Staying Current on Laws Is Key to Plan Success

Though employers are not required to provide employees with pension plans, if they do and hope to gain the associated tax benefits, they must comply with the Employee Retirement Income Security Act (ERISA), enacted in 1974, as well as specific provisions of the Internal Revenue Code (IRC).

ERISA practice is an especially complex area of law and specific issues regarding compliance or coverage should always be decided with the advice of legal counsel.

Pension plans must comply with many requirements contained in ERISA and the IRC, and the following are by no means exhaustive.

Coverage
ERISA covers certain retirement plans established by employers who are engaged in interstate commerce, or in any industry that affects interstate commerce, as well as certain union pension plans. Excluded plans include: government plans, church plans, and plans maintained solely for the purpose of complying with workers’ compensation laws.

ERISA Requirements
Pension plans subject to ERISA must comply with detailed and comprehensive requirements of that law which include:

• A detailed procedure for funding the plan, as well as a basis on which pension payments are made, must exist. ERISA pension plans must also provide for specific rates at which benefits accrue, and must inform beneficiaries of specific times after which accrued benefits are considered nonforfeitable.


• A minimum percent of the employer’s workforce must be eligible to participate in the plan—at least 70 percent of non-highly compensated employees.


• Pension plans may not discriminate against employees and can’t exclude anyone over age 21 from participating who meets minimum eligibility standards of 1000 hours of service within a 12 month period. A note of caution should be added here however in making sure that policies clearly state that temporary employees are excluded from the benefit plan.


• The plan must not discriminate against those who are considered highly compensated employees. They must cover a certain percentage of non-highly paid employees and provide a benefit to such employees that is at least 70 percent of the benefit provided to highly paid employees.


• Eligibility rules for participation also exist. Vesting can be as long as 7 years, and in some cases immediately.


• Annual reports must be filed with the IRS by the pension plan administrator. Filings are open to public inspection. The records used to compile these reports must be maintained for not less than six years, and must be available for inspection.


• Plan assets must be held in trust and separate from the assets of the sponsoring entity.


• Pension plans may not allow benefits to be assigned to creditors, and must resist creditor claims. However, beneficiaries’ spouses do have rights in the event of marital dissolution.

Beneficiary Rights
Beneficiaries enjoy certain rights under ERISA.

• Summary plan descriptions and information must be furnished to participants and beneficiaries, and must be written in language that an average plan participant can understand. Upon request, plan participants and beneficiaries must be provided with statements of the total benefits accrued and the nonforfeitable pension benefits.


• Employees whose ERISA rights or claims are denied have the right to review such denials. Discrimination against participants for asserting rights is prohibited.


• In situations where a plan participant is married and predeceases his or her spouse, subject to the plan’s terms, the participant’s surviving spouse is entitled to choose between various options regarding the distribution of plan benefits.


• If beneficiaries are discriminated against for asserting rights, or are denied benefits, they have the right to sue in civil court.

Fiduciary Responsibilities
Each pension plan must provide for one or more named fiduciaries who jointly or severally control and manage the operation and administration of the plan. Plan fiduciaries are prohibited from selling, exchanging, or leasing property, lending money, furnishing services, or transferring assets between the plan and a party in interest.

Plan fiduciaries are under a duty to act prudently for the best interest of the plan assets.

• Fiduciaries must pay particular attention to their efforts to address anticipated Y2K problems with pension plans. They must obtain information from service providers, such as banks, accounting firms and insurance companies, and evaluate their efforts at Y2K compliance. Fiduciaries may be held liable for Y2K failures if their review of such services is not conducted in a prudent manner.


• Pension plan fiduciaries should also be aware that the U.S. Supreme Court’s 1996 holding in Varity Corp. vs. Howe has resulted in an increase in claims by beneficiaries that they have not been fully informed or were even misled about plan benefits. Therefore, employers should ensure that only designated individuals present plan information to beneficiaries, and that those individuals are fully informed and well trained to provide accurate information in response to inquiries by beneficiaries.

Enforcement
The U.S. Department of Labor and the IRS are the agencies responsible for ensuring that pension plans comply with ERISA. ERISA vests the Department of Labor with authority to file civil suits to correct ERISA violations and also provides for criminal penalties for willful violations of ERISA.

The Pension Benefit Guarantee Corp.—the federal agency responsible for ensuring pension plans are fully funded—also has rights against the plan in the event the plan becomes insolvent.

Due to the complexity of this area, the need for competent legal or other advice in formulating and complying with applicable legal requirements is critical.