The Employee Retirement Income Security Act of 1974 (ERISA) the federal standard for employee benefits plans. HR leaders and organizations should have a strong understanding of ERISA basics to avoid the serious consequences for violating ERISA. Let’s examine a high-level overview of the basics of ERISA plans and what employers need to know.

Is your plan(s) subject to ERISA?

Not all benefit plans are covered by ERISA — that means it would not have to comply with the requirements, but also misses out on the legal protection it offers such as general protection from

Let’s start with the plans that are covered by ERISA:

• Employee welfare benefit plans established by private-sector employers
• Includes both fully insured and self-funded benefit plans
• Exemptions apply to certain payroll practices and voluntary plans

ERISA applies to almost all private-sector employers that offer benefit plans for their employees, regardless of employer size including corporations, partnerships, limited liability companies, sole proprietorships and nonprofit organizations.

Exempt plans

There are two primary types of plans which are generally exempt from ERISA requirements.

Governmental Employers

Employee benefit plans maintained by governments are exempt from ERISA. Plans which fall under this exemption include plans offered by federal, state or local governments. This includes cities, counties and townships.

Church plans

Employee benefit plans that are established or maintained by churches, conventions or associations of churches are exempt from ERISA due to their tax-exempt status under IRS code — if they have not made an election to be subject to ERISA.

ERISA’s church plan exemption also includes plans ran by “principal-purpose organizations” which:

• Are controlled by a church or a convention or association of churches; and
• Have a principal purpose of funding or administering benefits to the employees of its parent organization

Q: I run a very small company, are we exempt? 

A: There is no exemption for small employers unless they fall under the governmental employer or church plan exemptions.

Benefit Plans Covered by ERISA

To qualify as an ERISA plan, there must be a plan, fund or program that is established by the employer for the purpose of providing ERISA-covered benefits to members and their dependents.

ERISA-covered benefits include:

• Medical, surgical or hospital benefits
• Dental and vision benefits
• Prescription drug benefits
• HRAs and FSAs
• Accidental death and dismemberment benefits
• Group life insurance
• Wellness programs
• Employee assistance programs
• Disability benefits
• Disease specific coverage (i.e. cancer policies)

Benefit Plans Not Covered by ERISA?

The following benefit arrangements do not fall under ERISA’s definition of a welfare benefit plan:

• Adoption assistance plans
• Liability or casualty insurance
• Voluntary health savings accounts (HSAs)
• Transportation assistance
• Dependent care
• Pet insurance
• Scholarship programs
• Tuition reimbursement
• Event discounts
• Health or fitness club memberships
• Retirement planning programs

Safe Harbor Exemptions

The Department of Labor has excluded specific benefit plans that would typically fall under Covered Plans. These include:

• A safe harbor exemption for certain payroll practices
• A safe harbor exemption for “voluntary plans.”

So, how do these safe harbor exemptions work? Here is what you need to know.

ERISA Exemption: Payment of Wages

Compensation for work (including higher rates of compensation beyond ordinary wages) does not create an ERISA plan with respect to wages, overtime pay, shift premiums, and holiday or weekend premiums.

Unfunded Sick Pay or Paid Medical Leave Programs

Additionally, paying an employee’s normal compensation, out of the employer’s general assets, is not a payroll practice subject to ERISA.

Normally, this practice covers periods of time when an employee is physically or mentally unable to perform their work. It also could be a practice for when an employee is absent for medical reasons such as pregnancy or psychiatric treatment.

These practices can include:

• Income replacement
• Short-term disability
• Salary continuation
• Paid medical leave programs.

To fall under the payroll practice exemption, your program must:

• Be unfunded and uninsured
• Not pay more than an employee’s normal compensation
• Cover current employees only

Unfunded Vacation, Holiday, Jury Duty and Similar Pay

Similar to the previous example, paying employees out of a company’s general assets does not create an ERISA plan for the following types of time off:

• Vacations or holidays
• Active military duty
• Jury duty or testifying in official proceedings
• Training periods
• Sabbatical leave or time off for further education

ERISA Exemption: Voluntary Plans

The second type of safe harbor exemption is for voluntary insurance arrangements. What does that mean? Generally, benefit plans where the full premiums are paid by employees and the employer has minimal involvement.

To qualify as a voluntary plan under the DOL’s safe harbor, the plan must meet these requirements:

• The program is funded by group (or group-type) insurance
• No contributions are made by the employer or employee organization(i.e. a PEO)
• Employee participation in the program is completely voluntary
• All the employer does is collect premiums and pass them to the insurer
• The employer receives no financial incentives or profit beyond compensation for administration

The key: to meet this safe harbor exemption, employer involvement must be minimal. You cannot endorse the plan. The following would be considered endorsement:

• Selecting the insurer
• Negotiating plan terms or linking coverage to employee status
• Using the employer’s name or associating the plan with other employee benefits
• Recommending the plan to employees
• Saying that the plan is subject to ERISA
• Doing more than making payroll deductions
• Assisting employees with claims or disputes.

 

Next Steps for Employers

If you have questions about ERISA, you are not alone. The rules and regulations are complex, and the consequences are severe. The good news — you don’t have to navigate this topic on your own. Reach out to your broker and seek guidance to determine if your benefits plan is covered by ERISA, and if you are in compliance.

Some content courtesy of our friends at Zywave.

Additional Links and Resources:

• DOL’s website on ERISA health plans and benefits
• DOL’s compliance assistance website for health plans
• DOL’s website on ERISA reporting and filing requirements