Employee Benefit Plans: ERISA

Each employer that offers any type of employee benefit to its employees should be familiar with its fundamental duties in establishing, administering, amending and terminating those pension and welfare benefit plans that are subject to the requirements of the Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act of 1974 (“ERISA”). Each time an employee is hired, takes a leave of absence, changes positions within the company, becomes disabled, or terminates employment, the employee’s rights under the employer’s benefit plans are usually affected, and require certain actions by the employer and/or the benefit plan administrator that must comply with the Code and ERISA.

There are two basic types of benefit plans governed by the Code and ERISA: 1) pension plans, which cover any retirement benefit or income deferral that is paid following termination of employment (see footnote 1); and 2) welfare benefit plans consisting of medical, dental, vision, life insurance, short term and long term disability insurance, severance, and medical reimbursements under cafeteria plans (see footnote 2). The Code contains requirements for favorable tax treatment of pension (see footnote 3) and welfare (see footnote 4) benefit plans and also establishes excise taxes for violations (see footnote 5). ERISA, on the other hand, establishes rules governing the administration (see footnote 6) and fiduciary responsibility of plan sponsors, administrators and trustees (see footnote 7) and provides procedures for participants who challenge the actions of the sponsor or administrator (see footnote 8). The Code and ERISA requirements are more complex and detailed for pension plans than for welfare plans. There are similar, but not always identical, requirements in the Code and ERISA governing the same conduct or minimum standards. However, a full discussion of these requirements is beyond the scope of this Guide.

As the sponsor of an employee benefit plan, the employer often will wear two hats: as the employer, it may act to amend a plan, terminate a plan, set contribution limits, and appoint and oversee third parties, such as the record keeper and trustees, who manage the plan and plan assets. Often times, however, the employer also assumes, by law or the terms of the plan, certain fiduciary duties in the administration of the plan and investment of plan assets. When the employer is acting in its role as employer, most of its acts are subject to the general business judgment rule that governs all other corporate actions. When the employer acts as a fiduciary, it must meet a higher standard: a fiduciary must act for the exclusive benefit of plan participants and beneficiaries, in compliance with employee benefit laws and the terms of the plan document, and must exercise the same degree of care and diligence that the person would use in their own personal affairs (see footnote 9). Persons who act in a fiduciary capacity may be personally liable for their actions, although an employer may indemnify employees and directors acting within the scope of their employment as a fiduciary for an employee benefit plan (see footnote 10). Persons handling plan assets must also be bonded against theft or embezzlement (see footnote 11).

As mentioned above, each time there is a significant change in the relationship between an employer and an employee, there usually is a related effect on the company’s employee benefit plans. The following is a general, but by no means exhaustive, list of activities related to employee benefit plans that the employer or plan administrator should consider undertaking in those situations:

Newly Hired Employees (or Employees Moving from Non-Eligible into Eligible Employment):

  • Provide employee with information regarding eligibility for an automatic enrollment in pension and welfare benefit plans and any conditions that apply, such as contributions toward premiums for certain coverages;
  • Provide enrollment forms (if required) for the employee to complete and any other eligible persons (spouse and dependents), including authorization for payroll deductions, beneficiary designations and investment choices, if permitted;
  • Determine if employee had creditable coverage under a prior health plan to avoid the application of any pre-existing conditions, exclusions, or limitations under the health plan;
  • Provide initial COBRA notice to employee and to spouse or other dependents, if any, which details qualifying events permitting continuation of group health plan coverage by employee and any qualified beneficiaries (see footnote 12);
  • Provide summary plan description or certificate of coverage summarizing material terms of each employee benefit plan within 90 days of the employee becoming covered under that plan (see footnote 13);
  • Notify plan recordkeepers, administrators and payroll in order to initiate and/or complete the enrollment process and payroll withholding.

    Begin Leave of Absence (including Family & Medical Leave (FMLA) and Qualified Military Leave):

  • Determine which benefits will automatically continue, which benefits the employee may elect to continue, and which benefits, if any, terminate during the leave of absence;
  • Determine if the leave triggers a change in family status that would permit a change inthe employee’s cafeteria plan election;
  • Determine the effect on any participant loans from a pension plan and the rights theemployee may have to a distribution or withdrawal of funds (employer must suspendloan repayment during period of qualified military leave);
  • Determine whether the leave results in a qualifying event which will trigger COBRA orstate law health plan continuation coverage rights;
  • Determine whether the continuation of benefits will require contributions from the employee and determine whether such contributions are to be paid through any remaining payroll deductions or directly by the employee;NOTE: For FMLA leave of absence, an employer is required to continue the employee’s group health coverage during the period of FMLA leave as if the employee had continued to work, although the employee must continue to pay his or her share of the group health plan premiums in order to retain coverage during the leave. An employee on an FMLA leave of absence will not experience a COBRA qualifying event as a result of being on leave until he or she fails to return from FMLA leave or, if expressed earlier, makes it unequivocally clear to the employer that he or she does not intend on returning to employment.
  • For highly compensated executives, determine if the leave triggers a separation from service that would require distribution under a non-qualified deferred compensation arrangement.
  • Determine when benefits end if employee fails to return from leave.

    Return to Employment After Leave of Absence:

  • Restart the employee payroll deductions for current contributions toward premiums and salary deferrals;
  • For qualified military leave, determine whether employee is entitled to make up missed salary deferrals to pension plans for period of military leave and re-amortize any participant loan; also, credit any missed pension or profit sharing contributions;
  • Determine whether the period of leave affects (counts) toward vesting, if any, or for benefit accruals under pension plans;
  • Determine if the employee is permitted to repay any prior pension plan distribution received as a result of the leave.

    Promotion, Increase in Compensation or Change in Job Location:

  • Determine whether any benefits for the employee change or if benefit levels increase;
  • Check plan definition of “compensation” to determine if new or additional compensation items are included or excluded in determining pension or profit-sharing contributions, life and disability insurance levels, and if salary deferral election covers those new or additional items;
  • If group health plan coverage is lost due to job relocation or change to non-covered employment, determine if COBRA or state law continuation coverage rights are triggered.

    Termination of Employment (including Disability, Retirement, and Death While Employed):

  • Provide COBRA or state law continuation notice to employee and qualified beneficiaries and determine whether any employer paid group health plan continuation coverage runs concurrent with, before or in place of, COBRA coverage;
  • Determine if the employer owes any severance to the employee (e.g., Severance Pay Plan or terms of employment agreement);
  • Notify recordkeepers, other plan administrators and insurers of change in the employee’s employment status;
  • Determine whether the employee is entitled to a year-end matching or profit-sharing contribution;
  • Determine proper vesting for pension benefit payout;
  • Determine the status of any outstanding qualified participant plan loan balance and the right to continue payment or acceleration of remaining debt;
  • Process distributions from qualified plans, if a distribution is elected by participant;
  • Determine the right to continued participation in the cafeteria plan for medical expense reimbursement and/or dependent day care reimbursement.

Miscellaneous Events:

The following events may also require action by the employer in connection with one or more employee benefit plans:

  • Change in the terms of a benefit plan, which may trigger an obligation of the employer to provide employees a written supplement to the summary plan description, describing the plan changes (certain changes to health benefit plans must be communicated within 60 days of the change) (see footnote 14);
  • Plan year-end, which generally triggers an employer obligation to provide an annual statement of each participant’s account in the qualified plan and provide annual notices as applicable about default deferral levels, default investments and fees associated with pension investment options (see footnote 15) and to file with the IRS an annual tax return for pension and certain welfare plans (see footnote 16);
  • A participant appeal of a denied claim for benefits, wherein the employer must comply with strict time periods and notice requirements under ERISA (see footnote 17);
  • A participant’s change in family status, such as divorce, birth or adoption, reaching age of majority, which may result in:
    • a loss of dependent status and separate COBRA continuation rights;
    • a court issuing a qualified domestic relations order (QDRO) dividing pension and profit sharing plan assets; or
    • a court issuing a qualified medical child support order (QMCSO) to require an employer’s health plan cover an employee’s children.
  • Acquisition or sale of a business or assets, which may result in:
    • a reduction in force that may trigger an employer’s obligation to provide affected employees with severance, a COBRA notice, and pension distribution or the buyer to acquire to hire additional employees;
    • transition of affected employees from seller’s to buyer’s benefit plans; or
    • the acquiring employer possibly assuming certain assets and liabilities of the seller’s benefit plans.

Finally, a word of caution: employers who sponsor welfare and pension plans have faced increasing liability for errors in the administration of such plans, breach of fiduciary duty and conflicts of interest. Individual participants may sue pension plans directly for errors and certain losses caused by fiduciaries and service providers (see footnote 18). Often, a service provider to whom administration has been outsourced does not assume fiduciary status or requires in its service contract that the employer indemnify the service provider for any damages that result from the service provider’s actions. Federal and state regulatory agencies have begun to scrutinize fee arrangements and conflicts of interest among service providers, which may in turn necessitate that the employer review provider service agreements and/or fee arrangements. Employers should carefully review plan documents and service provider contracts to determine the extent of any contractual indemnification, what relationship the service provider has to the plan and what fiduciary duties, if any, the employer and the service provider have undertaken under ERISA as applied to the benefit plan in question.


1. ERISA § 3(2); 29 USC § 1002(2)
2. ERISA § 3(1); 29 USC § 1002(1)
3. I.R.C. §§ 401 et. seq.; 26 USC §§ 401 et. seq.
4. See I.R.C. §§ 104-106, 125; 26 USC §§ 104-106, 125
5. For example, I.R.C. §§ 4975, 4980B; 26 U.S.C. §§ 4975, 4980B
6. ERISA, Title I, Parts 1-3; 29 USC §§ 1021-1085
7. ERISA, Title I, Part 4; 29 USC §§ 1101-1114
8. ERISA, Title I, Part 5; 29 USC §§ 1131-1148
9. ERISA § 404(a)(1)(A)-(D); 29 USC § 1104(a)(1)(A)-(D)
10. ERISA § 410(b); 29 USC § 1110(b); M.S.A. 302A.521
11. ERISA § 412; 29 USC § 1112
12. ERISA § 606(a)(1); 29 USC § 1166(a)(1)
13. ERISA § 104(b)(1)(A); 29 USC § 1024(b)(1)(A)
14. ERISA § 104(b)(1); 29 USC § 1024(b)(1)
15. ERISA § 105; 29 USC § 1025
16. ERISA § 104(a)(1); 29 USC § 1024(a)(1)
17. ERISA § 503; 29 USC § 1133; 29 CFR § 2560.503-1
18. LaRue v. DeWolff, Boberg & Assocs, Inc. (2008 S.Ct) 2008 WL.440748

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