ERISA and Benefits Compliance

ERISA Benefits Compliance: A Complete Guide for PHR Exam Success

Understanding ERISA and Benefits Compliance

Why ERISA and Benefits Compliance Matter

The Employee Retirement Income Security Act (ERISA) of 1974 is one of the most critical federal laws governing employee benefits in the United States. Understanding ERISA and benefits compliance is essential for HR professionals because:

• Legal Protection: ERISA protects millions of American workers and their families by setting minimum standards for pension and health plans.
• Organizational Risk Management: Non-compliance can result in substantial fines, penalties, and legal liability for employers.
• Employee Trust: Proper compliance ensures employees receive accurate information about their benefits and protections.
• Career Advancement: Mastery of ERISA is fundamental for HR professionals seeking PHR and SPHR certifications.

What is ERISA?

ERISA is a federal law that establishes minimum standards for most voluntarily established pension and health plans in private industry. It protects the interests of employees and their beneficiaries by:

• Setting standards for disclosure and fiduciary responsibility
• Establishing rules for eligibility, vesting, and benefit accrual
• Creating enforcement mechanisms and remedies for violations
• Requiring plan documentation and regular reporting to the government

Key Point: ERISA applies to most private sector employee benefit plans but has specific exemptions for governmental plans, certain church plans, and plans maintained solely to comply with workers' compensation laws.

Core Components of ERISA

1. Plan Administration and Documentation

ERISA requires employers to:

• Maintain a written plan document that specifies the terms under which the plan is established and operated
• Establish a plan with a specific effective date and in writing
• Provide employees with a Summary Plan Description (SPD) within 120 days of plan establishment or 60 days after an employee joins the plan
• Keep records of plan operations and decisions

2. Fiduciary Responsibility

ERISA imposes strict fiduciary duties on those who manage plans and handle plan assets:

• Duty of Care: Act prudently, as a prudent expert would under similar circumstances
• Duty of Loyalty: Act solely in the interest of plan participants and beneficiaries
• Duty of Diversification: Diversify plan investments to minimize risk of large losses
• Duty to Follow Plan Documents: Follow the terms of the plan documents

3. Disclosure Requirements

Plans must provide participants with:

• Summary Plan Description (SPD) - plain language overview of key plan provisions
• Summary of Material Modifications (SMM) - notice of changes to the plan
• Individual Benefit Statements - upon request, showing accrued benefits
• Annual funding notices for pension plans

4. Vesting Requirements

ERISA requires minimum vesting schedules for pension plans:

• Cliff Vesting: 100% vesting after 5 years of service
• Graded Vesting: Gradual vesting over 6 years (minimum 20% per year starting in year 2)
• Employer Contributions: Must vest under one of these schedules

5. Plan Termination Insurance

The Pension Benefit Guaranty Corporation (PBGC) provides insurance for defined benefit pension plans, protecting accrued benefits if a plan terminates without sufficient assets.

ERISA's Interaction with Other Laws

Health Insurance Portability and Accountability Act (HIPAA) - Requires group health plans to provide coverage for pre-existing conditions and mandates privacy protections.

Consolidated Omnibus Budget Reconciliation Act (COBRA) - Requires employers to offer continuation coverage to employees and dependents who lose eligibility due to qualifying events.

Women's Health and Cancer Rights Act (WHCRA) - Requires health plans to cover reconstructive surgery following mastectomy.

Mental Health Parity and Addiction Equity Act (MHPAEA) - Requires health plans to provide equal coverage for mental health and substance abuse treatment.

How ERISA Works: The Compliance Framework

Step 1: Plan Design and Documentation

Employers must establish qualified plans with formal documentation that includes:

• Eligibility requirements (age, service, employment status)
• Contribution formulas and benefit calculations
• Vesting schedules
• Distribution rules and conditions

Step 2: Participant Communication

Organizations must provide timely, accurate information to employees:

• SPD must be provided before or within 90 days of plan entry
• Updates must be communicated within 210 days of plan changes
• Employees have the right to request and receive plan documents

Step 3: Fiduciary Management

Those managing the plan must:

• Maintain bonding requirements
• Keep fiduciary liability insurance
• Document decision-making processes
• Conduct regular audits and reviews

Step 4: Compliance Monitoring and Reporting

Employers must:

• File Form 5500 (Annual Return/Report of Employee Benefit Plan) for pension plans with 100+ participants
• Conduct annual plan audits if required
• Report to the Department of Labor, IRS, and PBGC
• Maintain compliance with nondiscrimination rules

Step 5: Claims Administration

Plans must:

• Establish written procedures for submitting benefit claims
• Process claims within 45 days (30 days for health claims)
• Provide written notice of claim denials with explanation
• Allow appeals of claim denials

Common ERISA Violations and How to Avoid Them

1. Failure to Provide Required Disclosures

• Violation: Not providing SPD or failing to update it when plan changes
• Avoidance: Establish systems to track and distribute all required documents on schedule

2. Breach of Fiduciary Duty

• Violation: Making investment decisions that benefit plan sponsors rather than participants
• Avoidance: Document all fiduciary decisions and ensure they follow the plan documents and prudent person standard

3. Improper Handling of Plan Assets

• Violation: Co-mingling plan assets with company funds or using plan money for prohibited transactions
• Avoidance: Maintain separate accounts and segregate plan assets from company operations

4. Inadequate Claims Administration

• Violation: Failing to process claims within required timeframes or denying claims without proper justification
• Avoidance: Establish clear claims procedures and maintain documentation of all decisions

5. Failure to Meet Nondiscrimination Requirements

• Violation: Benefits disproportionately favor highly compensated employees
• Avoidance: Conduct annual nondiscrimination testing and adjust plans as needed

Answering Exam Questions on ERISA and Benefits Compliance

Understanding Question Types

ERISA questions on the PHR exam typically fall into these categories:

1. Definition and Scope Questions

These test your knowledge of what ERISA covers and its basic requirements.

Example: Which of the following employee benefit plans is NOT covered by ERISA?

Answer Strategy: Remember that ERISA covers most private sector pension and health plans but exempts governmental plans, church plans, and those established under workers' compensation laws. Also note that unfunded deferred compensation plans for select executives are exempt.

2. Fiduciary Responsibility Questions

These assess understanding of fiduciary duties and obligations.

Example: A benefits manager invests 80% of pension plan assets in company stock because she believes the company will perform well. This violates which fiduciary duty?

Answer Strategy: This violates the duty of diversification. Even with good intentions, concentrating investments violates ERISA's diversification requirement designed to minimize risk.

3. Disclosure and Communication Questions

These focus on required communications with employees about benefits.

Example: An employer modifies its health plan by increasing employee contributions. When must the company communicate this change to employees?

Answer Strategy: Changes must be communicated in a Summary of Material Modifications (SMM) within 210 days of the plan modification.

4. Compliance and Penalties Questions

These test knowledge of what happens when organizations violate ERISA.

Example: What is the primary purpose of the Pension Benefit Guaranty Corporation (PBGC)?

Answer Strategy: The PBGC insures defined benefit pension plans, protecting participants' accrued benefits if a plan terminates without sufficient funds.

5. Scenario-Based Questions

These present realistic situations requiring application of ERISA principles.

Example: An employee requests access to her plan documents. Under ERISA, what is the maximum time the company has to provide these documents?

Answer Strategy: Employees have the right to reasonable access to plan documents. The plan must provide documents within a reasonable time, typically interpreted as 30 days or less.

Key Concepts to Master

Vesting: Understand the two allowed vesting schedules and when they apply. Know that employer contributions must vest but employer discretion in matching is allowed.

Fiduciary Liability: Remember that multiple parties can be fiduciaries, and fiduciaries can be personally liable for breaches. Know the three main fiduciary duties and how they apply.

Nondiscrimination: Understand that plans cannot unfairly favor highly compensated employees. Know that benefits must be provided on a nondiscriminatory basis.

Plan Documentation: Recognize that written plan documents are essential and must be specific about eligibility, benefits, and distribution.

Form 5500: Know that this annual report is required for certain plans and what information it contains.

Exam Tips: Answering Questions on ERISA and Benefits Compliance

Tip 1: Know the Fundamentals

Before tackling complex scenarios, ensure you understand the basics:

• What plans does ERISA cover and which are exempt?
• What are the four main fiduciary duties?
• What documents must be provided to participants?
• What are the two allowed vesting schedules?

These foundational concepts appear frequently on the exam in various forms.

Tip 2: Pay Attention to Keywords

Certain words change answer meanings significantly:

• Must vs. Should: ERISA uses "must" for mandatory requirements. "Should" indicates recommendations.
• Eligible vs. Entitled: An employee can be eligible for a plan without being entitled to benefits (before vesting).
• Participant vs. Beneficiary: A participant is an employee; a beneficiary is someone designated to receive benefits.
• Accrued Benefit vs. Vested Benefit: Accrued benefits are earned; vested benefits are owned. An employee can have accrued benefits that aren't yet vested.

Tip 3: Understand Fiduciary Liability

When a question describes someone managing plan assets or making plan decisions, consider:

• Is this person a fiduciary under ERISA? (If yes, strict standards apply)
• Are they acting in the participants' best interests?
• Are they diversifying investments appropriately?
• Are they following the plan documents?
• Can they delegate this responsibility or are they still liable?

Tip 4: Remember Timing Requirements

ERISA has specific deadlines. Memorize these:

• SPD Delivery: 90 days from plan establishment or 60 days from employee entry into plan
• SMM Distribution: 210 days from plan modification
• Claim Decision: 45 days for pension claims, 30 days for health claims
• Claim Denial Appeal: Participants have 60 days to appeal
• Annual Funding Notice: By November 15 for defined benefit plans

Tip 5: Distinguish Between ERISA and Other Laws

Questions often test whether you know which law applies:

• ERISA: Covers private sector benefit plans generally
• HIPAA: Addresses health plan coverage and privacy
• COBRA: Requires continuation coverage after qualifying events
• ACA: Requires group health plans to meet coverage standards
• FMLA: Addresses leave, not benefits directly

If a question mentions health coverage, think HIPAA first. If it mentions leaving employment, think COBRA.

Tip 6: Apply the "Prudent Person" Standard

When evaluating whether a fiduciary action is acceptable, ask: Would a prudent expert in similar circumstances take this action? This standard appears frequently in exam questions.

For example:

• Is investing 100% in company stock prudent? No - violates diversification
• Is obtaining investment advice from a qualified professional prudent? Yes - shows care and diligence
• Is making investment decisions without analyzing options prudent? No - fails the care standard

Tip 7: Recognize Common Scenario Patterns

Pattern 1 - Fiduciary Conflicts: A question describes someone with competing interests (employee advocate vs. management representative). The answer usually emphasizes that fiduciaries must act solely for participants' interests.

Pattern 2 - Documentation: A question asks what should be in the plan document. The answer involves specific ERISA-required provisions like eligibility, vesting, and benefit calculations.

Pattern 3 - Communication Failures: A question describes employees not receiving required information. The violation typically involves failure to provide SPD, SMM, or other mandated disclosures.

Pattern 4 - Nondiscrimination: A question describes benefits favoring highly compensated employees. The answer notes this violates nondiscrimination requirements.

Tip 8: Understand Plan Types and Their ERISA Requirements

Defined Benefit Plans:

• PBGC insurance applies
• Actuarial calculations determine benefits
• Employer bears investment risk
• Annual funding notices required
• Form 5500 filing required

Defined Contribution Plans (401(k)):

• No PBGC insurance
• Employee contributions and earnings determine benefits
• Employee bears investment risk
• Investment advice regulations apply
• Form 5500 filing required for certain plans

Health Plans:

• HIPAA requirements apply
• COBRA rights apply to most plans
• ACA requirements apply to group plans
• Claims administration rules apply
• Different fiduciary standards may apply

Tip 9: Know When to Apply Remedies

Understand who can bring what types of claims:

• Participants/Beneficiaries: Can sue for breach of fiduciary duty, denial of benefits
• Department of Labor: Can investigate violations and impose penalties
• IRS: Can disqualify plans for violations
• PBGC: Protects pension benefits and can take over failing plans

Tip 10: Practice With Real Exam-Style Questions

When practicing, focus on:

• Reading questions carefully for keywords that change meaning
• Eliminating obviously wrong answers first
• Applying ERISA principles systematically
• Considering all relevant laws, not just ERISA
• Checking whether the question asks what should happen vs. what must happen

Common Wrong Answers to Avoid

Answer Trap 1: Confusing "Eligible" with "Vested"

An employee can be eligible for a plan but not vested in benefits. A correct answer distinguishes between plan entry requirements (eligibility) and ownership rights (vesting).

Answer Trap 2: Assuming ERISA Covers All Plans

ERISA has specific exemptions. A correct answer remembers that governmental plans, church plans, and certain other plans are exempt.

Answer Trap 3: Thinking Fiduciaries Can Delegate Liability

Fiduciaries remain liable even when delegating tasks. A correct answer recognizes that delegation requires monitoring and oversight.

Answer Trap 4: Applying One Law to Another's Situation

Different laws apply to different situations. Using COBRA requirements to answer a HIPAA question is incorrect. Read carefully about what law governs the situation.

Answer Trap 5: Confusing Timelines

Different communications have different deadlines. SPD is 90 days, SMM is 210 days, health claim decisions are 30 days. Don't mix these up.

Strategy for Test Day

Before the Exam:

• Create flashcards with ERISA timelines, vesting schedules, and key terms
• Review sample questions and explanations
• Understand the rationale for correct answers, not just memorizing answers
• Practice explaining ERISA concepts in your own words

During the Exam:

• Read each question completely before looking at answers
• Identify keywords that define what the question is really asking
• Determine which law(s) apply to the situation
• Apply ERISA principles systematically
• Eliminate obviously incorrect answers
• Choose the most accurate answer, not just a partially correct one

For Complex Scenarios:

• Break down the scenario into key facts
• Identify the legal issue (fiduciary duty, disclosure, vesting, etc.)
• Apply the relevant ERISA requirement
• Evaluate the options against the requirement
• Select the best answer

Final Mastery Checklist

Before taking the exam, ensure you can:

• ☐ Define ERISA and identify what it covers
• ☐ Explain the four fiduciary duties
• ☐ Identify fiduciaries and their liability
• ☐ Distinguish between the two vesting schedules
• ☐ Describe SPD and SMM requirements
• ☐ Explain nondiscrimination requirements
• ☐ Detail claims administration procedures
• ☐ Identify when other laws (HIPAA, COBRA, ACA) apply
• ☐ Describe PBGC insurance and its scope
• ☐ List common ERISA violations and how to prevent them
• ☐ Apply ERISA principles to realistic scenarios

Mastering ERISA and benefits compliance is essential for PHR success. These concepts form the foundation of benefits management and appear frequently on the exam. By understanding the "why" behind ERISA's requirements, not just the rules themselves, you'll be prepared to answer even unfamiliar questions accurately.