Federal Employment Laws That Impact Compensation and Benefits

ERISA

The Employee Retirement Income Security Act of 1974, or ERISA, was originally passed to regulate defined benefit plans, also known as pensions, offered by private-industry employers. Today, it covers both defined benefit plans and defined contribution plans, which include corporate 401(k) plans, 403(b) plans, for public schools, tax-exempt organizations and certain ministries, or simple plans for small employers. Defined contribution plans will generally be portable allowing for rollover into a similar type of plan with another employer or individual retirement account (IRA).

Vesting

Under ERISA, an employee gains ownership of accrued pension rights through a period of employment. These ownership rights are obtained even if the employee leaves the organization before retirement. The process of acquiring ownership of employer contributions through employment time is called vesting. Employees are immediately vested in their own contributions to their retirement plan.

For defined benefit plans, an organization can use any of two vesting methods required under ERISA or use their own more generous schedule.

1. 5-year cliff vesting: 0% vested for less than 5 years of service; 100% vested after 5 years.
2. 7-year-graded vesting: 0% for years 1 and 2; 20% vested after year 3, plus an additional 20% each subsequent year until 100% vested after 7 years.

ERISA also has requirements for defined contribution plans. For 2002 and beyond, ERISA requires companies to adopt a schedule at least as generous as one of two vesting schedules for 401(k) and 403(b) plans:

1. 3-year cliff vesting: 0% vested for less than 3 years of service; 100% vested after 3 years.
2. 6-year graded vesting: at least 20% vested at the end of the second year of service with increases of 20% each year, until the employee is fully vested by the end of the 6th year of employment.

If an organization automatically enrolls its employees in a 401(k) plan and the plan requires employer contributions, employees vest in those contributions after 2 years.

ERISA Employer Requirements

ERISA requires that employers provide plan participants with important information about defined benefit and defined contribution plans and sets minimum standards for:

• funding
• vesting
• participation and
• benefit accrual

ERISA requires plan fiduciaries (those who manage an employee benefit plan and its assets) to be accountable to the extent that they may be responsible for restoring losses to the plan. ERISA also allows participants to sue for benefits and breaches of fiduciary duty.