Overview of ERISA’s Legislative and Regulatory Scheme

By Pamela D. Perdue

February 2007

I. Introduction
 
Prior to the enactment of the Employee Retirement Income Security Act of 1974 ("ERISA"), the Internal Revenue Code provided virtually the only rules governing employee benefit plans. However, these rules were hardly all encompassing. Plans could impose stringent vesting requirements such that many long service workers terminated or were terminated without gaining any vested right in their retirement plans. In fact, during the first half of the last century, only approximately 1/3 of workers participating in retirement plans were vested due to stringent vesting standards imposed by the plans.
 
In some instances, plans terminated and/or companies went out of business without adequate means of ensuring the payment of benefits promised under the retirement plan.
 
Even where participants earned vested benefits, their ability to actually enforce their claims would sometimes depend upon the particular jurisdiction in which their claims arose.
 
In 1974, Congress enacted the Employee Retirement Income Security Act ("ERISA") to address these and other concerns.
 
II. Enactment of ERISA
 
A. Generally
 
ERISA was enacted to address these perceived problems and abuses. Specifically, ERISA was designed to:

1. establish equitable standards of plan administration;
 
2. mandate minimum standards of plan design with respect to the vesting of plan benefits;
 
3. require minimum standards of fiscal responsibility by requiring the amortization of unfunded liabilities;
 
4. ensure the vested portion of the unfunded liabilities against the risk of premature plan termination, and
 
5. promote a renewed expansion of private retirement plans and increase the number of participants receiving private retirement benefits.

[HR No. 533, 93d Cong., 2d Sess. reprinted in 1974 U.S. Code Cong. & Admin. News 4640]

In short, the goal of ERISA was to protect participants while also promoting the expansion of the private pension system. This was sought to be accomplished through the enactment of ERISA by the inclusion of provisions designed to ensure that:
 
1. pension plans would be funded adequately;
 
2. plan participants would vest in pension benefits, and
 
3. fiduciaries, that is, those persons charged with administering the plan and its assets, would exercise the highest fiduciary and trust duties with respect to the plan.

 B. How ERISA Addresses the Perceived Abuses
 
1.  Funding and Financial Security
 
ERISA established a minimum funding requirement for pension plans; specifically, in the case of defined benefit plans. Requires the amortization of future costs using some method designed to ensure that the funds will actually be there at retirement; requires plans to use "reasonable funding methods"; imposes excise taxes for failure to comply; continues these requirements even if the plan loses its tax qualified status. These provisions are found at Section 412 of the Internal Revenue Code and in Section 302 of ERISA.
 
2.  Vesting Requirements
 
Imposed, for the first time, minimum in-service vesting requirements; before, only had to be vested upon plan termination or at normal retirement age. ERISA imposed minimum schedule of vesting so that longer service employees would become vested absent normal retirement age. [ERISA § 203] The new post-ERISA minimum vesting requirements are found at Section 411 of the Internal Revenue Code and Section 203 of ERISA.
 
3.  Preemption
 
What about the problem of different courts taking different approaches to such things as benefit claims?
 
In order to provide for uniform administration, ERISA preempts any and all state laws insofar as they relate to any employee benefit plan covered by ERISA. However, under the so called "savings clause", generally, this provision is not to be construed to exempt or relieve any person from any law of any state that regulates insurance, banking or securities. Under the so called "deemer clause", ERISA covered plans are not deemed to be an insurance company or other insurer, bank, trust company or investment company or to be engaged in the business of insurance or banking for purposes of any law of any state purporting to regulate insurance companies, insurance contracts, banks, trust companies or investment companies. In addition, as a result of the Pension Protection Act of 2006, any state law that would restrict or limit the ability of an employer to institute an automatic contribution arrangement (i.e., a Section 401(k) plan that automatically enrolls participants in the absence of an affirmative election and meets certain other requirements) is also preempted by ERISA. However, preemption does not apply to any generally applicable state criminal law. [ERISA § 514]
 
III. Layout and Organization
 
A.  The Employee Retirement Income Security Act of 1974 ("ERISA"), codified at 29 U.S.C. § 1001, et. seq., is an Act consisting of four titles:
 
1.  Title I deals primarily with the rights of participants under a plan and includes requirements for: reporting and disclosure, fiduciary responsibility, vesting, minimum standards for participation, and minimum funding standards.
 
2.  Title II reflects the amendments made by Congress to parallel the Title I requirements under Parts 2 and 3 of Title I of ERISA. In addition, however, Title II contains qualification requirements which are not reflected in Title I. As such, a plan subject to ERISA which is also seeking tax qualification will be required to comply with the provisions of both Title I and Title II of ERISA. However, plans which are subject to Title I but which do not seek tax qualification, such as in the case with most nonqualified plans, will, except where ERISA provides a specific exception, nevertheless be required to comply with the requirements of Title I of ERISA. Note, however, that ERISA provides for relief for most nonqualified plans from the rigorous requirements of Title I.
 
3.  Title III divides the jurisdiction of the Act between the Department of Labor and the Department of the Treasury. In addition, Title III provides for certain notifications between the two and authorizes the two agencies to make arrangements or agreements between them for mutual cooperation and assistance. The jurisdiction between the agencies has now been further refined through the issuance of the Reorganization Plan No. 4 of 1978.
 
4.  Title IV provides for the establishment of the Pension Benefit Guaranty Corporation ("PBGC"), a self-funded governmental organization associated with, but separate from, the Department of Labor, and establishes a termination insurance program for plans subject to Title IV and sets forth termination requirements for those plans that are subject to Title IV. The reason for the enactment of Title IV and the establishment of the PBGC was to ensure participants in covered plans at least a minimum guaranteed benefit without regard to the solvency of the employer. Covered plans are required to pay annual premiums. If the plan terminates with insufficient assets, the PBGC may step in to provide the minimal guaranteed level subject to its right to recoup from the employer and controlled group members.
 
B.  Not all plans subject to Title I of ERISA are also subject to Title IV. Specifically, subject to certain exceptions, the general rule is that Title IV applies to all employee pension benefit plans established or maintained by an employer engaged in commerce or an industry or activity affecting commerce or by any employee organization similarly engaged or by both, which, in practice, satisfied the tax qualification requirements of the Code for the preceding five years. In sum, this means that most pension plans are going to be subject to Title IV subject to the following major exceptions:

 1. An individual account pension plan including a money purchase pension plan and a target benefit plan;
 
2. A governmental plan;
 
3. A church plan, as defined in Section 414(e), that has not elected to be covered by ERISA;
 
4. A plan that is unfunded and that is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees;
 
5. A plan that is maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on contributions and benefits imposed by Section 415 on plans to which that section applies, without regard to whether the plan is funded;
 
6. A plan that is established and maintained exclusively for substantial owners;
 
7. A plan maintained solely for the purpose of complying with applicable worker's compensation laws or unemployment compensation or disability;
 
8. A plan established and maintained by a professional service employer that does not at any time after enactment of ERISA have more than 25 active participants in the plan. [ERISA § 4021(b)]

 C.  With respect to the exception for plans established and maintained by a professional service employer that does not, at any time after the enactment of ERISA, have more than 25 active participants in the plan, the phrase "professional service employer" includes any proprietorship, partnership, corporation or other association or organization owned or controlled by professional individuals or by executors or administrators of professional individuals the principal business of which is the performance of professional services. [ERISA § 4021(c)(2)(A)] The term "professional individual includes but is not limited to physicians, dentists, chiropractors, osteopaths, optometrists, other licensed practitioners of the healing arts, attorneys at law, public accountants, public engineers, architects, draftsmen, actuaries, psychologists, social or physical scientist and those engaged in the performing arts. [ERISA § 4021(c)(2)(B)] This list does not purport to be exhaustive. In attempting to determine whether or types of services not included in the list constitute professional services, the basic rule is that a professional individual is generally one who provides services of a nature that requires advanced knowledge in a field of science or learning that is generally acquired only by a prolonged course of specialized instruction. This type of knowledge and skill is to be distinguished from that which can be learned in a general academic study or through apprenticeship or other similar training. Further, the rendering of a professional service generally requires the consistent exercise of discretion and judgment by the professional individual.
 
IV. Plans Subject to Title I Requirements
 
In many respects, the heart and soul of ERISA can be found in Title I as this is the section that imposes mandatory minimum requirements on plans. For example. a plan subject to Title I is required to satisfy certain minimum coverage and vesting requirements. However, because of ERISA's broad reach, employers sometimes find that even plans established which they did not intend to be tax qualified and which they did not intend to be subject to ERISA, may nevertheless be subject to the minimum requirements of ERISA Title I.
 
The provisions of Title I apply to employee benefit plans established or maintained by an employer engaged in commerce or in any industry affecting commerce or by any organization representing employees engaged in commerce or in any industry or activity affecting commerce or by both. [ERISA § 4(a)] It is not necessary that the arrangement be a formal plan in order for a court to find that the benefit or arrangement is subject to ERISA. Rather, courts have held that the term "plan" in ERISA is synonymous with such words as arrangement, scheme, fund or program. As such, employers are sometimes surprised to find that an arrangement which they considered to be ad hoc or informal is determined to be subject to ERISA.
 
In reviewing whether an arrangement constitutes a plan subject to ERISA, courts generally perform a three step inquiry: (1) whether the arrangement is exempt under regulations including the safe harbor provisions that apply to certain group insurance arrangements or the special safe harbor for tax deferred annuities; (2) whether there is a plan, and (3) whether the employer or employee organization has "established or maintained" the plan for the purpose of providing benefits to its employees. [See, for example, Thompson v. American Home Assur. Co., 95 F.3d 429 (6th Cir. 1996)]
 
A. Welfare Benefit Plan Regulatory Exemptions
 
Regulatory exemptions include:

 For purposes of the definition of "welfare benefit plan" and "welfare plan":

 1. payroll practices such as overtime pay, shift premiums; holiday premiums and weekend premiums;
 
2. payment of normal compensation from the employer's general assets on account of periods of time during which the employee is physically or mentally unable to perform his or her duties or is otherwise absent for medical reasons such as pregnancy, a physical examination or psychiatric treatment, including on vacation, holiday, while on military duty, while training, while on jury duty;
 
3. on premises facilities for recreation, dining or other facilities (other than day care centers) for use by employees or members and on-premises facilities for the treatment of minor injuries or illness or rendering first aid;
 
4. holiday gifts such as turkeys, hams at Christmas and other holiday seasons;
 
5. sales to employees (whether or not at prevailing market prices) of articles, or commodities of the kind which the employer offers for sale in the regular course of business;
 
6. maintenance of a hiring hall facility;
 
7. remembrance funds;
 
8. strike funds;
 
9. industry advance programs, i.e., a program maintained by an employer or a group or association of employers which has no employee participants and does not provide benefits to employees or their dependents, regardless of whether the program serves as a conduit through which funds or other assets are channeled to employee benefit plans covered under ERISA, and
 
10. an unfunded scholarship program including a tuition and education expense refund program, under which payments are made solely from the general assets of an employer or employee organization.
 
[Labor Reg. Section 2510.3-1(b)-(i), & (k)]

 B  Welfare Plan Safe Harbor Exemption
 
The term employee welfare benefit plan and welfare plan shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which:

 1. no contributions are made by an employer or employee organization;
 
2. participation in the program is completely voluntary for employees or members;
 
3. the sole function of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer, and
 
4. the employer or employee organization receives no compensation in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoff.

 [Labor Reg. Section 2510.3-1(j)]

 C.  Pension Benefit Plan Regulatory Exemptions
 
Regulatory exemptions include:

 1. severance pay plans provided that: (1) payments are not contingent, directly or indirectly, on the employee's retirement; (2) the total amount of payments does not exceed the equivalent of twice the employee's annual compensation during the year immediately preceding the year of his severance, and (3) all payments to any employee are completed, in the case of an employee whose service is terminated in connection with a limited program of terminations, within the later of 24 months after the termination of the employee's service, or 24 months after the employee reaches normal retirement age, and in the case of all other employees, within 24 months after the termination of the employee's service;
 
2. bonus programs unless such bonus programs are systematically deferred to termination of covered employment or beyond, or to provide retirement income to employees, and
 
3. individual retirement accounts provided that: (1) no contributions are made by the employer or employee organization; (2) participation is completely voluntary for employees or members; (3) the sole involvement of the employer or employee organization is, without endorsement, to permit the sponsor to publicize the program to employees or members, to collect contributions through payroll deductions or dues checkoffs and to remit them to the sponsor.
 
[Labor Reg. Section 2510.3-2(b)-(e)]

 D.  Special Pension Plan Safe Harbor Exemption for Tax Sheltered Annuities
 
Under a special rule, a Tax Sheltered Annuity is not treated as "established or maintained by an employer" for purposes of the phrases "employee pension benefit plan" and "pension plan" if:
 
1. participation in the program is completely voluntary for employees;
 
2. all rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or by any authorized representative of such employee or beneficiary;
 
3. the sole involvement of the employer is limited to any of the following:
 
a. permitting annuity contractors (including agents or brokers) to publicize their products to employees;
 
b. requesting information concerning the proposed funding media, products or annuity contractors;
 
c. summarizing or otherwise compiling the information provided with respect to the proposed funding media or products which are made available; or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees;
 
d. collecting annuity or custodial account considerations as required by salary reduction agreements or by agreements to forego salary increases, remitting such considerations to annuity contractors and maintaining records of such considerations;
 
e. holding in the employer's name one or more group annuity contracts covering its employees;
 
f. limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice of light of all relevant circumstances (such as the number of employees affected; variety or products available; administrative burdens and cost to employer, and possible interfere with employee performance resulting from direct solicitation by contractors, and

 4. the employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer's duties pursuant to the salary reduction agreement or agreements, to forego salary increases described in the regulation.
 
[Labor Reg. Section 2510.3-2(f)]

E.  What Constitutes a "Plan" for purposes of ERISA
 
At a minimum, in order for a plan subject to ERISA, a reasonable person must be able to ascertain: (1) the intended benefits; (2) the intended beneficiaries; (3) a source of financing as well as (4) procedures to apply and collect benefits. [See, for example, Northwest Airlines, Inc. v. Federal Ins., Co., 32 F. 3d 349, 354 (8th Cir. 1994) (quoting Donovan v. Dillingham, 688 F. 2d 1367, 1373 (11th Ci. 1982) (en banc); accord Bannister v. Sorenson, 103 F. 3d 632, 636 (8th Cir. 1996). Further, the plan must provide benefits for employees.
 
While an employee benefit plan will be subject to ERISA, the extent to which ERISA's substantive rules apply to any given employee benefit plan will depend upon whether the plan qualifies as a pension or welfare plan under ERISA.
 
The term "employee benefit plan" is defined under ERISA to mean an employee welfare benefit plan or an employee pension benefit plan. [ERISA § 3(3)]
 
An "employee welfare benefit plan" means any plan, fund or program established or maintained by an employer or by an employee organization, or by both, to the extent established or maintained for the purpose of providing, to participants or their beneficiaries, through the purchase of insurance or otherwise: (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) certain benefits described in Section 302(c) of the Labor Management Relations Act of 1947, that is, certain plans providing for holiday, severance or similar benefits. [ERISA § 3(1)]
 
An employee pension benefit plan means any plan, fund or program established or maintained by an employer by an employee organization or by both which provides retirement income to employees or results in the deferral of income by employees for periods extending to the termination of covered employment or beyond. [ERISA § 3(2)(A)] In some instances, an employment contract may constitute an employee pension benefit plan.
 
However, excluded from the requirements of Title I are the following:

 1. a governmental plan, as defined in Section 3(32) of ERISA;
 
2. a church plan, as defined in Section 3(33) of ERISA, that has not elected to be covered by ERISA;
 
3. a plan maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws;
 
4. a plan maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens, or
 
5. an unfunded excess benefit plan, as defined in Section 3(36). [ERISA § 4(b)]
 
6. also excluded from most of ERISA's provisions are Top Hat Plans, that is, an unfunded plan maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees [ERISA § 201(2)]
 
In addition to the above statutory exemptions, as discussed previously, the following plans are excluded by regulation:
 
7. Title I of ERISA does not apply to a plan which does not cover "employees"; a plan which benefits only owners and their spouses. [DOL Reg. § 2510.3-3(b)] [Note, however, that such plans may have other reporting obligations under the Internal Revenue Code, such as an obligation, in certain instances to file an annual report]
 
8. Welfare benefit plans are exempt from most of the provisions of Title I and are subject to lesser reporting requirements;
 
9. Most standard payroll practices are exempt from the provisions of Title I [DOL Reg. § 2510.3-1(b)];
 
10. Holiday gifts such as hams, turkeys given by an employer to an employee during the holiday season [DOL Reg. § 2510.3-1(d)];
 
11. Remembrance funds; [DOL Reg. § 2510.3-1(g)]
 
12. Strike Funds; [DOL Reg. § 2510.3-1(h)].
 
If an arrangement, fund or program comes within the definition of an employee benefit plan subject to ERISA, then absent an applicable exception, the arrangement will be subject to all of the substantive requirements of ERISA including, for example, minimum vesting, funding and coverage requirements. This means that arrangements which the employer does not intend to come within the confines of ERISA may inadvertently, nevertheless be subject to ERISA without regard to whether the plan is intended to be tax qualified under the Code.
 
However, by contrast, a welfare plan is subject to minimal regulation under ERISA with no rules providing for the substantive provisions. That is, welfare plans are not subject to specific ERISA rules regarding coverage, vesting, funding etc.
 
The determination as to whether a plan or program is subject to Title I of ERISA is crucial. It is the necessary first step in determining what law will apply, that is, state law or ERISA; it will determine the forum in which disputes will be resolved, that is, state or federal courts, as well as the potential remedy, that is, whether the remedies are generally limited to the four corners of the document, as is the case generally under ERISA, or whether punitive or other extra contractual remedies may be available.
 
V. Differences between ERISA Speak and Code Terms
 
As indicated above, ERISA covers certain employee benefit plans, a term which, under ERISA is further broken down to include employee pension plans and employee welfare benefit plans. That is, ERISA only differentiates between those two broad categories of plans with ERISA imposing broad substantive guidelines on those plans which qualify as pension plans and substantially less restrictions on those plans that qualify as welfare plans. For purposes of ERISA, pension plans are not further broken down between profit sharing or pension.
 
However, while the Code also imposes fewer restrictions and guidelines on welfare plans, the Code looks primarily to and imposes most of its substantive rules on those retirement plans that seek to obtain the benefits of tax qualification. Further, the Code imposes different rules on different types of retirement plans breaking that broad category of plans down into defined contribution and defined benefit plans and further, into profit sharing, stock bonus, money purchase pension plans and defined benefit plans as well as employee stock ownership plans.