What are ERISA Plans?
ERISA is a federal law that sets minimum standards for pension plans and other retirement accounts offered by private-sector employers. The plans covered under ERISA, known as ERISA plans, include most employer-sponsored retirement and health plans.
Common types of ERISA plans include:
- Defined Benefit Plans: Also known as pension plans, these provide employees with a specific monthly benefit at retirement, typically based on salary and years of service.
- Defined Contribution Plans: These include plans such as 401(k)s, 403(b)s, and employee stock ownership plans (ESOPs). In these plans, the employees, and often employers, contribute a certain amount, and the final benefit depends on the performance of the investments in the plan.
Key Benefits and Protections
ERISA plans come with several benefits and protections, including:
- Claim Against Plan Assets: ERISA requires plans to establish a trust fund to hold the plan’s assets. This provides assurance to the participants that the money they have contributed will be there when they retire.
- Fiduciary Duties: ERISA imposes strict fiduciary duties on those who manage and control plan assets. This means they must act solely in the interest of the participants and their beneficiaries.
- Plan Information: Participants have the right to receive information about their plan, including details about plan features, funding, and a yearly disclosure document (Summary Plan Description).
- Vesting Rights: ERISA sets minimum standards for when employees must be allowed to accrue benefits and when those benefits become non-forfeitable or “vested.”
- Asset Protection: ERISA plans enjoy substantial protection from creditors. In most cases, assets held in ERISA-qualified plans are safe from bankruptcy proceedings and civil lawsuits.
ERISA and Asset Protection
One of the key aspects of ERISA plans is the strong asset protection they offer. Assets held in ERISA-qualified retirement plans are generally completely exempt from the claims of creditors, even in bankruptcy. This is a substantial benefit over other retirement accounts, such as IRAs, which have more limited bankruptcy protections.
This protection extends not just to the funds in the plan, but also to distributions from the plan, so long as they are rolled over to another ERISA-qualified plan or an eligible retirement plan such as an IRA.