ERISA Rules: Pre-Tax Benefits Aren’t Always Pre-Tax
Originally published on September 9, 2019
Updated on December 7th, 2021
If you offer benefit plans as a pre-tax perk for your employees, pay attention. Because if they don’t meet criteria cited by the Employee Retirement Income Security Act (ERISA), you could be subject to serious penalties and civil liabilities.
What is ERISA?
Passed in 1974, ERISA protects the assets of U.S. workers who place funds in retirement plans. It also governs the structure of welfare benefit plans such as group medical insurance, dental and vision plans, heath savings accounts, disability and accident plans and more.
ERISA sets minimum standards for these plans regarding participation, vesting, benefits accrual and funding. Under the law, a person may need to meet certain requirements for plan participation and rights to benefits.
ERISA also establishes funding rules so plan sponsors provide adequate funding for plans and gives participants the right to sue for benefits and “breaches of fiduciary duty.” Through the Pension Benefit Guaranty Corporation (PBGC), ERISA guarantees payment of certain benefits if a defined plan is terminated.
Plan sponsors (employers) must provide participants (employees) with information about the plan along with any important information about the plan’s features and funding. Plan information should be furnished to employees regularly. Should the DOL request any plan documentation, the plan sponsor must be able to provide that information.
Who is subject to ERISA?
Nearly all types and sizes of businesses offering retirement or welfare benefit plans—except churches and government entities— are subject to ERISA laws and compliance.
How does ERISA affect taxes?
Employers create qualified and non-qualified plans with the intent of benefiting employees.
Qualified plans are designed to meet ERISA guidelines and, as such, qualify for added tax benefits on top of those received by regular plans. Employers deduct an allowable portion of pretax dollars from the employee’s wages. To qualify as an ERISA plan, plan sponsors must meet several guidelines regarding participation, vesting, benefit accrual, funding and plan information.
Non-qualified plans are those that are not eligible for tax-deferral benefits under ERISA. They are often offered as extra perks and don’t come with an entire set of rules.
What are ERISA requirements?
A plan must meet several criteria to be considered compliant and qualified, including:
- ERISA-compliant plan document: This plan document is an employer document that can separate or combine your offering of employer-sponsored benefits. (This is sometimes called a wrap or umbrella document.)
- Summary Plan Description (SPD): The SPD of your benefits must be distributed within 90 days of coverage for new participants. It should clearly list the benefits offered by the plan, rules for obtaining the benefits in the plan, and any guidelines for using those benefits, along with claims and repeals procedures. The SPD must also include a statement of ERISA rights, plan sponsor, administrator and trustee information. Note that the Evidence of Coverage or the Certificate of Insurance provided by the insurance company does not act as the SPD for plan participants; this is a common mistake made by employers.
- Form 5500: This form must be filed for the plan years required (applicable to employees with 100+ employees).
What happens if our plans aren’t compliant with ERISA?
If you allow pre-tax contributions to your benefit plans without meeting ERISA requirements, you could face penalties from the U.S. Department of Labor and civil liabilities. Additionally, the IRS will require that you pay the unpaid back taxes on the contributions and assess penalties on top of that. Combine this potentially large sum of money with the prospect of up to 10 years of jail time (if it is found that you willfully violated this law)… let’s just say it’s not a scenario you would want to face.
What can I do?
If you have any questions or concerns about your standing with ERISA compliance, don’t navigate this landscape alone. While we’ve discussed the basics, ERISA is a complicated law that has been amended several times in response to the changing needs of America’s workers. This article merely scratches the surface of the areas covered.
An experienced ERISA attorney or HR consultant will have the in-depth knowledge you need to help make sure you’re in compliance—so you can continue offering those much deserved pre-tax benefits for your employees.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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