Pension Plans and ERISA: What Employers Need to Know
The Employee Retirement Income Security Act (ERISA) is the guiding legislation that governs the operation of a pension plan in the United States. Companies that offer pension benefits to their employees must adhere to this law; otherwise, they can face stiff financial penalties. To protect your company from severe financial and legal repercussions, the following are some fundamental regulations that you should know so that your company remains compliant in your obligations to your employees and other plan beneficiaries.
Fiduciaries must perform their duties in the best interest of plan beneficiaries and participants. Fiduciaries can charge reasonable fees for their services. At all times, fiduciaries are required to fulfill their duties cost-effectively and efficiently while refraining from any actions that constitute a conflict of interest.
Fiduciaries are obligated to comply with the limitations of the investment portfolio. They are prohibited from taking actions contrary to the IRS code or applicable state or federal law. To ensure compliance, fiduciaries are required to file regular reports to the government regarding the pension plan's condition and its administration.
Employers are held to strict requirements regarding their minimum required contributions. This is calculated using the target normal cost, which considers the present value of the benefits expected to accrue over the coming year. It also includes calculating the total plan expenses for the year.
It also includes the funded status of the plan and any shortfall amortization charges required to address any shortfalls. This is a critical factor because, once assessed, companies are required to pay the shortfall amortization charge for seven years. The only way to stop paying this charge is to bring the plan back up to full funding.
Participation and Vesting
ERISA establishes minimum standards for pension plan participation and vesting. The law states that employees participating in a defined benefit plan who have completed five years of service are entitled to a nonforfeitable right to 100% of their accrued benefit. For individual account plans, this time frame is reduced to 3 years.
What happens if a business' situation changes? It happens all the time, and ERISA gives employers some flexibility to change their pension plan benefits. Employers cannot change the benefits that employees have already accumulated. However, they can change the benefits earned in the future.
Transparency Is Essential
Employees have a right to receive and review regular updates regarding the status of the pension plan. This includes a summary of the funding status and any material changes to the plan. This information should be made readily available upon request at no charge to the participant. Further, it must be presented in clear language within a summary plan description that is easy to understand. Employers should expect employees to request this information at least once per year, and must promptly make any corrections to the employee's record regarding errors to salary level, years of service, beneficiary designations, social security number, etc.
Participants Can Sue
ERISA allows participants to sue employers and plan fiduciaries for damages. When an employer or their fiduciaries breach their duty to pension plan participants, ERISA gives plaintiffs considerably sharp teeth. Thus, it is vital that employers routinely monitor their pension plan's status, compliance with ERISA, and the actions of the fiduciaries responsible for administering the plan.
We encourage you to contact Greenlink Payroll at (480) 385-2525 with your questions about pension plans and other benefits you can offer your employees. It is our pleasure to help you understand your options and regulatory obligations.