The Employee Retirement Income Security Act of 1974 (ERISA), was put in place to protect retirement assets accrued by workers in the United States. The program puts regulations into place that all qualified business owners need to follow.
The goal is to ensure businesses do not misuse assets they put in place to benefit employees. Furthermore, ERISA also puts rules and regulations into place that cover other non-retirement assets, including employee health plans.
Through the Security Act of 1974, ERISA plans need to give participants information about the features of the plan as well as its funding.
Businesses must provide this information free of charge. The Employee Benefits Security Administration, which is part of the federal Department of Labor (DOL), oversees ERISA.
Why did the government enact ERISA?
The act was put in place to address a variety of irregularities that originally plagued larger pension plans. Unfortunately, many older pension plans did not have a lot of protections in place for workers. For example, thousands of workers would lose their pension plans if the original employer closed. This was largely due to the fact that there were not enough funds for plan.
There were other situations where a company might be misusing funds. For example, some companies may use retirement plans as collateral for certain loans. Then, they would lose these retirement assets when they paid the loan back.
In some cases, certain people would even take retirement assets of their employees to gamble at local casinos. Ultimately, the public caught wind of this activity, forcing the government to do something to protect the retirement assets of employees.
In the vast majority of cases, retirement accounts that are protected by ERISA are not subject to being garnished by bankruptcy proceedings, creditors, or civil lawsuits. This means that if the employer files for bankruptcy, retirement savings are not necessarily at risk. Finally, if employees to money to creditors, those creditors cannot make claims against retirement accounts.
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Understanding the rules and regulations in ERISA
ERISA covers the vast majority of retirement plans. A few examples of plans that fall under its umbrella include 401k plans, employee pension plans, profit-sharing plans, 403b plans, and even deferred compensation plans.
Other examples of plans that the act covers include:
- Flexible spending accounts (FSAs)
- Health maintenance organizations (HMOs)
- Life insurance
- Disability insurance.
ERISA requires that fiduciaries are accountable for these plans.
Fiduciaries must act in the best interests of the clients, which are the employees. If fiduciaries do not follow the best practices in the industry, they could be held responsible, forcing them to restore any losses that the plan might have incurred. Furthermore, ERISA also ensures that fiduciaries are not allowed to misuse any of the plan assets.
In addition, small business owners need to understand that ERISA also sets minimum standards related to funding plans, benefit accrual, participation, and vesting in these plans. For example, ERISA specifies how long a person might need to work before they can participate in the plan.
ERISA also states rules that require any sponsors of the plan to give adequate contributions, ensuring retirees have access to these benefits when the time comes.
Finally, ERISA also gives all participants the right to sue if they feel the fiduciary did not fulfill his or her obligations. ERISA also guarantees payment of these benefits even if the business owner terminates the plan. This takes place through a pension benefit guaranty corporation (PBG). ERISA covers plans in the private industry, requiring all companies to keep participants informed of their rights.
Note: ERISA does not protect every retirement plan. For example, the law does not cover IRAs. It also does not cover plans that have been set up by government organizations and churches.
If a company sets up a plan outside of the United States, ERISA does not protect it. This is why it is important for all small business owners and employees to understand how ERISA works and its implications.
How can small business owners manage the rules and regulations of ERISA?
Because ERISA comes with a lot of complicated rules, many small business owners hesitate to set up retirement accounts. They are nervous about the regulatory risk they incur, and they are worried that they might not be able to fund the plans appropriately.
Fortunately, there are options available for small business owners who are looking for ways to avoid the complicated regulations of this federal law.
For example, some small business owners are able to set up a plan called a SIMPLE IRA. This is a retirement savings plan for small business owners that have 100 or fewer employees. In this case, it stands for Savings Incentive Match Plans for Employees.
It is important to note that ERISA still covers all SIMPLE IRAs. However, they do not include the red tape, bureaucracy, and regulations that other retirement plans require, such as a 401k. Small business owners do not have to worry about dealing with reporting requirements as frequently.
Small business owners interested in setting up a SIMPLE IRA need to use the designated forms from the IRS. These are the 5304 SIMPLE or the 5305 SIMPLE.
Then, employers simply need to follow the rules regarding:
- Which employees are eligible
- How to handle contributions of employees
- Informing employees of their rights, which usually takes place in an employee handbook.
Why do small business owners want to set up retirement plans for their employees?
Given that there are a lot of complications surrounding ERISA, there are some people who are wondering why small business owners might want to set up a retirement plan in the first place. These include:
- Less administrative burden: Even though there are a lot of rules and regulations related to ERISA, small business owners might be able to set up a SIMPLE IRA instead, which comes with significantly less paperwork.
- Tax-deduction: If small business owners contribute to retirement plans for their employees, they may be able to save money on their taxes. It is always important to meet with a qualified accountant before claiming tax deductions.
- Increase in talent attraction: Retirement plans are a great way to attract talented employees. A lot of people are looking for ways to save for retirement, and they may be more willing to work for a company that is offering a solid match rate on retirement plans.
- Decrease in turnover: Finally, offering retirement plans is also a great way to reduce employee turnover rates. Companies spend a lot of money training new employees. By offering retirement plans, companies can encourage their best employees to stick around. Therefore, they may not have as much employees turnover, allowing the company to save money on hiring and training expenses.
These are just a few of the biggest reasons why small business owners should consider setting up retirement plans for their employees.
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Clearly, there are a lot of regulations to know regarding the Employee Retirement Income Security Act (ERISA). That is why you need to rely on Homebase HR Pro to help you manage these retirement accounts and reduce your compliance risk.
With Homebase, you will have access to modern tools and HR guidance that can help you manage your retirement plans and stay compliant. Sign up for Homebase HR Pro today and get started with live chats with certified HR advisors, policy reviews, and more.