Legal Definitions - Employee Retirement Income Security Act

ERISA stands for the Employee Retirement Income Security Act.

ERISA is a comprehensive federal law enacted in 1974 that sets minimum standards for most voluntarily established private-sector retirement and health plans. Its primary purpose is to protect the interests of individuals participating in these plans and their beneficiaries. ERISA achieves this by:

• Requiring plans to provide participants with information about their benefits.
• Establishing strict responsibilities for those who manage plan assets (known as "fiduciaries").
• Setting rules for the funding, vesting, and termination of pension plans.
• Providing participants with the right to sue for benefits and breaches of fiduciary duty.
• Establishing the Pension Benefit Guaranty Corporation (PBGC) to insure certain types of defined-benefit pension plans.

While often associated with retirement plans like 401(k)s and traditional pensions, ERISA also covers employer-sponsored welfare benefit plans, such as health insurance, life insurance, and disability benefits.

Here are some examples of how ERISA applies:

• Example 1: Protecting Retirement Savings from Mismanagement

  Imagine a company, "InnovateTech," offers its employees a 401(k) retirement plan. The company's HR director, who also serves as a plan administrator, decides to invest a large portion of the employees' collective 401(k) funds into a single, highly speculative cryptocurrency venture, believing it will yield quick, massive returns. This investment goes sour, and employees see significant losses in their retirement accounts.

  How ERISA applies: ERISA imposes strict "fiduciary duties" on anyone who manages an employee benefit plan. The HR director, as a fiduciary, has a legal obligation to act solely in the best interests of the plan participants and to diversify investments prudently. By placing a large, undiversified bet on a speculative asset, the HR director likely breached their ERISA fiduciary duties. Employees could use ERISA to sue the company and the HR director to recover their losses, as the law provides protections against such mismanagement and imprudent investment decisions.

• Example 2: Challenging a Health Insurance Benefit Denial

  Sarah works for "Global Logistics Inc.," which provides health insurance to its employees through a self-funded plan. Sarah undergoes a necessary surgical procedure that her doctor recommended and which she believed was covered. After the surgery, the plan administrator denies a substantial portion of the claim, stating the procedure was "experimental" and therefore not covered, despite her doctor providing extensive documentation of its medical necessity and standard practice.

  How ERISA applies: Most employer-sponsored health plans, especially self-funded ones, are governed by ERISA. ERISA sets forth requirements for how benefit claims must be processed, including deadlines for decisions and the right for participants to appeal a denial. Sarah can use ERISA's provisions to formally appeal the denial, requiring the plan to conduct a full and fair review of her claim and provide specific reasons for its decision. If the appeal is unsuccessful, ERISA allows her to sue the plan in federal court to enforce her rights to the benefits.

• Example 3: Ensuring Pension Benefits After a Company Closure

  A long-standing manufacturing company, "Midwest Gears," operates a traditional "defined benefit" pension plan, promising its employees a specific monthly income upon retirement based on their years of service and salary. Due to economic downturns, Midwest Gears announces it will cease operations and terminate its pension plan. Many employees worry that the company hasn't adequately funded the plan over the years and that their promised retirement income will not be paid.

  How ERISA applies: ERISA established the Pension Benefit Guaranty Corporation (PBGC), a federal agency that insures certain private-sector defined benefit pension plans. If Midwest Gears' plan is covered by the PBGC, this agency would step in to ensure that eligible participants receive at least a portion of their promised benefits, up to certain legal limits, even if the company itself cannot fully pay them. ERISA also sets minimum funding standards for these plans to try and prevent such shortfalls from occurring in the first place, providing a safety net for retirees.