ERISA and Benefits Law Compliance

ERISA and Benefits Law Compliance: A Comprehensive Guide for SPHR Exam Success

Why ERISA and Benefits Law Compliance Matters

Understanding ERISA and benefits law compliance is crucial for HR professionals because it directly impacts how organizations manage employee benefits while maintaining legal compliance. Non-compliance can result in significant penalties, loss of tax-advantaged status, and damage to employee trust. As an SPHR candidate, mastering this content demonstrates your ability to protect both employee interests and organizational assets.

What is ERISA?

ERISA (Employee Retirement Income Security Act of 1974) is federal legislation that establishes minimum standards for pension plans and health plans offered by private employers. It was designed to protect employee benefit rights and ensure that plan administrators act responsibly with plan assets.

Key Components of ERISA:

• Title I: Addresses employee benefit plan requirements, fiduciary responsibilities, and disclosure obligations
• Title II: Covers tax incentives for retirement plans
• Title III: Establishes insurance regulation provisions
• Title IV: Created the Pension Benefit Guaranty Corporation (PBGC) to protect pension benefits

Core ERISA Requirements

1. Plan Documentation and Disclosure

Organizations must provide employees with clear, written documents explaining their benefits plans. Required disclosures include:

• Summary Plan Description (SPD): Written explanation of plan terms in understandable language, provided within 90 days of plan participation
• Summary of Material Modifications (SMM): Notice of significant plan changes
• Individual Benefit Statements: Regular statements showing accumulated benefits
• Notices of Rights and Protections: Information about legal rights under ERISA

2. Fiduciary Responsibilities

ERISA imposes strict fiduciary duties on those who manage benefit plans and plan assets. Fiduciaries must:

• Act solely in the interest of plan participants and beneficiaries
• Act with the care, skill, and diligence of a prudent professional
• Follow the plan document unless it violates ERISA
• Diversify investments to minimize large losses
• Avoid conflicts of interest
• Maintain accurate records and documentation

3. Participation and Vesting

ERISA establishes standards for when employees can participate in retirement plans and when they have a non-forfeitable right to their benefits:

• Participation: Employees generally must be allowed to participate once they meet age and service requirements (typically age 21 with one year of service)
• Vesting Schedules: Employers must follow specific vesting schedules—cliff vesting (100% after set period) or graded vesting (gradual increases in benefit rights)
• Minimum Vesting Standards: For 401(k) plans, employees must be fully vested in employer contributions within specified timeframes

4. Contribution Limits and Tax Treatment

ERISA and the Internal Revenue Code establish limits on contributions and govern tax-advantaged status:

• 401(k) contribution limits ($23,500 in 2024 for employee deferrals)
• Catch-up contributions for employees age 50+
• Employer contribution limits
• Non-discrimination testing to ensure plans don't disproportionately benefit highly compensated employees

5. Health Plan Compliance

ERISA regulates group health plans through several amendments and companion laws:

• COBRA (Consolidated Omnibus Budget Reconciliation Act): Requires employers to offer continued health coverage to former employees and their families
• HIPAA (Health Insurance Portability and Accountability Act): Protects privacy of health information and ensures group health plans cannot exclude employees for pre-existing conditions
• Mental Health Parity: Requires health plans to provide mental health benefits at parity with medical/surgical benefits
• Preventive Care Coverage: Health plans must cover certain preventive services without cost-sharing

How ERISA Works in Practice

Step 1: Plan Establishment and Design

Organizations establish written plans that specify benefits, eligibility, contribution amounts, vesting schedules, and procedures. The plan document is the governing instrument.

Step 2: Disclosure to Participants

Within required timeframes, organizations must provide participants with SPDs and other required documents in understandable language.

Step 3: Fiduciary Management

Those responsible for plan administration, investment selection, and benefit determinations act as fiduciaries and must meet strict standards of care and prudence.

Step 4: Plan Administration and Record Keeping

Plans must maintain accurate records, track vesting, process benefits correctly, and handle contributions appropriately.

Step 5: Compliance and Enforcement

The Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation (PBGC) enforce ERISA requirements through audits, investigations, and penalties for violations.

Common ERISA Compliance Issues

1. Inadequate Documentation

Failure to maintain proper plan documents, amendments, and amendments can result in plan disqualification and loss of tax-favored status.

2. Fiduciary Breaches

Self-dealing, conflicts of interest, or imprudent investments can trigger Department of Labor enforcement actions and participant lawsuits.

3. Incorrect Eligibility and Vesting Determinations

Miscalculating service credit or incorrectly denying participation or benefits violates ERISA standards.

4. Failure to Properly Disclose Information

Not providing timely SPDs or failing to notify participants of material modifications creates liability.

5. Non-Discrimination Testing Failures

When retirement plans disproportionately benefit highly compensated employees, they may lose tax-favored status.

6. COBRA and HIPAA Non-Compliance

Failing to offer COBRA continuation coverage, violating privacy rules, or improperly excluding individuals based on health status creates legal exposure.

How to Answer ERISA Exam Questions

Question Type 1: Definition and Scope

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

Strategy: Remember ERISA applies to private sector employee benefit plans. Government plans and church plans are exempt. Unfunded, non-formal plans may not be covered. Look for keywords like "government," "church," "informal," or "unfunded."

Question Type 2: Fiduciary Responsibilities

Example: A plan administrator invests heavily in the company stock of the plan sponsor. Which ERISA principle is violated?

Strategy: Recall the fiduciary duties: sole interest of participants, prudence, diversification, and avoiding conflicts of interest. This scenario violates the diversification and prohibition on self-dealing. Choose answers referencing "conflict of interest" or "prudence."

Question Type 3: Vesting and Participation

Example: An employee participates in a 401(k) plan with a 3-year cliff vesting schedule for employer contributions. After 2.5 years, the employee is terminated. What is the employee's vesting percentage in employer contributions?

Strategy: Under cliff vesting, the employee is 0% vested until the cliff period expires. Even though 2.5 of 3 years have passed, the employee has not reached the cliff date. Answer: 0%.

Question Type 4: Disclosure and Communication

Example: When must an employer provide an SPD to a new plan participant?

Strategy: The standard answer is "within 90 days of plan participation" or "within 90 days of becoming eligible." Know the specific timeframes for SPDs (90 days), SMMs (within 30-60 days), and benefit statements (annually).

Question Type 5: COBRA and HIPAA Compliance

Example: An employer must offer COBRA continuation coverage to which of the following?

Strategy: COBRA applies to qualified beneficiaries: employees, spouses, and dependent children who lose coverage due to qualifying events (termination, reduction in hours, death, divorce). Employers with 20+ employees must offer COBRA.

Question Type 6: Plan Amendments and Compliance

Example: A company amends its 401(k) plan to increase the employer match. Which of the following is required?

Strategy: Material amendments require notification to participants via Summary of Material Modifications (SMM). The plan document itself must be formally amended. Look for answers mentioning SMM, notification, or documentation.

Exam Tips: Answering Questions on ERISA and Benefits Law Compliance

Tip 1: Understand the Three-Part Definition

When analyzing any ERISA question, ask yourself: (1) Is this a private sector plan? (2) Does it involve employee benefits? (3) Is it a formal plan? If all three are "yes," ERISA likely applies.

Tip 2: Know the Key Acronyms and Their Functions

• DOL: Department of Labor—enforces ERISA for reporting and fiduciary matters
• IRS: Internal Revenue Service—enforces tax qualification requirements
• PBGC: Pension Benefit Guaranty Corporation—insures defined benefit pensions
• SPD: Summary Plan Description—required disclosure document
• SMM: Summary of Material Modifications—notification of plan changes

Tip 3: Master the Fiduciary Duty Framework

The four fiduciary duties are: Sole Interest, Prudence, Diversification, and Document Compliance. Many questions test whether a specific action violates one of these duties. Create scenarios in your mind to test understanding—such as investing too heavily in company stock (violates diversification) or using plan funds for personal benefit (violates sole interest).

Tip 4: Differentiate Between Defined Benefit and Defined Contribution Plans

ERISA requirements vary somewhat between plan types:

• Defined Benefit Plans: Require PBGC insurance, have different vesting schedules, involve actuarial calculations
• Defined Contribution Plans (401(k), 403(b)): Have employee deferral limits, require non-discrimination testing, involve individual accounts

Tip 5: Remember Timing and Deadlines

ERISA heavily involves deadlines:

• SPD: 90 days from eligibility
• SMM: 30-60 days from adoption
• COBRA notice: 14 days from qualifying event
• Vesting schedules: Cliff (up to 3 years) or Graded (up to 7 years for employer contributions)

Tip 6: Recognize When ERISA Does NOT Apply

Questions often test exceptions. ERISA does not apply to:

• Federal, state, and local government plans
• Church plans
• Plans maintained solely for non-residents
• Individual insurance contracts where the employer is not involved in administration
• Plans that are unfunded and informal (some exceptions)

Tip 7: Connect ERISA to Related Laws

The exam often tests ERISA in combination with related laws:

• COBRA: Continuation coverage rights (works with health plans)
• HIPAA: Privacy and health insurance protections
• Mental Health Parity: Equal treatment of mental health benefits
• ACA: Employer coverage mandates and preventive care requirements

Tip 8: Practice Vesting Calculations

Vesting questions often appear. Be prepared to calculate:

• Service credit (years of service)
• Cliff vesting percentages (typically 0% until cliff date, then 100%)
• Graded vesting percentages (proportional increase annually)
• Break-in-service rules (effect on vesting)

Tip 9: Identify Red Flags in Scenarios

When reading case studies, watch for common violations:

• Using plan assets for personal purposes (fiduciary breach)
• Failing to communicate plan changes (disclosure violation)
• Excluding employees improperly from plans (participation violation)
• Investing heavily in one company's stock (diversification violation)
• Charging excessive plan fees (prudence violation)

Tip 10: Know the Penalties and Remedies

The exam may test consequences of non-compliance:

• Civil Penalties: Department of Labor can impose significant fines
• Tax Penalties: Loss of tax-favored status, excise taxes
• Participant Remedies: Participants can sue fiduciaries for breach of duty and seek restoration of plan assets
• PBGC Intervention: For defined benefit plans, PBGC may take control if plans are underfunded

Tip 11: Practice With Real Scenarios

ERISA questions are often scenario-based. Practice breaking down cases by asking:

1. Is ERISA applicable to this plan?
2. Which specific requirement or rule is being tested?
3. Who are the responsible parties (fiduciaries, participants, plan sponsor)?
4. What is the compliance issue or violation?
5. What are the consequences or required remedies?

Tip 12: Stay Current on Recent Changes

ERISA is regularly updated through legislation (SECURE 2.0, Inflation Reduction Act, etc.). Be aware of:

• Recent changes to contribution limits
• New compliance requirements
• Updated regulatory guidance from DOL and IRS
• New rules affecting vesting, participation, or disclosures

Key Takeaways

ERISA and benefits law compliance represent a critical area of HR expertise that combines legal knowledge, operational execution, and risk management. By understanding the foundational principles—fiduciary responsibility, proper disclosure, accurate administration, and participant protection—you'll be well-equipped to answer exam questions and succeed as an HR professional.

The core message of ERISA is that benefit plans must be professionally managed, properly communicated, and ethically administered. When you encounter an exam question, filter it through these principles, apply the specific requirements, and select answers that prioritize participant protection and legal compliance. With focused study and practice, mastering ERISA and benefits law compliance will be within reach.