The Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal law that governs the structure of employer-sponsored group benefit plans. It applies to private employers and specifically excludes 1) government and church plans, 2) plans maintained outside the United States, and 3) plans maintained only to comply with worker’s compensation, unemployment compensation or disability insurance laws.
ERISA was enacted to address public concerns over the mismanagement and abuse of private pension plans funds. It requires 1) disclosure to plan participants; 2) reporting to the government; and 3) establishes fiduciary standards. The provisions of ERISA are enforced by the U.S. Department of Labor (DOL), Employee Benefits Security Administration.
ERISA requires the creation of a Trust for any employee benefit plan. However, the DOL has taken a non-enforcement action relating to self-funded plans, which are defined as plans that pay claims from the general assets of the employer. Employee contributions are considered plan assets and therefore, any participant contributions of a self-funded plan can only be used to pay benefits and reasonable administrative expenses of the plan. As such, an employer must be careful about improperly using plan assets, which could lead to the assessment of a 15% excise tax.
Finally, an employer must be careful not to establish a Trust if it is a self-funded plan. A Trust may be a formal trust or a separate account, even if solely in the name of the employer. Any contributions placed in a separate trust or an account cannot be used for anything other than plan expenses. Employers may face the 15% excise tax if any assets placed in a Trust or separate account are used for employer expenses, rather than plan expenses.