Is Your Business ERISA Compliant? Follow This Checklist

Richard has more than 30 years of experience in the financial services industry as an advisor, managing director, and director of training and marketing, specializing in Finra exams, investing, and retirement planning. He has served as an editor or expert contributor for more than a dozen books, including Webvisor, Wealth Exposed, 5 Steps for Selecting the Best Financial Advisor, and The Retirement Bible. His personal finance column appears on the sites of more than 100 regional and community banks.

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Many businesses offer some form of qualified retirement plan and, in doing so, they fall under the governance guidelines of the Employee Retirement Income Security Act of 1974, better known as ERISA.

ERISA establishes guidelines and minimum standards designed to protect employees of private sector companies who participate in retirement and welfare benefit plans. A business administering a qualified retirement plan that isn't in full compliance with ERISA could be subject to penalties.

If your employee retirement plan provides a future retirement income or allows employees to defer earnings for retirement, then it is an ERISA plan. As the employer who provides the plan, you are considered a named fiduciary. You take on the responsibility of administering the plan and the liability should it not comply with the guidelines and standards.

Key Takeaways

• ERISA rules prevent retirement plan fiduciaries from misusing the plan's assets and sets minimum standards for participation, vesting, benefit accrual, and funding of retirement plans.
• Companies that offer qualified retirement plans to employees must be ERISA compliant to maintain tax-favored status, and will often seek out a third-party administrator to ensure the guidelines are met.
• ERISA compliance covers start-up procedures as well as ongoing requirements.

Getting Compliant With ERISA

Meeting ERISA compliance requirements does not have to be overly burdensome. While there are a lot of requirements, a good third-party administrator (TPA) can shoulder much of the burden.

Many of the requirements are calendar-driven, requiring filing forms by specific deadlines. These deadline dates form one checklist that can be managed by a TPA or a human resources staff person. Other requirements may be met on an ad hoc basis as circumstances dictate.

ERISA Calendar Checklist

Administering a 401(k) plan involves performing certain tasks according to an annual schedule. These are the most common tasks that should be on most companies’ checklists.

1. First Quarter of the Plan Year: Provide fourth-quarter benefit statements to plan participants no later than 45 days after the end of the quarter. Make prior-year employer contributions for a tax deduction to count in the prior year.
2. Second Quarter: Provide first-quarter benefit statements to plan participants. Distribute excess deferrals made above the IRC Section 402(g) limit. For plan participants turning age 73 in the prior year, distribute first-year required minimum distributions (RMDs). (The age for RMD withdrawals was raised to 73 from 72 as of Jan. 1, 2023.)
3. Third Quarter: Provide second-quarter benefit statements. File Form 5500 for the prior year or file Form 5558 for a 2.5-month extension. If the plan document was modified during the prior year, distribute a new Summary Plan Description to plan participants. Distribute a Summary Annual Report for the prior year to plan participants.
4. Fourth Quarter: Provide third-quarter benefit statements. Send applicable notices to participants, including installments of or changes to a safe harbor 401(k) plan, Qualified Default Investment Alternative (QDIA), or automatic enrollment. Correct any ADP/ACP test failures, and pay 10% excise tax.

Ongoing ERISA Requirements

Some ERISA requirements are ongoing administrative tasks or are triggered by certain events. Below are some of the most common notifications and guidelines which must be followed by ERISA-compliant firms:

• Adherence to Plan Document: Ensure the plan management continuously adheres to the plan document's terms. The IRS considers any failure to strictly follow the plan document's terms an operational defect, which, if not remedied, can result in the plan's disqualification.
• Annual Participant Fee Disclosure: All plan-eligible employees, terminated employees, and beneficiaries with an account balance must receive a participant fee disclosure every 12 months.
• Notice of Plan Change: Participants must be notified of any changes to the plan 30 to 90 days before the effective date of the change.
• Opportunity to Enroll: All employees who have met the plan age and service requirements must be given the opportunity to enroll. They should receive all necessary forms and instructions along with a Summary Plan Description and any applicable participant notices.
• Loan Compliance: Outstanding loans must be repaid in accordance with the plan’s policy terms and the borrowers’ promissory note.
• Timely Deposits: Ensure that employee deferrals and loan payments are deposited on time, typically at the same time as payroll tax deposits are made.
• Conduct Quarterly Housekeeping: Cash out small account balances for terminated employees. Process loan defaults, and use any unallocated forfeitures.

Although most of these requirements can be managed by a TPA, the employer-plan sponsor has the fiduciary duty to ensure they are met and performed correctly.

What Is ERISA?

The Employee Retirement Income Security Act, or ERISA, is a set of rules and guidelines that is imposed on private employers who provide retirement benefits. The law establishing it was passed by Congress in 1974 amid concerns about the viability of some pension plans of the time.

In those days, pension plans were the most common retirement benefit offered to employees. Since then, pensions have been largely replaced by 401(k) plans, at least in the private sector. However, the issue remains: Employees must be confident that the money that they and their employer are putting away for retirement is still there when they need it.

Today, ERISA operates under the U.S. Department of Labor. It issues and enforces federal regulations regarding the administration of employer-sponsored retirement plans and pensions as well as health benefits.

What If I Accidentally Break an ERISA Rule?

Don't. An employer can face a fine of up to $1,100 a day for a single late form. Worse yet, your company retirement plan could lose its qualified retirement plan status. And that means that you and your employees lose the tax benefits that come with participation in a qualified plan.

Does ERISA Force Companies to Offer Retirement Benefits?

ERISA does not require any company to offer a retirement program like a pension plan or a 401(k). It does require programs that offer those benefits to run their programs in an honest and transparent manner so that their employers can be confident that the money will really be there when they retire.

The Bottom Line

The purpose of ERISA is to keep company retirement plans honest and transparent. Therefore, most of the rules and regulations are aimed at ensuring that employees are informed about their eligibility for a retirement program and the status of their plan.