimburse the plan for any amounts the beneficiary
receives from a third party.199
In another 5-4 decision, the Court found for the beneficiary, holding that Section
502(a)(3) did not authorize the reimbursement sought by the plan. The health plan
claimed the relief sought was restitution,200 which could be characterized as equitable
relief. The Court refused to accept this reasoning, explaining that while restitution
could be found traditionally in courts of equity, what mattered for purposes of
Section 502(a)(3) was whether the restitution sought was to restore to the plaintiff
particular funds or property in the defendant’s possession. Because the proceeds of
the settlement were not in the identifiable defendant’s possession (i.e., they had been
paid to a trust, to the plaintiff’s attorney, etc.), the plaintiff’s claim for equitable relief

197 See id. at 255, 256.
198 Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002).
199 This type of claim is referred to as a subrogation claim. For additional discussion of a
subrogation claim, see footnote 231 infra and accompanying text.
200 “Restitution” has been defined as “return or restoration of some specific thing to its
rightful owner or status.” Black’s Law Dictionary 1315 (7th ed. 1999). It has been noted that
restitution is an ambiguous term, sometimes referring to the disgorging of something which
has been taken and at times referring to compensation for injury done.” Id. (citing John D.
Calamari and Joseph M. Perillo, THE LAW OF CONTRACTS, § 9-23 at 376 (3d. Ed. 1987).
201 Cf. Sereboff v. Mid-Atlantic Services, 547 U.S. 356 (2006) in which the Supreme Court
found health plan administrators were entitled to equitable relief under Section 502(a)(3).
Similar to the Great West case, in Sereboff, plan participants were in an automobile
accident, and their health plan paid medical expenses on the participant’s behalf. Later,
after the participants had received a settlement amount arising from a claim brought because

5. Criminal Enforcement under ERISA and Other Federal Law.

ERISA provides for three types of criminal sanctions. First, Section 501 provides
that any person who willfully violates the reporting, disclosure and other related
provisions202 of ERISA may be fined up to $100,000, imprisoned up to 10 years, or
both.203 Persons other than individuals (e.g., corporate entities) may be fined up to
$500,000. Conduct that may be prosecuted under Section 501 includes a willful act
as well as an omission to perform reporting or disclosure required by ERISA.204
Second, Section 511 states that it is unlawful for any person to use (or threaten to
use) fraud, force, or violence in interfering or preventing a person from exercising
rights under an employee benefit plan.205 Persons who willfully violate this section
can be fined $100,000 or imprisoned for not more than ten years, or both.
Third, Section 411 bars individuals convicted of various crimes from holding
certain positions with regard to an employee benefit plan.206 Individuals convicted
of these crimes may not serve (1) as an administrator, fiduciary, officer, trustee,
custodian, counsel, agent, employee, or representative of a plan in any capacity; (2)
as a consultant or advisor to a plan; or (3) in any capacity that involves decision-
making authority or custody or control of the moneys, funds, assets or property of any
plan.207 Under this section, individuals may be barred from service during or for the
period of 13 years after conviction or after imprisonment, whichever is later. This
time period is subject to certain exceptions.208 In addition, Section 411 prohibits an
individual from knowingly hiring, retaining, employing, or otherwise placing
someone to serve in any capacity which violates this section. Individuals who
intentionally violate this provision are subject to a fine of no more than $10,000, up
to five years imprisonment, or both.
Besides the three provisions under ERISA, the Federal Criminal Code prohibits
certain conduct relating to employee benefit plans. Provisions under the Federal
Criminal Code include the following:

201 (...continued)
of the accident, the health plan sought reimbursement from plan participants. In finding that
the relief sought by the administrators was equitable under Section 502(a)(3), the Court
distinguished the Sereboff case from Great West because, among other things, the amounts
in question in Sereboff were identifiable, as they were set aside in an investment account.
202 29 U.S.C. § 1021 et seq.
203 29 U.S.C. § 1131.
204 EMPLOYEE BENEFITS LAW 1400 (Matthew Bender 2d ed.)(2000).
205 29 U.S.C. § 1141.
206 Crimes that prevent an individual from service with an employee benefit plan include
robbery, bribery, embezzlement, murder, perjury, crimes that disqualify individuals from
serving as an investment advisor (see 15 U.S.C. § 80a-9(a)(1)), as well as violations of
ERISA. See 29 U.S.C. § 1111(a).
207 Id.
208 Id.

!Under Section 664 of Title 18, any person who embezzles, steals, or
unlawfully and willfully abstracts or converts to his own use (or to
the use of another) any assets of an employee benefit plan, will be
fined, imprisoned no more than five years, or both. Assets of a plan
include money, securities, premiums, and property.
!Under Section 1127 of Title 18 of the United States Code, any
individual who knowingly makes a false statement or representation
of fact, or knowingly conceals, covers up, or fails to disclose any fact
on certain documents required under ERISA may be subject to
criminal penalties of up to $10,000, five years in prison, or both.
!Section 1954 of Title 18 prohibits various persons serving in
positions relating to employee benefit plans from (1) soliciting or
receiving or (2) giving or offering any fee, kickback, commission,
gift, loan, money or other item of value because of, or to influence,
a certain question or matter concerning an employee benefit plan.209
Persons violating this section may be fined, imprisoned for up to
three years, or both. An exception to Section 1954 may be made for
a person’s salary, compensation, or other payments made for goods
and services furnished or performed in the regular course of a
person’s duties to the plan.
Section 506(b) of ERISA provides that the Secretary of Labor has the
responsibility and authority to detect, investigate, and refer both civil and criminal
violations of ERISA as well as other related federal laws, including the provisions
under the United States Criminal Code.210 ERISA also requires the Secretary of
Labor to provide evidence of crimes to the United States Attorney General, who may
consider this evidence for purposes of criminal prosecution.211
K. Preemption of State Laws
A critical feature of ERISA is its preemption of state laws. According to the
Supreme Court, Congress provided for ERISA preemption in order to “avoid a
multiplicity of regulation in order to permit the nationally uniform administration of
employee benefit plans.”212 ERISA preemption reflects this objective of ERISA: to
regulate employee benefit plans “as exclusively a federal concern.”213

209 18 U.S.C. § 1954.
210 29 U.S.C. § 1136(b).
211 ERISA § 506(a), 29 U.S.C. § 1136(a).
212 Travelers, 514 U.S. at 657.
213 See Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981), as cited in New York
State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 656

The question of whether ERISA preempts state law has, at times, been complex
and controversial. The provisions at issue in the preemption debate are (1) Section
514, ERISA’s express preemption section, under which ERISA may supercede state
law, and (2) Section 502(a), which provides for claims that may be brought and
remedies a plaintiff may recover under ERISA, and may preempt a state law cause
of action.

1. Section 514. ERISA’s express preemption provision, Section 514, has214

three important parts. First, under Section 514(a), ERISA preempts “any and all
State laws insofar as they may now or hereafter relate to any employee benefit
plan....” The Supreme Court has examined the scope of this provision on several
occasions. In one of the first key cases to address ERISA preemption, Shaw v. Delta215
Airlines, the Court interpreted the term “relate to” as applying to any state law that
“has a connection with or reference to such a plan.”216 The Court has stated that
“[u]nder this ‘broad common sense meaning,’ a state law may ‘relate to’ a benefit
plan, and thereby be pre-empted, even if the law is not specifically designed to affect217
such plans, or the effect is only indirect.” While the Court’s early decisions (e.g.,
Shaw) suggested that the application of ERISA’s explicit preemption clause was
virtually limitless, its decision in New York State Conference of Blue Cross & Blue
Shield Plans v. Travelers Insurance Co. signaled a change in the Court’s218
interpretation of Section 514(a).
In Travelers, several commercial insurers challenged a state law that required
them, but not Blue Cross and Blue Shield, to pay surcharges. The commercial
insurers argued that the law was preempted by ERISA because it “relate[d] to”
employer-sponsored health insurance plans. In addressing the issue of ERISA’s
preemption clause, the Court first noted that there is a “presumption that Congress
does not intend to supplant state law.”219 The Court then turned to whether Congress220
intended to preempt state law by looking to “the structure and purpose of the act.”
The Court concluded that “nothing in the language of the act or the context of its
passage indicates that Congress chose to displace general health care regulation,
which historically has been a matter of local concern.”221 In other cases, the Court
has similarly recognized the states’ ability to regulate matters of health and safety,
and has concluded that state laws of general applicability are not necessarily

214 ERISA and Health Plans, Employee Benefits Research Institute, available at
[ h t t p : / / www.ebr i .or g/ pdf / b r i ef spdf / 1195i b.pdf ] .
215 463 U.S. 85 (1983).
216 Shaw, 463 U.S. at 97.
217 Ingersoll-Rand v. McClendon, 498 U.S. 133, 139 (1990).
218 514 U.S. 645 (1995).
219 Id. at 654.
220 Id. at 655.
221 Id. at 661.

preempted by ERISA.222 However, despite the Travelers case arguably narrowing the
scope of Section 514(a), this section still is considered to broadly preempt state
law. 223
The second important part is the “savings clause” under ERISA Section 514(b),
which provides exemptions to ERISA preemption. The savings clause allows states
to enforce any “law ... which regulates insurance, banking, or securities.”224 The
issue of which state laws “regulate insurance” under Section 514(b) has received
considerable attention from the Supreme Court. An important case interpreting the
savings clause is Kentucky Association of Health Plans, Inc. v. Miller,225 where the
Supreme Court found that Kentucky’s “any willing provider” (AWP) laws, which
prohibited insurers from discriminating against a health care provider willing to meet
the insurer’s criteria for participation in the health plan, was saved from ERISA
preemption. In finding that the AWP laws “regulated insurance,” the Court departed
from reasoning it had used in earlier savings clause cases, and articulated a new two-
part test.226 Under this test, a state law falls within the ambit of the savings clause if
it is “specifically directed toward” the insurance industry and “substantially affects
the risk pooling arrangement between the insurer and insured.”227
In evaluating whether the law was specifically directed toward the practice of
insurance, the Court explained that the savings clause regulates insurance, not
insurers, and that insurers may only be regulated “with respect to their insurance
practices.228 Petitioner HMOs argued, among other things, that the AWP laws were
not directed toward insurers, as the laws regulated both the insurance industry and
doctors who seek to form and maintain provider networks. The Court rejected this
argument and pointed out that the law did not impose any prohibitions or

222 De Buono v. NYSA-ILSA Medical and Clinical Services Fund, 520 U.S. 806 (1997) (state
tax on gross receipts of health care facilities not preempted by ERISA); California Div. of
Labor Standards Enforcement v. Dillingham Constr., 519 U.S. 316 (1997) (California’s
prevailing wage law not preempted by ERISA).
223 See Constitution of the United States of America, Analysis and Interpretation,
Congressional Research Service, p. 262, stating that ERISA’s preemption provision is
“[p]erhaps the broadest preemption section ever enacted.”
224 ERISA § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A).
225 538 U.S. 329 (2003).
226 For many years, the Court, in evaluating whether a state law was saved from ERISA
preemption under Section 514(b), examined, among other things, whether the state law in
question regulated the “business of insurance” under the McCarran-Ferguson Act (an act
describing federal and state roles in insurance regulation). See, e.g., Metropolitan Life
Insurance v. Massachusetts, 471 U.S. 724 (1985); Pilot Life v. Dedeaux, 481 U.S. 41 (1987).
Under the McCarran-Ferguson factors, a state law regulates the business of insurance if it
(1) has the effect of transferring or spreading the policyholder’s risk, (2) is an integral part
of the policy relationship between the insurer and the insured, and (3) is limited to entities
within the insurance industry that could be included under the savings clause.
227 Id. at 334, 338.
228 Id. at 334 (citing Rush Prudential HMO Inc. v. Moran, 536 U.S. 355, 366 (2002)).

requirements on health providers, and that health care providers were still able to
enter into exclusive health care networks outside the state.
In regard to the second part of the new test, the Court explained that it was
necessary for a law to affect the risk pooling arrangement between the insurer and the
insured to be covered under the savings clause; otherwise, any law imposed upon an
insurance company could be deemed to “regulate insurance.”229 Petitioners had
argued that the AWP laws do not alter or affect the terms of insurance policies, but
instead concern the relationship between insureds and third-party providers.230 The
Court disagreed and pointed out that it had never held that a state law must alter or
control the terms of the insurance policies in order to “regulate insurance.”231 The
Court found that AWP laws affected the risk pooling arrangement because they
altered the scope of permissible bargains between insurers and insureds, and
restricted insurers’ ability to offer lower premiums in exchange for acceptance of a
closed network of providers.232
The third important part of ERISA preemption, known as the “deemer clause,”
generally provides that an employee benefit plan governed by ERISA shall not be
“deemed” an insurer, bank, trust company, investment company, or a company
engaged in the insurance or banking business in order to be subject to state law (and
accordingly, avoid ERISA preemption).233 In FMC v. Holliday, the Supreme Court
found that a Pennsylvania law that prevented subrogation234 when applied to a self-
funded health plan235 was preempted by ERISA by virtue of the deemer clause. In its
decision, the Court held that although the statute did “relate to” an ERISA benefit
plan, the law fell within the ambit of the savings clause because the law controlled
the terms of insurance contracts by invalidating any subrogation provisions that they

229 Miller, 538 U.S. at 338. In its explanation, the Court gave an example of a law that would
require insurance companies to pay their janitors twice the minimum wage. The Court
stated that while this type of law would be a requirement to engage in the business of
insurance, it would not “regulate insurance” within the meaning of the savings clause. See
230 Id.
231 Id.
232 Id. at 338-39.
233 ERISA § 514(b)(2)(B), 29 U.S.C. § 1144.
234 “Subrogation” can be defined as “the principle under which an insurer that has paid a loss
under an insurance policy is entitled to all the rights and remedies belonging to the insured
against a third party with respect to any loss covered by the policy.” BLACKS LAWth
DICTIONARY 1440 (7 ed. 1999). In other words, a subrogation provision could require a
health plan participant to reimburse the plan for medical costs that the plan had paid, if the
member recovers on a claim in a liability action against a third party.
235 A self-funded (or self-insured) health plan is an employee benefit plan under which an
employer provides health benefits directly to plan participants, as opposed to offering
benefits through health insurance. Because self-funded plans do not provide benefits though
insurance, they cannot be regulated by the states under the exemption to preemption
provided by the savings clause.

contain.236 However, because the plan in question was a self-funded plan (i.e., it did
not offer benefits through health insurance), it was found that the plan could not be
“deemed” an insured plan for the purpose of state regulation.
2. Section 502. ERISA preemption can also be found in ERISA’s remedial
provisions under Section 502. Section 502(a) creates a civil enforcement scheme that
allows a participant or beneficiary of a plan to bring a civil action for various reasons,
including “to recover benefits due to him under the terms of the plan, to enforce his
rights under the terms of the plan, or to clarify his rights to future benefits under the
terms of the plan.” If a plaintiff seeks to bring a state law claim is “within the scope”237
of Section 502(a), the state law claim can be preempted. See the “Administration
and Enforcement” section of this report for additional discussion of ERISA Section


L. Special Regulation of Health Benefits
Besides the regulation of pension plans, ERISA also regulates welfare benefit238
plans offered by an employer to provide medical, surgical and other health benefits.
ERISA applies to health benefit coverage offered through health insurance or other
arrangements (e.g., self-funded plans).
Health plans, like other welfare benefit plans governed by ERISA, must comply
with certain standards, including plan fiduciary standards, reporting and disclosure
requirements, and procedures for appealing a denied claim for benefits. However,
these health plans must also meet additional requirements under ERISA. As enacted
in 1974, ERISA’s regulation of health plan coverage and benefits was limited.
However, beginning in 1986, Congress added to ERISA a number of requirements
on the nature and content of health plans, including rules governing health care
continuation coverage, limitations on exclusions from coverage based on preexisting
conditions, parity between medical/surgical benefits and mental health benefits, and
minimum hospital stay requirements for mothers following the birth of a child.239
1. COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA) added a new Part 6 to Title I of ERISA, which requires the sponsor of a
group health plan to provide an option of temporarily continuing health care coverage240
for plan participants and beneficiaries under certain circumstances. Under ERISA
Section 601, a plan maintained by an employer with 20 or more employees must

236 498 U.S. 52 at 60-61 (citing Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. at


237 See Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 66 (1987).
238 Health plans, life insurance plans, and plans that provide dependent care assistance,
educational assistance, or legal assistance can be deemed “employee welfare benefit plans.”
under ERISA. See 29 U.S.C. § 1002(1).
239 See generally EMPLOYEE BENEFITS LAW 355 (Matthew Bender 2d ed.) (2000).
240 P.L. 99-272, tit. X, 100 Stat. 327 (1985). For additional information on COBRA, see CRS
Report RL30626, Health Insurance Continuation Coverage Under COBRA, by Heidi G.

provide “qualified beneficiaries”241 with the option of continuing coverage under the
employer’s group health plan in the case of certain “qualified events.” A qualifying
event is an event that, except for continuation coverage under COBRA, would result
in a loss of coverage, such as the death of the covered employee, the termination
(other than by reason of the employee’s gross misconduct) or reduction of hours of
the covered employee’s employment, or the covered employee becoming entitled to
Medicare benefits.242
Under Section 602 of ERISA, the employer must typically provide this
continuation coverage for 18 months.243 However, coverage may be longer,
depending on the qualifying event.244 Under ERISA 602(1), the benefits offered
under COBRA must be identical to the health benefits offered to “similarly situated
non-COBRA beneficiaries,” or in other words, beneficiaries who have not
experienced a qualifying event. The health plan may charge a premium to COBRA
participants, but it cannot exceed 102% of the plan’s group rate. After 18 months of
required coverage, a plan may charge certain participants 150% of the plan’s group
2. HIPAA. The Health Insurance Portability and Accountability Act of 1996
(HIPAA) added a new Part 7 to Title I of ERISA to provide additional health plan245
coverage requirements. Other federal legislation amended Part 7 of ERISA to
require plans to offer specific health benefits. The requirements of Part 7 generally246
apply to group health plans, as well as “health insurance issuers” that offer group
health insurance coverage.247 HIPAA amended ERISA to limit the circumstances
under which a health plan may exclude a participant or beneficiary with a preexisting
condition from coverage.248 This exclusion from coverage cannot be for more than
12 months after an employee enrolls in a health plan (or 18 months for late
enrollees). HIPAA prohibits pre-existing condition coverage exclusions for any

241 A “qualified beneficiary” can be an employee (who loses health coverage due to
termination of employment or a reduction in hours), as well as a spouse or the dependent
child of the employee. 29 U.S.C. § 1167.
242 29 U.S.C. § 1163.
243 29 U.S.C. § 1162(2).
244 See 29 U.S.C. § 1162(2)(A)(iv). For example, in the case of a death of a covered
employee (a qualifying event under Section 603(1) of ERISA) coverage can be up to 36
245 P.L. 104-191, 110 Stat. 1936 (1996). For additional information on HIPAA, see CRS
Report RL31634, The Health Insurance Portability and Accountability Act (HIPAA) of
1996: Overview and Guidance on Frequently Asked Questions, by Hinda Chaikind, Jean
Hearne, Bob Lyke, and Stephen Redhead.
246 A health insurance issuer is defined by ERISA as “an insurance company, insurance
service, or insurance organization (including a health maintenance organization) which is
licensed to engage in the business of insurance in the State....” 29 U.S.C. § 1191b.
247 Group health plans and health insurance issuers that provide health coverage will be
referred to collectively hereinafter as “health plans.”
248 29 U.S.C. § 1181(a)(1)-(3).

conditions relating to pregnancy. Similarly, newborns and adopted children may not
be excluded from plan enrollment if they were covered under “creditable coverage”
within 30 days after birth or adoption, and there has not been a gap of more than 64
days in this coverage.249
HIPAA also created ERISA Section 702, which provides that a group health
plan or health insurance issuer may not base coverage250 eligibility rules on certain
health-related factors, such as medical history or disability.251 In addition, a health
plan may not require an individual to pay a higher premium or contribution than
another “similarly situated” participant, based on these health-related factors.252
HIPAA also added Section 703 of ERISA, which provides that certain health plans
covering multiple employers cannot deny an employer (whose employees are covered
by the plan) coverage under the plan, except for certain reasons, such as an
employer’s failure to pay plan contributions.253
3. Mental Health Parity. In 1996, Congress enacted the Mental Health Parity
Act (MHPA), which added Section 712 of ERISA to create certain requirements for
mental health coverage, if this coverage was offered by a health plan.254 Under the
MHPA, health plans are not required to offer mental health benefits. However, plans
that choose to provide mental health benefits must not impose lower annual and
lifetime dollar limits on these benefits than the limits placed on medical and surgical
benefits. The MHPA allows a plan to decide what mental health benefits are to be
offered; however, the parity requirements do not apply to substance abuse or
chemical dependency treatment.255
Certain plans may be exempt from the MHPA. Plans covering employers with
50 or fewer employees are exempt from compliance. In addition, employers that
experience an increase in claims costs of at least 1% as a result of MHPA compliance
can apply for an exemption. The MHPA was authorized through December 31, 2007.
However, recent efforts have been made to extend these provisions though December256

31, 2008.

4. Maternity Length of Stay. In 1996, Congress passed the Newborns’ and
Mothers’ Health Protection Act (NMHPA), which amended ERISA and established

249 29 U.S.C § 1181(d).
250 “Creditable coverage” as defined under ERISA Section 701(c)(1) (29 U.S.C. §
1181(c)(1)) includes coverage under a group health plan, health insurance, and various other
means of health benefit coverage.
251 29 U.S.C. § 1182(a)(1)(A)-(H).
252 29 U.S.C. § 1182(b)(1).
253 29 U.S.C. § 1183.
254 P.L. 104-204, tit.VII, 110 Stat. 2874 (1996).
255 29 U.S.C. § 1185a(a)(4).
256 See, e.g., H.R. 3997 (Engrossed Amendment as Agreed to by Senate) 110th Cong., 1st
Sess. (2007). See also H.Res. 884 (As passed by the House) 110th Cong., 1st Sess. (2007).

minimum hospital stay requirements for mothers following the birth of a child.257 In
general, the NMHPA prohibits a group health plan or health insurance issuer from
limiting a hospital length of stay in connection with childbirth for the mother or
newborn child to less than 48 hours, following a normal vaginal delivery,258 and to
less than 96 hours, following a cesarean section.259
5. Reconstructive Surgery Following Mastectomies. The Women’s
Health and Cancer Rights Act, enacted in 1998, amended ERISA to require group
health plans providing mastectomy coverage to cover prosthetic devices and
reconstructive surgery.260 Under Section 713 of ERISA, this coverage must be
provided in a manner determined in consultation between the attending physician and
the patient.261
ERISA Title II: Internal Revenue Code Provisions
In order for an employer-sponsored retirement plan to qualify for federal income
tax deferrals and deductions, it must comply with the pension-related provisions of
the Internal Revenue Code (IRC). The pension-related provisions of the IRC require
plans to cover rank-and-file workers, and they include “nondiscrimination rules” that
prohibit qualified plans from favoring highly-compensated employees with respect
to eligibility or benefits.262
A. Limits on Plan Contributions and Benefits
The IRC limits the amount of money that can be contributed on a tax-deductible
basis to a defined benefit plan or defined contribution plan, the amount that can be
paid annually from a defined benefit plan, and the amount of income that can be
taken into consideration when establishing benefits under a defined benefit plan.
1. Defined Benefit Plan Provisions. In 2008, no more than the first
$230,000 of an employee’s annual compensation can be used in computing benefits
or contributions under a DB plan.263 The maximum annual benefit payable in 2008
under a defined benefit plan at age 62 is the lesser of $185,000 or 100% percent of
the participant’s average compensation for his or her three highest years of

257 P.L. 104-204, tit. VI, 110 Stat. 2935 (1996).
258 29 U.S.C. § 1185(a)(1)(A)(I).
259 29 U.S.C. § 1185(a)(1)(A)(ii).
260 P.L. 105-277, 112 Stat. 2681 (1998).
261 29 U.S.C. § 1185b.
262 The Taxpayer Relief Act of 1997 (P.L. 105-34) exempted state and local government
plans from the nondiscrimination, minimum coverage, and minimum participation rules
applicable to qualified plans.
263 26 U.S.C. § 401(a)(17).

earnings.264 This dollar limit is adjusted annually by the increase in the consumer
price index (CPI), and rounded down to the next lower multiple of $5,000. IRC
§415(b) requires the dollar limit on benefits to be actuarially reduced for retirement
before age 62. For qualified police and firefighters with at least 15 years of service,
no actuarial reduction is required. Consequently, the dollar limit for police and
firefighters is the same as the unreduced §415(b) dollar limit, or $185,000 in 2008,
regardless of age.
a. Tax on asset reversions. ERISA prohibits plan sponsors from
withdrawing money from a pension trust fund. However, they can recover “excess”
assets upon terminating a plan, provided they have satisfied all pension claims. The
employer must pay both a corporate income tax and a federal excise tax on the
amount of the asset reversion. The Omnibus Budget Reconciliation Act of 1990
(P.L. 101-508) amended the IRC to increase the excise tax on pension asset
reversions from 15% to 50%, unless the employer: (1) establishes or maintains a
“qualified replacement plan;” (2) provides significant benefit increases; or (3) is in265
bankruptcy liquidation. In these cases, the excise tax is 20%. A qualified
replacement plan must cover at least 95% of the active participants in the terminated
plan, and 25% of the amount the employer could otherwise receive in a reversion
must be transferred to the replacement plan.266 The amount transferred is not subject
to the excise tax or corporate income tax.
b. Transfers of assets to fund retiree health benefits. P.L. 101-508
permitted the transfer of excess assets from a single-employer defined benefit267
pension plan to a retiree health plan. The amount that could be transferred was the
excess of the market value of the plan’s assets over the full funding limit, but could
not exceed what the employer expected to pay in retiree health benefits in that year.
Transfers were limited to the greater of amounts above the plan’s full-funding limit
or 125% of the plan’s current liability. The PPA amended IRC §420 to expand the
ability of defined benefit plan sponsors to transfer surplus plan assets to retiree health
plans. Sponsors of single-employer plans may now transfer excess pension assets to
fund the estimated retiree medical costs for a period of up to 10 years. Plan sponsors
are required to maintain the plan’s funded status during the transfer period, either by
additional contributions or transfers back from the health accounts, and they must
maintain retiree medical benefits at a certain level for the transfer period and for four
years subsequent to the transfer period.
c. Limit on tax deductions for employer contributions. In 2007, the
maximum tax-deductible employer contribution to a defined benefit plan was 150%
of the plan’s current liability minus the value of the plan’s assets. Beginning in 2008,
the maximum tax-deductible employer contribution is (1) the plan’s target normal
cost plus (2) 150% of the funding target plus (3) an allowance for future pay or

264 26 U.S.C. § 415(b).
265 26 U.S.C. § 4980.
266 26 U.S.C. § 4980(d). The replacement plan can be either a DB plan or a DC plan.
267 §§12011 and 12012 of P.L. 101-508. ERISA § 408(b), 29 U.S.C. § 1108(b).

benefit increases minus (4) the value of the plan’s assets.268 Excess employer
contributions to defined benefit plans are subject to a 10% excise tax.
2. Defined Contribution Plan Provisions. IRC §415(c) limits the
maximum “annual addition” to a defined contribution plan (the sum of employer and
employee contributions). In 2008, the maximum annual addition is the lesser of269
$46,000 or 100% of annual compensation. The maximum employee contribution
(called an “elective deferral”) to a 401(k), 403(b), or 457(b) plan is $15,500 in270

2008. This amount is indexed annually in $500 increments.

a. Combined limit under IRC §404(a)(7). IRC §404(a)(7) establishes
limits on employer tax deductions for contributions made in connection with one or
more defined contribution plans and one or more defined benefit plans. One effect
of these limits is that large contributions to a defined benefit plan could result in the
employer’s contributions to the defined contribution plan being nondeductible for
that year. The PPA revised the law such that the combined contribution limit under
§404(a)(7) is determined without regard to defined benefit plans that are insured by
the PBGC. In addition, only employer contributions to a defined contribution plan
that exceed 6% of participant compensation are subject to the limit. Employees’
elective deferrals are disregarded from the deduction limits.
b. “Catch-up” contributions. The Economic Growth and Tax Relief
Reconciliation Act of 2001271 added §414(v) to the Internal Revenue Code. This
amendment allows additional (“catch-up”) contributions by participants in 401(k),
403(b), 457(b), SEP, IRA, and SIMPLE plans who are or will be age 50 or older by
the end of the plan year. These contributions were to “sunset” in 2010, but they
were made permanent by the PPA. The maximum catch-up contribution is the lesser
of (1) a specific dollar limit or (2) the participant’s compensation for the year reduced
by any other elective deferrals made during the year. In 2008, the catch-up dollar
limit for 401(k), 403(b), SEP, and 457(b) plans is $5,000. For SIMPLE plans, the

2008 catch-up dollar limit is $2,500. For IRAs, the catch-up dollar limit is $1,000.

B. Coverage and Nondiscrimination
Tax-qualified retirement plans may not discriminate in favor of highly-
compensated employees (HCEs) with regard to coverage, amount of benefits, or
availability of benefits.272 A “highly compensated employee” is defined in law as
any employee who owns 5% or more of the company or whose compensation in 2008
exceeds $105,000 (indexed to inflation).273 An employer can elect to count as HCEs

268 §801 of the PPA.
269 26 U.S.C. § 415(c)(1)(A).
270 26 U.S.C. § 402(g)(1).
271 P.L. 107-16, 115 Stat. 38 (June 7, 2001).
272 Both DB plans and DC plans are subject to the IRC nondiscrimination test.
273 26 U.S.C. § 414(q).

only employees who rank in the top 20% of compensation in the firm, but must
include anyone who owns 5% or more of the company.
1. Nondiscrimination Test. IRC §410(b) specifies who a qualified plan
must cover. A plan must meet one of the following tests:
!The plan must benefit at least 70% of non-highly compensated
employees. This is called the percentage test.
!The plan must benefit a percentage of nonhighly compensated
employees which is at least 70% of the percentage of highly
compensated employees benefitting under the plan. This is called
the ratio test.
!The plan must benefit a classification of employees that does not
discriminate in favor of highly-compensated employees
(nondiscriminatory classification test) and the average benefit
percentage of the nonhighly compensated employees must be at least
70% of the average benefit percentage of the highly-compensated
employees (average benefit percentage test).
In a defined contribution plan, either the proportion of non-highly compensated
employees (NHCEs) covered by the plan must be at least 70% of the proportion of
highly compensated employees (HCEs) covered by the plan, or the average
contribution percentage for NHCEs must be at least 70% of the average contribution
percentage for HCEs.274 Plans that have after-tax contributions or matching
contributions are subject to the “actual contribution percentage” (ACP) test, which
measures the contribution rate to HCEs’ accounts relative to the contribution rate to
NHCEs’ accounts. Some §403(b) plans are subject to nondiscrimination rules; §457
plans generally are not. The actual contribution percentage of HCEs in a §401(k)
plan generally cannot exceed the limits shown in Table 2.
Table 2. Maximum Average 401(k) Contributions for Highly
Compensated Employees
Nonhighly compensated employees (NHCEs)Highly compensated employees (HCEs)
Maximum average deferral and match:Maximum average deferral and match:
2% of pay or less NHCE percentage X 2
More than 2% and less than 8% of payNHCE percentage + 2%
8% of pay or moreNHCE percentage X 1.25
Note:Deferral and match” is the sum of employer and employee contributions.

274 For the purposes of the latter test, the average contribution percentage is defined as all
employer contributions divided by total compensation. A third test — that at least 70% of
NHCEs must be covered by the plan — will automatically satisfy the first test listed above.

2. Safe Harbor Plans. Any of three “safe-harbor” 401(k) plan designs are
deemed to satisfy the ACP test automatically for employer matching contributions
(up to 6% of compensation):
!The employer matches 100% of employee elective deferrals up to
3% of compensation, and 50% of elective deferrals between 3% and
5% of compensation, and all employer matching contributions vest
!Employer matching contributions can follow any other matching
formula that results in total matching contributions that are no less
than under the first design. All employer matching contributions
must vest immediately.
!The employer automatically contributes an amount equal to at least
3% of pay for all eligible NHCEs. Employer contributions must vest
All 401(k) plans must satisfy an “actual deferral percentage” (ADP) test, which
measures employees’ elective deferrals. The same numerical limits are used as under
the ACP test. Three “safe-harbor” designs, similar to the safe-harbor designs for the
ACP test, are deemed to satisfy the ADP test automatically. In addition,
“cross-testing” allows defined-contribution plans to satisfy the nondiscrimination
tests based on projected account balances at retirement age, rather than current
contribution rates. This permits bigger contributions for older workers. Because
higher-paid employees receive proportionally smaller Social Security benefits relative
to earnings than lower-paid workers, employers are permitted to make larger
contributions on earnings in excess of the Social Security wage base ($102,000 in
2008). Regulations limit the size of the permitted disparity in favor of workers
whose earnings are above the wage base.
C. Distributions from Qualified Plans
The Tax Reform Act of 1986275 created uniform distribution rules for pension
plans and established an excise tax to be imposed for failure to make a required
minimum distribution. This law also specified that, if there were after-tax employee
contributions to a plan, a portion of each payment to the participant is to be
considered a return of employee contributions (and not taxed) and that a portion is
to be considered a return of employer contributions (and subject to tax). Defined
benefit plans and money purchase plans must offer participants a benefit in the form
of a life annuity. Defined benefit and money purchase plans may also offer other
payment options, such as lump-sum distributions. Defined contribution plans other
than money purchase plans usually pay benefits in a single lump-sum or as payments
over a set period of time, such as 5 or 10 years. Some of these plans also offer an
annuity option.
A qualified plan must allow participants to begin receiving benefits by the latest
of (1) age 65 (or the plan’s normal retirement age, if earlier than 65), or (2) after ten

275 P.L. 99-514, 100 Stat. 2085 (Oct. 22, 1986).

years of service, or (3) upon terminating service with the employer.276 Defined
benefit plans and money purchase plans usually allow participants to receive benefits
only after they have reached the plan’s normal retirement age, but some have
provisions for early retirement, often at age 55. Most 401(k) plans allow participants
to receive their account balances when they leave the employer. A 401(k) plan may
allow for distributions while the worker is still employed if he or she has reached age
59½ or has suffered a severe financial hardship, such as facing imminent eviction or
foreclosure. Profit-sharing plans may permit participants to receive their vested
benefits after a specific number of years or when they leave the employer.
Distributions from employer-sponsored plans must start no later than April 1of
the year after the year in which the participant attains age 70½, unless the participant
is still employed by the form that sponsors the plan.277 Failure to make a required
distribution results in an excise tax equal to 50% of the excess of the minimum
required distribution over the amount actually distributed. The amount of the required
minimum distribution is based on the participant’s age and remaining life
expectancy. If a participant in a DB plan retires after age 70½, his or her accrued
pension benefit must be actuarially increased to reflect the value of benefits that
would have been received had the employee retired at age 70½. The actuarial
adjustment rule does not apply to defined contribution plans.
Some employers now offer a “phased retirement” option that allows employees
at or near retirement age to reduce their work hours to part-time and receive a
pension distribution to supplement their reduced earnings. The PPA amended
ERISA to allow defined benefit plans to make in-service distributions to employed
plan participants beginning at the earlier of age 62 or the plan’s normal retirement
age.278 Distributions from a 401(k) plan can be made to a current employee without
penalty beginning at age 59½.279 In-service distributions from either a DB plan or a
DC plan are subject to income taxes.
1. Plan Loans. Qualified plans are permitted, but are not required, to offer
loans to participants. The loan must charge a reasonable rate of interest and be
adequately secured. A loan from a tax-qualified pension plan is treated for federal
income tax purposes as a taxable plan distribution if it exceeds prescribed limits.280
The maximum permissible loan amount takes into account other outstanding plan
loans as well as the present value of the benefits earned by the recipient. A participant
can borrow up to half of the present value of accrued benefits, but no more than
$50,000. The loan must be repaid within five years unless it is used to purchase a
principal residence. Loans that are not repaid when due are treated as taxable

276 ERISA § 206(a), 29 U.S.C. § 1056(a); 26 U.S.C. § 401(a)(14).
277 26 U.S.C. §401(a)(9). Prior to the Small Business Job Protection Act of 1996
distributions had to begin at age 70½, whether or not the participant had retired or separated
from service.
278 ERISA §3(2), 29 U.S.C. §1002(2), as amended by §905 of the PPA.
279 Distributions from a traditional IRA must begin by this date even if the individual is still
working. There are no required distributions from a Roth IRA. 26 U.S.C. §§ 408 and 408A.
280 26 U.S.C. §72(p).

distributions and may also be subject to a 10% additional tax if the recipient was
under age 59½. Defined contribution plans established under §401(k), §403(b), or
§457 also can make distributions in case of financial hardship, such as imminent
eviction or foreclosure. Hardship distributions are subject to income taxes, and if the
recipient is under age 59½, they may be subject to an additional 10% tax.

2. Additional Tax on Early Withdrawals. With certain exceptions, a 10%

additional tax is imposed on distributions from a qualified plan unless the individual281
is age 59½, dies, or becomes disabled. This additional tax does not apply to early
distributions if they are paid:
(1) after the plan participant has reached age 59½;
(2) to a beneficiary after the death of the participant;
(3) because the participant has become disabled;
(4) as part of a series of substantially equal periodic payments (SEPPs) over the
life of the participant or the joint lives of the participant and survivor;
(5) to an employee who has separated from service under an early retirement
arrangement after reaching age 55;282
(6) as dividends paid from an Employee Stock Ownership Plan (ESOP);
(7) through an IRS levy to collect back taxes owed by the plan participant;
(8) to pay medical expenses of the plan participant, a spouse, or dependent, but
only to the extent that they exceed 7.5% of adjusted gross income; or
(9) to an alternate payee under a qualified domestic relations order (QDRO).
3. Rollovers. Departing plan participants can roll over (transfer) distributions
from a qualified plan to an individual retirement account (IRA) or to another
employer’s plan, if the plan accepts such transfers. If the accrued benefit is less than
$5,000 when the participant leaves an employer, the plan can make an immediate
distribution without the participant’s consent. Amounts of $5,000 or more may be
cashed out only with the written consent of the participant. For married workers, the
consent of the worker’s spouse is also required.
If the distribution is more than $1,000, the plan must automatically roll over the
funds into an IRA that it selects, unless the participant elects to receive a lump sum
payment or to roll it over into an IRA that he or she chooses. The plan must first send
a notice allowing the participant to make other arrangements, and it must follow rules
regarding what type of IRA can be used (for example, it cannot combine the
distribution with savings the individual has deposited directly in an IRA). Rollovers
must be made to an entity that is qualified to offer individual retirement plans. Also,
the rollover IRA must have investments designed to preserve principal. The IRA
provider may not charge more in fees and expenses for such plans than it would to
its other IRA customers.
If the departing employee elects to receive a lump sum payment and does not
transfer the money to another qualified employer plan or to an IRA, the participant

281 26 U.S.C. § 72(t).
282 The individual is not prohibited from being employed, or even from returning to work for
the same employer, but there must be a period of separation that began after age 55.

will owe a 10% tax penalty if he or she is under age 59½ and does not meet the
exceptions listed in §72(t). Distributions paid directly to the plan participant rather
than being rolled over into an IRA or a qualified employer plan are subject to
mandatory tax withholding equal to 20% of the total distribution. If the rollover —
which must be equal to the cash received plus the 20% withheld — is completed
within 60 days of the distribution, the tax that was withheld is applied to the
individual’s income tax liability.
D. Integration with Social Security
The Social Security benefit formula is designed to replace a greater percentage
of wages for lower-income workers than for higher-income workers. The Social
Security Administration estimates that for benefits claimed at the full retirement age,
Social Security currently replaces 55% of the average earnings of a low-wage worker
and 27% of the earnings of a high-wage worker.283 Since the Revenue Act of 1942,
it has been permissible for private pension plans to narrow the difference in total
wage replacement by providing larger pension benefits as a percentage of
compensation to higher-paid workers than to lower-paid workers. Plans may
coordinate or “integrate” their retirement benefit formulas with Social Security under
an “offset method” or an “excess method.”284
In defined benefit plans, integration with Social Security is usually related to the
benefit paid to participants, while in defined contribution plans it most often relates
to the contributions made by employers. In an integrated defined benefit plan, the
amount of the worker’s monthly pension is reduced or “offset” by a percentage of his
or her Social Security benefit. In an integrated defined contribution plan, the amount
contributed by the employer is higher for the portion of the employee’s salary that is
in excess of a specific amount, called the integration level. The most common
integration level is the maximum amount of annual income that is subject to Social
Security taxes ($102,000 in 2008). The maximum offset allowed under an offset plan
and the “maximum permitted disparity” allowed under an excess plan are both
limited by the tax code.
E. Special Rules for “Top-heavy” Plans
A defined benefit pension plan is considered “top-heavy” if more than 60% of
benefits (in a DB plan) are earned by key employees or if more than 60% of285
contributions (in a DC plan) are made on behalf of key employees. Key employees
are defined as company officers with earnings over $150,000 in 2008, owners of at
least 1% of the company who receive over $150,000 in annual compensation, and
owners of 5% or more of the company. For any plan year in which a plan is found
to be top-heavy, special requirements must be met if the plan is to retain its tax-

283 For these estimates, a low-wage worker is defined as one who earned 45% of the national
average wage every year and a high-wage earner is defined as one who earned the maximum
amount taxable under Social Security every year.
284 26 U.S.C. § 401(a)(5).
285 26 U.S.C. § 416. Small pension plans are most likely to fall into the top-heavy category.

qualified status. Top-heavy plan requirements fall into two main areas: (1) faster
vesting schedules for non-key employees; and (2) minimum nonintegrated benefits
and contributions for non-key employees.
Top-heavy plans must implement an accelerated vesting schedule. The benefits
vested must include all benefits accrued (earned) under the plan, not just those
accrued while the plan is operating under the special top-heavy rules. Top-heavy
plans may choose from one of two special vesting schedules. Under the first, plan
participants must be 100% vested in their benefits after three years of service. Under
the second, 100% vesting occurs after six years and is reached by stages: 20% of the
employee’s accrued benefits are vested after two years of service, and an additional

20% become vested after each of the next four years.

For years in which a plan is deemed to be top-heavy, the plan must meet specific
minimum benefit and contribution levels for every non-key employee covered by the
plan. The specified minimum benefit or contribution may not be reduced or
eliminated through integration with Social Security. For each year that a defined
benefit plan is top-heavy, a minimum benefit is required equal to 2% of the
employee’s average compensation earned for the five highest consecutive years of
compensation. The highest minimum benefit does not have to exceed 20% of the
non-key employee’s average compensation. For each year that a defined contribution
plan is top-heavy, the employer must make a contribution on behalf of each non-key
employee equal to at least 3% of the employee’s annual compensation.
ERISA Title III: Jurisdiction, Administration, and
Title III of ERISA covers jurisdictional, administrative and enforcement
matters.286 Under this title, various enforcement and regulatory responsibilities are
coordinated between the Department of Labor, the Treasury Department, and the
Pension Benefit Guaranty Corporation (PBGC).
Under Section 3001 of ERISA, before the Treasury Department issues a
determination letter regarding whether a plan has met certain requirements under the
Internal Revenue Code, the Treasury Department must allow certain employees, as
well as the Department of Labor and the PBGC, the opportunity to comment on the
application. Section 3002 provides that if the Secretary of Labor or the PBGC want
to bring a claim against a party for violation of the participation, vesting, or funding
provisions of ERISA, the Secretary and the PBGC must give the Secretary of the
Treasury a reasonable opportunity to review the brief.287 ERISA also gives the
Secretary of the Treasury the right to intervene in these cases.
Section 3003 provides that unless collection of the tax is in jeopardy, the
Secretary of the Treasury must notify the Secretary of Labor before sending a notice

286 ERISA Section 3001 et. seq., 29 U.S.C. § 1201 et. seq.
287 ERISA Section 3002 et. seq., 29 U.S.C. § 1202 et. seq.

of deficiency relating to a tax imposed on a prohibited transaction.288 The Secretary
of the Treasury must also give the Secretary of Labor an opportunity to comment on
the imposition of the tax.289 Under Section 3004 of ERISA, whenever the Secretary
of the Treasury and the Secretary of Labor are required to carry out provisions in
ERISA (or a federal law amended by ERISA) that relate to the same subject matter,
the Secretaries must consult with each other to develop rules, regulations, practices,
and forms.290 This collaboration is to encourage efficient administration of the
provisions, and prevent duplication of efforts by the agencies, as well as creation of
additional burden for plan administrators, employers, participants and
ERISA Title IV: Pension Benefit Guaranty
Corporation and Plan Termination
Title IV of ERISA established the Pension Benefit Guaranty Corporation
(PBGC) as a government-owned corporation to protect the retirement income of
participants and beneficiaries in private-sector defined benefit pension plans.
Defined contribution plans such as ESOPs, profit-sharing plans, 401(k), 403(b),
thrift/savings plans, and stock bonus plans are not insured by the PBGC. The
insurance program treats pension plans differently depending on whether they are
single-employer plans or multiemployer plans (i.e., collectively bargained plans to
which more than one company makes contributions). The PBGC maintains separate
reserve funds for single-employer plans and multiemployer plans.
A. Premiums for Single-employer Plans
The PBGC receives no appropriations from Congress. Its revenues come from
premiums paid by employers that sponsor defined benefit pension plans, the assets
of the terminated plans that it has taken over, investment income on its trust funds,
and amounts recovered from the general assets of firms that terminate underfunded
pension plans. Although it receives no appropriations, the Multiemployer Pension
Plan Amendments Act of 1980 (P.L. 96-364) requires the PBGC’s receipts and
disbursements to be included in the federal budget. The PBGC does not have the
legal authority to set its own premiums, which are set in law by Congress. The
PBGC single-employer insurance program receives two types of premiums from plan
sponsors: a per-capita premium that is charged to all single-employer defined benefit
plans and a variable premium charged to underfunded plans. The Deficit Reduction

288 See section I(I) which discusses prohibited transactions under ERISA.
289 ERISA Section 3003 et. seq., 29 U.S.C. § 1203 et. seq.
290 ERISA Section 3004, 29 U.S.C. § 1204 et. seq. Whether provisions of ERISA relate to
the same subject matter under Section 3004 is determined by the Secretaries of Labor and
the Treasury.
291 Other requirements are provided under Title III. See ERISA Section 3001 et. seq., 29
U.S.C. § 1201 et. seq.

Act of 2005292 increased the per capita premium from $19 per year to $30 per year for
single-employer plans and indexed future premiums to average national wage
growth. The per-capita premium is $33 in 2008.
The variable premium is equal to $9 per $1,000 of underfunded vested benefits.
The interest rate for determining the amount of underfunding subject to the variable
rate premium is based on a composite corporate bond rate for the month preceding
the month in which the premium payment year begins. Under prior law, an
underfunded plan was exempted from the variable-rate premium if it was not
underfunded in any two consecutive years out of the previous three years. Under the
PPA, the variable premium is assessed on all underfunded plans, regardless of the
plan’s funding status in earlier years. For employers with 25 or fewer employees,
the variable premium is $5 per participant.
The PPA made permanent a surcharge premium for certain distress terminations
that was added by P.L. 109-171 and was to expire in 2010. An annual surcharge of
$1,250 per participant will be assessed for three years against any firm that terminates
an underfunded pension plan during bankruptcy if it later emerges from bankruptcy.
B. PBGC Insurance Limit
The PBGC guarantees only “basic benefits.” Basic benefits include pension
benefits beginning at normal retirement age (usually age 65), certain early retirement
and disability benefits, and benefits for survivors of deceased plan participants.293
Only vested benefits are insured. ERISA sets a limit on the benefits insured by the
PBGC. This limit is adjusted annually for increases in wage growth in the economy.
For pension plans ending in 2008, the maximum yearly pension guarantee is $51,750
for a participant retiring at age 65. The maximum insured benefit is reduced
actuarially if a participant retires before age 65 or if the pension plan provides
benefits in a form other than a life annuity.294 Benefits are insured at their nominal
value: once the insured benefit amount is determined, it is not adjusted for inflation.
Benefit increases that went into effect less than five years before a plan was
terminated are not fully insured. Insurance on these benefits is phased in,
guaranteeing 20% of the increase in benefits for each full year since the amendment
that increased plan benefits was adopted.
C. Plan Terminations295
A sponsor of a single-employer plan can voluntarily end the pension plan in one
of two ways: (1) a “standard” termination if the plan is fully funded; or (2) a

292 P.L. 109-171, 120 Stat. 4 (Feb. 8, 2006).
293 ERISA § 4022, 29 U.S.C. § 1322.
294 For example, for plans terminated in 2008, the maximum yearly guarantee for someone
who retires at age 62 is $40,882; for someone who retires at age 55 it is $23,287. The
maximum PBGC guaranteed benefit is not reduced for participants who elect early
retirement with a disability that meets the standards for Social Security disability benefits.
295 ERISA §§ 4041-4048; 29 U.S.C. §§ 1341-1348.

“distress” termination that allows a sponsor in serious financial trouble to terminate
a plan that may be less than fully funded. In addition, the PBGC may terminate a plan
involuntarily if certain conditions are met. The PBGC becomes responsible for
paying benefits in the case of a distress or involuntary termination.
1. Standard Termination. An employer can end a plan through a standard
termination only if the plan’s assets are sufficient to cover all of the plan’s liabilities.
Participants and beneficiaries must be informed of the amounts due them, including
the data and underlying actuarial assumptions used to compute the benefits. An
actuary must certify that the assets are sufficient to meet all plan liabilities. If the
rules for a standard termination have been met, the plan sponsor purchases annuities
from a commercial insurer or distributes lump-sum payments to beneficiaries. The
employer then has no further liability to the PBGC or plan participants and can
recapture any remaining assets after paying all applicable taxes.
2. Distress Termination. An employer can terminate an underfunded plan
under a distress termination only if one of the following conditions applies:
!Bankruptcy proceedings seeking liquidation have been filed by or
against the company under Chapter 7 of the Bankruptcy Code;
!The company is undergoing reorganization under Chapter 11of the
Code and the bankruptcy court has approved a plan termination;
!The company is unable to pay its debts when due and will be unable
to continue in business unless the plan is ended; or
!The company has experienced unreasonably burdensome pension
costs solely as a result of a decline in its workforce.
One of the criteria for a distress termination must be met by each company that
is a contributing sponsor of the plan or a “substantial member” of the sponsor’s
controlled group. Generally, a substantial member is a company whose assets
comprise 5% or more of the total assets of the controlled group. The controlled group
includes corporate parents and affiliates of the plan sponsor.
3. Involuntary Termination. The PBGC may end a pension plan even if a
company has not filed to do so on its own initiative. PBGC may end the plan if:
!The plan has not met the minimum funding requirements;
!The plan cannot pay current benefits when due;
!A lump-sum payment has been made to a participant who is a
substantial owner of the sponsoring company; or
!The loss to the PBGC is expected to increase unreasonably if the
plan is not ended.
D. Employer Liability to the PBGC296
In a distress termination, or in an involuntary termination initiated by the PBGC,
a pension plan sponsor is liable to the PBGC for any unfunded benefit liabilities. The

296 ERISA §§ 4061-4071; 29 U.S.C. §§ 1361-1371.

plan sponsor and members of the controlled group are jointly and severally liable for
such obligation, so each member can be held responsible for the entire liability. Each
contributing sponsor also would be liable to the PBGC if the plan had an
accumulated funding deficiency or a waived funding deficiency. The employer
liability to the PBGC is due on the termination date, except that the PBGC can
prescribe commercially reasonable terms for payment of employer liability that
exceeds 30 percent of the net worth of the employer. If a company sells or transfers
a business with an underfunded pension plan for the purpose of evading pension
liabilities and the plan is ended within five years of the sale or transfer, the firm can
be held liable for unfunded liabilities existing at the time of sale.
E. Reportable Events
The PBGC must be notified of certain events, including: (1) if the plan is
deemed not in compliance with the law; (2) if an amendment has been adopted
decreasing benefits; (3) if there has been a substantial drop in the number of active
participants; (4) if the plan does not meet the minimum funding standards or is
unable to pay benefits; or (5) if there is a distribution of $10,000 or more to a
substantial owner. The PBGC also must be notified if a controlled group member
leaves the group, liquidates, declares an extraordinary dividend, or redeems 10% or
more of total voting stock.
F. Notice Requirements
As amended by the PPA, ERISA requires that if a defined benefit plan
terminates while it is underfunded through a distress termination under ERISA
§4041(c), or is subject to an involuntary termination under ERISA §4042, the plan
sponsor must provide to plan participants the same information that the plan is
required to submit to the PBGC — subject to confidentiality limitations — within 15297
days of the PBGC filing. This requirement applies to notices of intent to terminate
and involuntary termination determinations.
G. Premiums for Multiemployer Pension Plans298
Multiemployer pension plans were covered by PBGC insurance by the
Multiemployer Pension Plan Amendments Act of 1980 (P.L. 96-364). The rules for
multiemployer plans differ from those applicable to single-employer plans because
of the special nature of these arrangements. The PBGC is required to provide
financial assistance to insolvent multiemployer plans, whether or not they are
terminated, when the assistance is needed to enable the plan to pay guaranteed
benefits. The PBGC guarantees 100% of the first $11 of monthly benefits earned per
year of service plus 75% of the next $33 of monthly benefits per year of service. The
75% guarantee is reduced to 65% if the plan does not meet specified funding
requirements. The annual insurance premium charged for each plan participant in a
multiemployer plan is $9 in 2008 and is indexed to wage growth in future years.

297 Section 506 of the PPA, amending ERISA § 4041.
298 ERISA § 4006; 29 U.S.C. § 1306.

H. Withdrawal Liability299
Employers who leave a multiemployer plan for any reason continue to be liable
for a portion of any underfunding. The purpose of the withdrawal liability is to
protect the remaining contributing employers and the PBGC from having to assume
the burden of funding the pension obligations of employers who cease contributing
to the plan. The withdrawal liability is imposed at the time of withdrawal and does
not depend on the actual termination of the plan. This rule is designed to discourage
withdrawals by requiring each employer to continue funding its share of the plan’s
unfunded vested liability. Withdrawal liability is equal to an employer’s share of the
plan’s unfunded vested liability determined under one of several rules that may be
adopted by the plan, and is payable to the plan in annual installments for a period of
up to 20 years. An employer first entering a multiemployer plan is allowed a six-year
“free look” during which it can participate in the plan without incurring withdrawal
liability. This provision is not available if the employer would account for 2% or
more of total contributions to the plan.

299 ERISA §§ 4201-4225; 29 U.S.C. §§ 1381-1405.

This glossary contains terms used within ERISA and the Internal Revenue Code.
It also contains certain abbreviations used within this report.
Accrual of Benefits. In the case of a defined benefit pension plan, the process of
accumulating pension credits for years of service, expressed in the form of an annual
benefit that is first paid at normal retirement age (usually age 65). In the case of a
defined contribution plan, the process of accumulating assets from contributions and
investment earnings in an individual employee’s plan account.
Accrual Rate. The benefit amount or percentage of pre-retirement salary earned for
a year of service.
Accrued Liability. The present value of future benefits less the present value of the
contributions for future normal costs, taking into consideration projected salary
increases and future service.
Actuarial Liability. Actuarial cost methods generally divide the present value of
future benefits into two parts: the part attributable to the past and the part attributable
to the future. The part attributable to the past is called the actuarial liability while
that attributable to the future is called the present value of future normal costs.
Actuarial Assumption. Assumptions about future economic and demographic
developments related to the pension plan that are used by plan actuaries in calculating
the annual pension contribution. There are two key actuarial assumptions for pension
funds: the interest rate assumption and the salary assumption. The former is an
assumption about the investment return likely to be earned by the assets of a pension
fund over a long period of time. The latter is an estimate of how rapidly employee
salaries will increase over the same period.
Actuarial Funding Method. The schedule of contributions to meet the plan’s
liabilities for benefit payments. There are several allowable funding methods, and
each produces a different flow of contributions. Some produce increasing
contributions, others level contributions, and still others declining contributions.
Amortization. Paying off a liability through a series of installments, including
Annuity. (a) The specified monthly or annual payment to a pensioner, often used
interchangeably with the term “pension;” (b) A contract that provides an income for
a specified period of time, such as a number of years or for life; (c) The periodic
payments provided under an annuity contract with a commercial insurance company.
Beneficiary. A person designated by a pension plan participant, or by the terms of
an employee benefit plan, who is or may become entitled to a benefit under that plan
(e.g., a spouse).

Cash Balance Plan. A cash balance plan is a defined benefit plan that defines the
benefit in terms of a stated account balance. Cash balance plans are sometimes called
hybrid plans because, while they are considered to be defined benefit plans, they are
designed to look to participants much like defined contribution plans. The
participant is credited with a percentage of pay each year in a hypothetical account
on which the employer pays interest. These accounts, however, are merely
accounting devices that track the worker’s accrued benefit. They are not individual
accounts owned by the participants, as they would be in a defined contribution plan.
As a defined benefit plan, a cash balance plan must offer participants the option of
receiving an annuity at retirement age. Most cash balance plans also offer separating
employees a lump sum payment in lieu of an annuity.
Cash or Deferred Arrangement. See 401(k) plan.
Catch-up contributions. Additional contributions to IRAs and defined contributions
by persons age 50 or older authorized by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (P.L. 107-16). In 2008, the maximum permissible catch-
up contribution to a traditional IRA or Roth IRA is $1,000. The maximum
permissible catch-up contribution to a SIMPLE-IRA is $2,500 and the maximum
permissible catch-up contribution to a 401(k), 403(b), or 457 plan is $5,000.
Church Plan. A plan established or maintained for its employees by a church or
convention of churches exempt from federal tax.
Controlled Group. A controlled group of corporations is any parent-subsidiary or
other group of related corporations where 50% or more of such corporations is owned
by the same or related persons taking into account only persons with ownership
interests of 5% or more.
Current Liability. The present value of accrued benefits using an interest
assumption that is within a permitted range. There is no consideration of future salary
increases or future service.
Defined Benefit Plan. A pension plan that specifies the benefits or the method of
determining the benefits, but not the contribution. Specification of benefits can be
done in several ways: a specified amount per month for each year of service payable
at retirement (dollar benefit); a stated percentage of compensation (fixed benefit); or
a stated percentage of compensation for each year of service (unit benefit). Employer
contributions to a defined benefit plan are determined actuarially on the basis of the
benefits expected to become payable. The company bears the risk of investment
performance and must compensate the plan for any shortfalls in funding.
Defined Contribution Plan. A pension plan in which the contributions are specified,
but not the benefits. Examples are money purchase plans, 401(k) salary deferral
plans, and profit-sharing plans. Under ERISA, a defined contribution plan (also
called “an individual account” plan) is a plan that provides an individual account for
each participant that accrues benefits based solely on the amount contributed to the
account, and any income, expenses, gains and losses, and reallocation of any
forfeitures of accounts of other participants. The employee bears the investment risk.

Early Retirement. Retirement at an age younger than the normal retirement age
specified in an employee pension benefit plan at which participants may first receive
pension benefits. The benefit payable to an early retiree is usually reduced to account
for the longer payout period.
Employee Benefit Plan. An employee welfare benefit plan or an employee pension
benefit plan.
Employee Pension Benefit Plan. Any plan, fund, or program established or
maintained by an employer or by an employee organization that provides retirement
income or that results in the deferral of income.
Employee Stock Ownership Plan (ESOP). An ESOP is a defined contribution plan
that provides shares of stock in the sponsoring company to participating employees.
An ESOP is required to invest primarily in employer stock and is permitted to borrow
money on a tax-deductible basis to purchase this stock.
Employee Welfare Benefit Plan. Any plan, fund, or program established or
maintained by an employer or by an employee organization that provides through the
purchase of insurance or otherwise (a) medical, surgical, or hospital care or benefits
in the event of sickness, accident, disability, or death, (b) unemployment or vacation
benefits, (c) apprenticeship or other training programs, (d) day care centers,
scholarship funds, or prepaid legal services, and (e) “pooled vacation, holiday,
severance, or similar benefits” provided by a joint trust fund.
Fiduciary. In the context of ERISA, a fiduciary is a person who exercises any
discretionary authority or control with respect to the management of the plan or
exercises any authority with respect to the management or disposition of plan assets;
(2) renders investment advice for a fee or other compensation with respect to any
plan asset or has any authority or responsibility to do so; or (3) has any discretionary
responsibility in the administration of the plan.

401(k) Plan. A 401(k) plan, also known as a salary reduction plan or a cash-or-

deferred-arrangement (CODA), is a defined contribution plan in which employees
may elect to save part of their salaries and defer paying tax on the deferred salary and
related investment earnings until the money is taken out of the plan. Companies may
make matching or unilateral contributions which are also tax-deferred. Section

401(k) of the tax code was added by the Revenue Act of 1978 (P.L. 95-600)

403(b) Plan. A 403(b) is a tax deferred retirement annuity available to employees
of educational institutions and certain non-profit organizations as determined by
Section 501(c)(3) of the Internal Revenue Code. Employee contributions are made
on a pre-tax basis and investment earnings grow tax deferred until they are
withdrawn, at which time they are taxed as ordinary income. Section 403(b) of the
Internal Revenue Code was added by the Technical Amendments of 1958 (P.L. 85-


457 Plan. A 457 plan is a nonqualified deferred compensation plan in which
employees of state and local governments or tax-exempt organizations under IRC
§501 can defer income on a pre-tax basis. Investment gains accumulate tax-deferred

until withdrawn from the plan. A state or local government 457 plan must be made
available to all employees, but in many tax-exempt organizations 457 plans are
offered to only a select group of employees, in the same manner as a nonqualified
plan would be in a private-sector company.
Funding. A systematic program under which assets are set aside in amounts
sufficient to assure the future payment of a pension plan’s promised benefits.
Governmental Plan. A plan established or maintained by federal, state, or local
government, and also any plan to which the Railroad Retirement Act applies.
Individual Account Plan. See “Defined Contribution Plan.”
Individual Retirement Account (IRA). An IRA can be either an “individual
retirement account” or an “individual retirement annuity” There are several types of
IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs. Traditional and
Roth IRAs are established by individuals. In 2008, workers can contribute the lesser
of $5,000 or 100% of compensation to an IRA. Contributions to a traditional IRA are
tax-deductible if the worker’s employer does not offer a retirement plan or the
worker’s family income falls below thresholds set in law. Investment gains accrue
on a tax-deferred basis. Withdrawals are taxed as ordinary income and withdrawals
before age 59½ may be subject to an additional 10% tax. Contributions to a Roth
IRA are not tax-deductible, but distributions from a Roth IRA are tax-free.
Joint and Survivor Annuity. An annuity paid over the joint life expectancy of the
participant and spouse. ERISA requires that the annuity payable to the surviving
spouse be at least 50% of the reduced annuity paid while the participant was alive.
The survivor annuity is automatically provided to a qualifying spouse unless both
participant and spouse elect in writing to waive it.
Money Purchase Plan. A type of defined contribution plan that provides for fixed
contributions. Employer contributions usually are specified a percentage of current
compensation and are allocated to individual accounts. The benefits for each
employee usually are provided in the form of an annuity based on the amount
accumulated in the account including related investment earnings.
Multiemployer Pension Plan. A collectively bargained arrangement in which two
or more employers in a particular trade or industry participate in one plan covering
a geographical area. These plans are common in the building and construction
industry, coal mining, and trucking.
Nonqualified plan. A nonqualified plan is an employer-sponsored retirement plan
or deferred compensation plan that does not meet the tax-qualification requirements
under Internal Revenue Code §401. A nonqualified plan allows an employee to defer
the receipt of income until some future year. For taxes to be deferred, the deferred
compensation arrangement must be entered into before the compensation is earned
by the employee; the deferred compensation cannot be available to the employee
until a previously agreed upon future date or event, and the amount of the deferred
compensation cannot be secured and must remain available to the employer’s

creditors. Nonqualified deferred compensation arrangements are most often
established for highly-compensated employees.
Normal Cost. Annual cost of future pension benefits and administrative expenses
assigned, under an actuarial cost method, for the year following the plan’s valuation
Normal Retirement Age. The age, as established by a plan, when retirement occurs
with unreduced benefits. Since unreduced Social Security benefits were originally
available at age 65, that is the most common normal retirement age used in pension
plans. ERISA defines “normal retirement age” as the earlier of (a) the age at which
a plan participant becomes eligible for retirement under the plan; or (b) the later of
(1) the date on which a plan participant attains age 65; or (2) the fifth anniversary of
the date on which a plan participant commenced participation.
Party-In-Interest. Includes: (a) any fiduciary (administrator, officer, trustee, or
custodian), counsel, or employee of an employee benefit plan; (b) a person providing
services to such plan; (c) an employer, any of whose employees are covered by the
plan; (d) a relative of any of the foregoing; and (e) an employee organization, any of
whose members are covered by the plan.
Pension Plan Integration. A method for adjusting pension benefits based on the
amount a participant receives from Social Security. Social Security benefits are
weighted, or tilted, in favor of lower-paid workers. Because the formula of an
integrated plan partially reverses the effect of the Social Security tilt, these plans by
themselves provide pension benefits in favor of higher-paid workers. A plan
generally will meet Internal Revenue Service requirements if the difference in plan
benefits between high-paid and low-paid workers is within a “permitted disparity.”
PPA. Pension Protection Act of 2006, P.L. 109-280, 120 Stat. 780 (Aug. 17, 2006).
Present Value of Accrued Benefits. The value of benefits accrued to date without
consideration of future salary increases or future service, expressed as a lump sum.
Profit-sharing Plan. A profit-sharing plan is a defined contribution plan in which
all contributions are made by the employer. Contributions do not have to be related
to profits. A company is not obligated to contribute to the plan on a regular basis.
Contributions are typically divided among participants in proportion to their
earnings, with larger contributions made to higher-paid workers.
Qualified Domestic Relations Order. A judgment, decree, or order (including
approval of a property settlement agreement) that (1) relates to the provision of child
support, alimony payments, or marital property rights to a spouse, former spouse,
child, or other dependent of a participant and (2) is made pursuant to a state domestic
relations law (including a community property law).
REA. Retirement Equity Act of 1984, P.L. 98-397, 98 Stat. 1451 (1984).
Safe Harbor 401(k). A safe-harbor 401(k) is exempted from nondiscrimination
testing. Employers are required to make fully-vested contributions on behalf of

employees. Safe harbor contributions can be structured either as matching
contributions or non-elective contributions made on behalf of all plan participants.
SEP IRA. A Simplified Employee Pension, commonly known as a SEP-IRA, is a
retirement plan specifically designed for self-employed people and small-business
owners. Employer contributions are made into each eligible employee’s SEP-IRA.
Tax-deductible contributions may total the lesser of 25% of compensation or $46,000
for 2008. All SEP-IRA contributions must be made by the employer, and the same
percentage of compensation must be contributed for each eligible employee (based
on W-2 wages) including the employer. Annual contributions are not required.
SIMPLE IRA. The SIMPLE IRA is an employer-sponsored retirement plan for
businesses with 100 or fewer employees. SIMPLE plans are funded by employer
contributions and can be funded by elective employee salary deferrals. Any small
business with 100 or fewer employees who earned at least $5,000 in the preceding
year can establish a SIMPLE-IRA plan, provided the employer does not concurrently
maintain any other employer-sponsored retirement plan. In 2008, eligible employees
can elect to contribute the lesser of 100% of compensation or $10,500 through salary
reduction. Participants age 50 and older in 2008 may be able to make an additional
annual $2,500 contribution to a SIMPLE-IRA. Employers can choose from two
different contribution methods. The matching option requires the employer to match
each participant’s contributions dollar-for-dollar up to 3% of compensation but no
more than $10,500 for 2008. The employer can reduce the match to as little as 1%
of each participant’s compensation for any two years in a five-year period. The
non-elective contribution option requires the employer to contribute 2% of each
eligible employee’s compensation each year, up to a maximum of $4,600 for 2008,
regardless of whether the participant contributes or not.
Stock Bonus Plan. A profit-sharing plan that delivers benefits to employees in the
form of stock instead of cash.
Target Benefit Plan. A target benefit is a defined contribution plan in which the
annual contribution is determined by the amount needed to accumulate (at an
assumed rate of interest) sufficient funds to pay a projected retirement benefit — the
target benefit — to each participant at retirement age. The contribution to a target
benefit plan is based on actuarial assumptions about interest rates, mortality, and
employee turnover similar to those used in a defined benefit plan. The contributions
to the plan are allocated to separate accounts for each participant. If earnings of the
fund differ from those assumed, this does not result in any increase or decrease in
employer contributions; instead, it increases or decreases the benefits payable to the
participant. An employee’s age is one of the factors that determines the size of the
contributions. Employer contributions to a target benefit plan are larger for older
employees than for younger employees.
Thrift Plan (or Savings Plan). A thrift plan is an employee-funded savings plan.
An employee generally makes contributions, often stated as a percentage of pay, to
an account established in his or her name. The contributions may be matched in full
or in part by the employer, but there is no legal requirement for employer
contributions. Prior to the Revenue Act of 1978, employee contributions to thrift
plans were made on an after-tax basis. The 1978 law added Section 401(k) to the

Internal Revenue Code, which allowed income taxes to be deferred on employee
contributions to these plans.
Vesting. Earning a nonforfeitable right to a pension benefit. A plan must provide
that an employee will retain, after meeting certain requirements, a right to at least
some, and perhaps all, of the benefits he/she has accrued, even if the employee ceases
employment under the plan before reaching the eligibility age for benefits. An
employee who has met such requirements is said to have a “vested” or
“nonforfeitable” right to benefits. Voluntary and mandatory employee contributions
are always fully vested when received by the plan.