Are you an employer and unsure how ERISA applies to different plans? You still can’t get why some pension and welfare plans are ERISA plans while some are not? You are not alone; most people can’t seem to comprehend how it works. But with the many complex rules associated with it, we can’t blame you.
For starters, ERISA is an acronym for the Employment Retirement Income Security Act, a federal law passed in 1974. The law prescribes the minimum standards for employer voluntarily established retirement and health plans in the interest of protecting individuals in these plans.
ERISA only applies to plans sponsored and maintained by private entities inside the United States. As such, employer-sponsored programs that withhold deductions from the worker or contributions by the employer qualifies as an ERISA plan. However, similar plans established or maintained by government agencies or religious institutions do not qualify as an ERISA plan.
Therefore, ERISA covers:
As the plan contributions are tax-deductible, the plan must observe non-discriminatory rules so that each employee is fairly treated.
The standards set by ERISA protect the interest of the stakeholders of the said plans. These stakeholders include benefit plan participants and their beneficiaries and employers. And by establishing standards for the plan managers and other fiduciaries, the law protects employers as well.
ERISA establishes that such an arrangement must:
A non-qualified plan is an employer-sponsored retirement plan that falls outside the scope of ERISA guidelines.
These non-qualified plans are often a type of tax-deferred payment plans that cater to specialized retirement needs for select employees. They include tax-deferred compensation and bonus plans.
Here is what’s interesting, 401k is an ERISA qualified plan, but there are cases when it is not. Individual Retirement Account (IRA), on the other hand, is not an ERISA plan, but it also depends on which type you are holding. Confusing, uh?
The only time when 401k is not an ERISA plan is when the employer is a government agency, religious institution, or nonprofit. Otherwise, if the employer in none of those, then your 401k is an ERISA plan.
For a plan to qualify, it has to be employer-sponsored, save for a few instances already discussed. So, naturally, traditional Roth IRAs do not qualify as ERISA plans for the underlying reason that they are managed by the individual plan holders, not their employers.
However, we have variations of IRA that are ERISA qualified. They include:
Both retirement accounts allow employers to contribute to their employees’ retirement accounts. Since the employers are involved, the Department of Labor classifies them as ERISA qualified.
So as a business owner, if you’ve adopted SEP IRA or SIMPLE to provide retirement benefits for yourself and your employees, then you know where you belong. That notwithstanding, it’s advisable to consult an ERISA attorney when classifying these plans. Incorrect classification leads to reporting errors, which could be costly to correct.
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