By Ian Berger, JD
Contrary to urban legend, ERISA does not stand for “Every Ridiculous Idea Since Adam.” Instead, it is an acronym for the Employee Retirement Income Security Act of 1974. ERISA is a federal law that regulates employer-sponsored retirement plans and health plans. (ERISA does not cover IRAs because they are not sponsored by an employer.)
For retirement plans, ERISA imposes certain requirements on the sponsoring employer and other plan officials. These requirements include:
- Filing annual reports with the IRS;
- Providing certain communications to plan participants, including a plan summary (called a “summary plan description”);
- Complying with certain standards for eligibility, vesting and plan funding;
- Managing the plan and investing plan assets solely in the interest of plan participants; and
- Maintaining a procedure for plan participants to file claims and appeals of denied claims.
When Congress enacted ERISA, it carved out certain plans from coverage. However, many non-ERISA plans must still follow some or all of the ERISA rules (or similar rules) if required under the tax code or state law.
So, which plans are covered?
- Most private sector retirement plans, including most 401(k) plans and pension plans.
- Many section 403(b) plans sponsored by private tax-exempt employers.
These plans are not covered:
- Plans with no employees other than the owner and the owner’s spouse (like a solo 401(k) plan).
- Section 403(b) plans sponsored by private tax-exempt employers – if the employer does not make contributions to the plan and the employer’s only involvement with the plan is administering employee elective deferrals.
- Plans sponsored by governmental or church employers. These include the Thrift Savings Plan, which is a 401(k)-type plan for federal government employees and the military. Also not covered are 403(b) plans for public school or church employees and section 457(b) plans.
- Non-qualified plans.
SEP-IRAs and SIMPLE-IRAs are technically covered by ERISA, but are exempt from most ERISA rules.
If you’re in an ERISA plan, you generally have more protection than if you’re in a non-ERISA plan. This is especially true when it comes to protection against creditors.
Plans covered by ERISA must completely shield plan assets from your creditors – whether or not you have declared bankruptcy. If you’re in a non-ERISA plan, you have unlimited protection if you’ve declared bankruptcy. But if you haven’t declared bankruptcy, your level of protection depends on the law of the state where you live. Some states provide protection comparable to federal law protection, while others provide weaker protection.
ERISA-covered plans must also provide certain protection to spouses of plan participants.