# Summary of the Employee Retirement Income Security Act (ERISA)

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/crs%3ARL34443

## Record

- **Collection:** Congressional research report
- **Document type:** CRS Report
- **Published:** May 19, 2009
- **Citation:** RL34443

## Text

Summary of the Employee Retirement Income
Security Act (ERISA)
(name redacted)
Specialist in Income Security
Jennifer Staman
Legislative Attorney
May 19, 2009

Congressional Research Service
7-....
www.crs.gov
RL34443

CRS Report for Congress
Prepared for Members and Committees of Congress

Summary of the Employee Retirement Income Security Act (ERISA)

Summary
Due to the recent economic decline and the desire to enact large-scale health reform, the current
federal regulation of pension plans, health plans, and other employee benefit plans has received
considerable congressional attention. The Employee Retirement Income Security Act of 1974
(ERISA) provides a comprehensive federal scheme for the regulation of employee pension and
welfare benefit plans offered by private-sector employers. ERISA contains various provisions
intended to protect the rights of plan participants and beneficiaries in employee benefit plans.
These protections include requirements relating to reporting and disclosure, participation, vesting,
and benefit accrual, as well as plan funding. ERISA also regulates the responsibilities of plan
fiduciaries and other issues regarding plan administration. ERISA contains various standards that
a plan must meet in order to receive favorable tax treatment, and also governs plan termination.
This report provides background on the pension laws prior to ERISA, discusses various types of
employee benefit plans governed by ERISA, provides an overview of ERISA’s requirements, and
includes a glossary of commonly used terms.

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

Contents
Introduction ................................................................................................................................1
Historical Development of Pension Plans in the United States ...............................................1
Origins of ERISA..................................................................................................................2
Types of Qualified Retirement Plans .....................................................................................3
Hybrid Plans ...................................................................................................................5
The Revenue Act of 1978 and 401(k) Plans .....................................................................5
ERISA: An Overview..................................................................................................................6
ERISA Title I: Protection of Employee Benefit Rights.................................................................7
A. Coverage..........................................................................................................................7
B. Reporting and Disclosure..................................................................................................7
1. Summary Plan Description ..........................................................................................8
2. Summary of Material Modifications ............................................................................8
3. Annual Report .............................................................................................................9
4. Benefit Statements ......................................................................................................9
5. Annual Funding Notice ............................................................................................. 10
6. Notice of Freedom to Divest Employer Securities...................................................... 10
C. Participation Requirements ............................................................................................. 10
D. Benefit Accrual .............................................................................................................. 11
1. Anti-cutback Rule ..................................................................................................... 12
2. Benefit Accrual and Age Discrimination.................................................................... 13
E. Minimum Vesting Standards ........................................................................................... 14
Breaks in Service .......................................................................................................... 15
F. Benefit Protections for Spouses ....................................................................................... 15
1. Preretirement Survivor Benefits................................................................................. 16
2. Postretirement Survivor Benefits ............................................................................... 16
3. Qualified Domestic Relations Orders......................................................................... 17
G. Buyouts, Mergers, and Consolidations ............................................................................ 17
H. Plan Funding .................................................................................................................. 18
1. Funding Requirements for Single-employer Plans ..................................................... 18
2. Valuation of Plan Assets ............................................................................................ 20
3. Benefit Limitations in Underfunded Plans ................................................................. 21
4. Lump-sum Distributions............................................................................................ 22
5. Funding Requirements for Multiemployer Plans ........................................................ 23
I. Fiduciary Responsibility .................................................................................................. 25
1. Duty of Loyalty......................................................................................................... 25
2. Duty of Prudence ...................................................................................................... 26
3. Duty to Diversify Investments ................................................................................... 27
4. Duty to Act in Accordance with Plan Documents....................................................... 28
5. Prohibited Transactions ............................................................................................. 29
6. Investment Advice..................................................................................................... 31
7. Fiduciary Duty and Participant-Controlled Investment............................................... 32
8. Fiduciary Liability under ERISA Section 409 ............................................................ 33
J. Administration and Enforcement...................................................................................... 34
1. Civil Enforcement under Section 502(a) .................................................................... 34
2. Claims to Enforce Benefit Rights .............................................................................. 35
3. Claims to Redress Breaches of Fiduciary Duty .......................................................... 37

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

4. Claims to Enforce Plan Provisions and “Other Equitable Relief” ............................... 38
5. Criminal Enforcement under ERISA and Other Federal Law ..................................... 40
K. Preemption of State Laws ............................................................................................... 41
1. Section 514 ............................................................................................................... 41
2. Section 502 ............................................................................................................... 44
L. Special Regulation of Health Benefits ............................................................................. 44
1. COBRA .................................................................................................................... 44
2. HIPAA ...................................................................................................................... 45
3. Mental Health Parity ................................................................................................. 46
4. Maternity Length of Stay........................................................................................... 47
5. Reconstructive Surgery Following Mastectomies....................................................... 47
ERISA Title II: Internal Revenue Code Provisions..................................................................... 48
A. Limits on Plan Contributions and Benefits...................................................................... 48
1. Defined Benefit Plan Provisions ................................................................................ 48
2. Defined Contribution Plan Provisions........................................................................ 49
B. Coverage and Nondiscrimination .................................................................................... 50
1. Nondiscrimination Test ............................................................................................. 50
2. Safe Harbor Plans...................................................................................................... 51
C. Distributions from Qualified Plans.................................................................................. 52
1. Plan Loans ................................................................................................................ 53
2. Additional Tax on Early Withdrawals ........................................................................ 53
3. Rollovers .................................................................................................................. 54
D. Integration with Social Security...................................................................................... 54
E. Special Rules for “Top-heavy” Plans............................................................................... 55
ERISA Title III: Jurisdiction, Administration, and Enforcement ................................................. 55
ERISA Title IV: Pension Benefit Guaranty Corporation and Plan Termination ........................... 56
A. Premiums for Single-employer Plans .............................................................................. 56
B. PBGC Insurance Limit ................................................................................................... 57
C. Plan Terminations ........................................................................................................... 57
1. Standard Termination ................................................................................................ 58
2. Distress Termination.................................................................................................. 58
3. Involuntary Termination ............................................................................................ 58
D. Employer Liability to the PBGC..................................................................................... 59
E. Reportable Events........................................................................................................... 59
F. Notice Requirements ....................................................................................................... 59
G. Premiums for Multiemployer Pension Plans .................................................................... 59
H. Withdrawal Liability....................................................................................................... 60

Tables
Table 1. Number of Plans, Participants, and Assets by Type of Plan, 1975-2006 ..........................4
Table 2. Maximum Average 401(k) Contributions for Highly Compensated Employees ............. 51

Contacts
Author Contact Information ...................................................................................................... 65

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

Introduction
The Employee Retirement Income Security Act of 1974 (ERISA)1 protects the interests of
participants and beneficiaries in private-sector employee benefit plans. Governmental plans and
church plans generally are not subject to the law. ERISA supersedes state laws relating to
employee benefit plans except for certain matters such as state insurance, banking and securities
laws, and divorce property settlement orders by state courts. An employee benefit plan may be
either a pension plan (which provides retirement benefits) or a welfare benefit plan2 (which
provides other kinds of employee benefits such as health and disability benefits). Most ERISA
provisions deal with pension plans. ERISA does not require employers to provide pensions or
welfare benefit plans, but those that do must comply with its requirements. ERISA sets standards
that pension plans must meet in regard to:
•

who must be covered (participation),

•

how long a person has to work to be entitled to a pension (vesting), and

•

how much must be set aside each year to pay future pensions (funding).

ERISA sets fiduciary standards that require employee benefit plan funds be handled prudently
and in the best interests of the participants. It requires plans to inform participants of their rights
under the plan and of the plan’s financial status, and it gives plan participants the right to sue in
federal court to recover benefits that they have earned under the plan. ERISA also established the
Pension Benefit Guaranty Corporation (PBGC) to insure that plan participants receive promised
benefits, up to a statutory limit, should a plan terminate with a lack of sufficient assets to pay
promised benefits. In order to encourage employers to establish pension plans, Congress has
granted certain tax deductions and deferrals to qualified plans. To be qualified for tax preferences
under the Internal Revenue Code (IRC), plans must meet requirements with respect to pension
plan contributions, benefits, and distributions, and there are special rules for plans that primarily
benefit highly compensated employees or business owners.
Responsibility for enforcing ERISA is shared by the Department of the Treasury, the Department
of Labor, and the Pension Benefit Guaranty Corporation (PBGC). In the Department of the
Treasury, the Internal Revenue Service oversees standards for plan participation, vesting, and
funding. The Department of Labor regulates fiduciary standards and requirements for reporting
and disclosure of financial information. The PBGC—a government-owned corporation—
administers the pension benefit insurance program.

Historical Development of Pension Plans in the United States
The first employer-sponsored pension plans in the United States were established in the late 19th
century in the railroad industry. At that time, pensions were regarded as gifts in recognition of
long service rather than as a form of compensation protected by law. Pension benefits often were
paid from employers’ annual revenues and sometimes were reduced or terminated if the company
paying the pension became unprofitable or went out of business.
1
P.L. 93-406, 88 Stat. 829 (Sept. 2, 1974). ERISA is codified at §§1001 to 1453 of title 29, United States Code and in
§§ 401-415 and 4972-4975 of the Internal Revenue Code.
2
See ERISA § 3(1), (29 U.S.C. § 1002), for the different types of welfare benefit plans.

Congressional Research Service

1

Summary of the Employee Retirement Income Security Act (ERISA)

Congress first gave pensions and profit-sharing plans preferential income tax treatment in the
1920s. At that time, few households paid income taxes, so these tax benefits did not immediately
spur the growth of the private pension system. The Revenue Acts of 1938 and 1942 outlined more
specific requirements for “tax-qualified” pension plans, including the requirement that benefits
and contributions not discriminate in favor of highly compensated employees. Tax qualification
means that the employer can deduct the amounts contributed to the plan, the earnings on the
pension trust fund are exempt from taxes until distributed, and covered employees do not have to
pay income tax on the employer’s contributions to the plan.3 Employers also are allowed to
“integrate” their pension benefit formulas with Social Security benefits to partly offset the
relatively more generous income replacement rates that Social Security pays to low-wage
workers.4
During the Second World War (1941-1945), pensions and other deferred compensation
arrangements were exempt from wartime wage controls. Employers who were unable to pay
higher wages due to these controls could increase workers’ total compensation by offering new or
increased pension benefits. Also in 1940s, the federal courts declared that pensions were subject
to collective bargaining, and that employers had to include pensions among the benefits for which
unions could negotiate.5 In addition, the expansion of the income tax to include more households
and the introduction of higher marginal income tax rates made the tax advantages of pensions
considerably more valuable to workers. Both of these developments led to more widespread
adoption of employer-sponsored pensions during the 1950s and 1960s.

Origins of ERISA
As the number and size of private pension plans grew in the 1950s and 1960s, so did the number
of instances in which employers or unions attempted to use the assets of these plans for purposes
other than paying benefits to retired workers and their surviving dependents. In 1958, Congress
passed The Welfare and Pension Plans Disclosure Act,6 which required public disclosure of
pension plan finances. Advocates of the legislation expected that greater transparency of pension
funding would ensure that the funds held in trust for workers’ pensions would not be misused by
plan sponsors. After the Studebaker automobile company terminated its underfunded pension plan
in 1963, leaving several thousand workers and retirees without the pensions that they had been
promised, Congress began considering legislation to ensure the security of pension benefits in the
private sector.
During the early 1970s, both the House and Senate labor committees drafted bills to regulate the
private pension system. The Senate Labor and Public Welfare Committee reported a pension bill
in 1972. Up to that point, the legislation had been handled exclusively as a labor issue, but since
most private pension plans benefitted from the favorable tax treatment accorded them under the
Internal Revenue Code, the Senate Finance Committee also asserted its jurisdiction. As passed by
Congress in 1974, ERISA included elements produced by the House and Senate labor
committees, the House Ways and Means Committee, and the Senate Finance Committee. Title I
3

When a plan participant receives income from a pension plan, it is taxable income.
Federal law limits the extent to which pension benefits can be reduced as a result of “integration” of the benefits with
Social Security benefits. See 26 U.S.C. § 401(l).
5
Inland Steel Co. v. National Labor Relations Board, 170 F.2d 247 (7th Cir. 1948). cert. denied, 336 U.S. 960 (1949).
6
P.L. 85-836, 72 Stat. 997 (Aug. 29, 1958).
4

Congressional Research Service

2

Summary of the Employee Retirement Income Security Act (ERISA)

of the law, which sets standards for pension plans of employers engaged in interstate commerce,
is under the jurisdiction of the House Committee on Education and Labor and the Senate
Committee on Health, Education, Labor, and Pensions. Title II, which makes conforming
amendments to the Internal Revenue Code for tax-qualified plans, is under the jurisdiction of the
House Ways and Means Committee and the Senate Finance Committee. The labor and tax
committees share jurisdiction over the PBGC.
ERISA was signed into law by President Gerald Ford on Labor Day, September 2, 1974.
Congress has amended ERISA over the years to provide greater protection to survivors and
spouses of pension plan participants, improve pension funding practices, strengthen the finances
of the PBGC, alter the limits on tax-deductible pension plan contributions, and to ensure that taxfavored plans are broadly based and do not unduly favor a firm’s owners and other highly
compensated employees.
Before ERISA was enacted, an employer could terminate an unfunded pension plan without being
liable for any additional pension contributions. If there were insufficient assets in the pension
plan to pay all claims, participants had no legal recourse to demand that employers use company
assets to continue funding the plan. ERISA protects the benefits of participants in most privatesector pension plans by requiring companies with defined benefit pension plans to fully fund the
benefits that participants have earned. The law prohibits companies from using pension funds for
purposes other than paying pensions and retiree health benefits. It also limits the age and lengthof-service requirements that firms can require participants to meet to receive a pension. ERISA
also requires all private-sector sponsors of defined benefit pension plans to purchase insurance
from the Pension Benefit Guaranty Corporation.

Types of Qualified Retirement Plans
ERISA and the IRC classify employer-sponsored retirement plans as either defined benefit (DB)
plans or defined contribution (DC) plans.7 A defined benefit plan specifies either the benefit that
will be paid to a plan participant or the method of determining the benefit. The plan sponsor’s
contributions to the plan vary from year to year, depending on the plan’s funding requirements.
Benefits often are based on average pay and years of service. For example, the benefit might be
defined as 1.5% of the average of the employee’s highest five years of pay multiplied by his or
her number of years of service. This would result in a benefit equal to 45% of a participant’s
“high-five” average pay after 30 years of service. Some DB plans, particularly plans covering
workers who belong to unions, pay a flat benefit per year of service. For example, if the benefit is
defined as $30 per month for each year of service, the monthly pension benefit after 30 years of
service would be $900.
ERISA requires DB plans to be fully funded. The assets held in the pension trust must be
sufficient to pay the benefits that the plan’s participants have earned. The employer bears the
investment risk for the assets held by the plan. If the assets decrease in value, or if the plan’s
liabilities increase, the plan sponsor must make additional contributions to the pension trust fund.
The assets of qualified DB plans are exempt from creditors’ claims if the sponsor is in
bankruptcy, and DB plan benefits are insured up to certain limits by the Pension Benefit Guaranty
Corporation.
7

29 U.S.C. § 1002(34) and § 1002(35); 26 U.S.C. § 414(i) and § 414(j).

Congressional Research Service

3

Summary of the Employee Retirement Income Security Act (ERISA)

A defined contribution plan is one in which the contributions are specified, but not the benefits. A
defined contribution plan (also called “an individual account” plan) is one that provides an
individual account for each participant that accrues benefits based solely on the amount
contributed to the account and any income, expenses, and investment gains or losses to the
account.8 The employee bears the investment risk in a DC plan, and DC plans are not insured by
the PBGC.
When ERISA was enacted in 1974, most employer-sponsored retirement plans were defined
benefit plans. The number of defined benefit plans continued to grow until the mid-1980s. The
number of DB plans then began to fall while the number of DC plans increased. Analysts have
suggested several possible reasons for these trends, including rising global competition that put
greater pressure on companies to reduce costs, a more mobile workforce that preferred the
portability of benefits earned in DC plans, the higher costs of maintaining DB plans after stronger
funding requirements were put into place by ERISA, and the greater attractiveness of DC plans
after Section 401(k) of the tax code was added by the Revenue Act of 1978.9 Although the
standards established under ERISA have made workers’ pensions more secure, some employers—
especially small employers—apparently decided that the plan funding requirements of ERISA
made DB plans too expensive to maintain. The decline in the number of DB plans since the 1980s
has been the result mainly of terminations of small plans. By the late 1990s, defined contribution
plans had overtaken defined benefit plans in number of plans, number of participants, and total
assets. (Table 1.)
Table 1. Number of Plans, Participants, and Assets by Type of Plan, 1975-2006
Defined Benefit Plans
Participants
(thousands)

Defined Contributions Plans
Assets
(millions)

Participants
(thousands)

Assets
(millions)

Year

Plans

1975

103,346

33,004

$185,950

207,748

11,507

$74,014

1980

148,096

37,979

401,455

340,805

19,924

162,096

1985

170,172

39,692

826,117

461,963

34,973

426,622

1990

113,062

38,832

961,904

599,245

38,091

712,236

1995

69,492

39,736

1,402,079

623,912

47,716

1,321,657

2000

48,773

41,613

1,986,177

686,878

61,716

2,216,495

2004

47,503

41,707

2,106,325

635,567

64,627

2,587,152

2005

47,614

41,925

2,254,032

631,481

75,481

2,807,590

2006

48,579

42,146

2,468,142

645,971

79,849

3,216,160

Plans

Source: U.S. Department of Labor, Private Pension Plan Bulletin: Abstract of Form 5500 Annual Reports, various
years.
Note: Includes active participants, vested separated participants, and retired participants. Beginning in 2005, data
for defined contribution plan participants includes individuals for whom no contributions were being made to the
plan.

8
9

26 U.S.C. § 414(i).
P.L. 95-600, 92 Stat. 2826 (Nov. 6, 1978).

Congressional Research Service

4

Summary of the Employee Retirement Income Security Act (ERISA)

Hybrid Plans
In recent years, many employers have converted their traditional DB plans to “hybrid” plans that
have characteristics of both defined benefit and defined contribution plans. The most common of
these hybrids is the cash balance plan. A cash balance plan looks like a defined contribution plan
in that the accrued benefit is defined in terms of an account balance. The employer contributes an
amount equal to a fixed percentage of pay to the plan and pays interest on the accumulated
balance. However, a cash balance plan is not an individual account owned by the participant.
Assets are held in a common trust, and each participant’s “account balance” is merely a record of
his or her accrued benefit. Because plan sponsors are obligated to provide the participants with
benefits that are no less than the sum of contributions to the plan plus interest, cash balance plans
are considered to be defined benefit plans.10

The Revenue Act of 1978 and 401(k) Plans
The most common defined contribution plans are 401(k) plans, named for the section of the IRC
added by the Revenue Act of 1978 under which they were authorized. In 1981, the IRS published
regulations for IRC §401(k). Soon after, the first 401(k) plans were established. A 401(k) plan is
an “individual account plan.”11 Its defining feature is that the employee, as well as the employer,
can make pre-tax contributions to the account. Taxes on these contributions and on investment
earnings are deferred until the money is withdrawn. Before Section 401(k) was enacted, DC plans
for private-sector employees were funded by employer contributions or by after-tax employee
contributions.12 Typically, participants in a 401(k) plan can allocate their account balances among
a menu of investment options selected by the employer or by a plan administrator appointed by
the employer. The participant’s retirement benefit consists of the balance in the account, which is
the sum of all the contributions that have been made plus interest, dividends, and capital gains (or
losses) minus fees and expenses. Upon separating from the employer, the participant usually has
the choice of receiving these funds through a series of withdrawals or as a lump sum. Some
401(k) plans allow participants to purchase a life annuity through an insurance company, but
defined contribution plans are not required to offer annuities.13
In most 401(k) plans, the employee must elect to have contributions to the plan deducted from his
or her pay, decide how much to have deducted, and direct these contributions among the plan’s
investment options.14 The employer often contributes either a fixed dollar amount or percentage
of pay to the account on behalf of each participant. Employer contributions are sometimes
conditioned on the employee also making contributions. In a 401(k) plan, the employer can
reduce or suspend its contributions to the plan if business conditions are unfavorable for the firm,

10

See “2. Benefit Accrual and Age Discrimination” in section III for additional discussion of hybrid plans.
IRC §401(k) authorizes “cash or deferred arrangements,” under which an employee may elect to have the employer
make payments as contributions to a trust fund on behalf of the employee in lieu of receiving that portion of his or her
compensation in cash.
12
Salary deferral plans under IRC §403(b) and §457 predate §401(k), but these plans are available only to employees
of tax-exempt organizations and state and local governments.
13
An exception to this rule is the “money purchase plan,” which is a DC plan but also is a pension plan established
under IRC §401(a), and must offer plan participants an annuity.
14
Some firms automatically enroll all eligible employees in their 401(k) plans, so that the default condition is for the
employee to be enrolled with the option to quit the plan.
11

Congressional Research Service

5

Summary of the Employee Retirement Income Security Act (ERISA)

or for any other reason. Although 401(k) plans are the most numerous DC plans, they are not the
only kind of DC plan. (See box below.)
ERISA and the pension provisions of the Internal Revenue Code have been amended several
times since ERISA was enacted in 1974. The most significant changes to ERISA since its original
passage were enacted in the Pension Protection Act of 2006 (PPA)(P.L. 109-280).15 In December
of 2008, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)
(P.L. 110-455), which makes several technical corrections to the Pension Protection Act of 2006
(P.L. 109-280) and contains provisions designed to help pension plans and plan participants
weather the current economic downturn.16 Amendments made to ERISA by the PPA and WRERA
are discussed below.
Principal Types of Defined Contribution Plans
A. Qualified plans under Internal Revenue Code §401(a)
1. Money purchase pension plans
a. Traditional money purchase plans
b. Target benefit plans
c. Thrift plans (other than profit sharing plans)
2. Profit sharing plans
a. Traditional profit sharing plans
b. Thrift plans
c. Cash or deferred arrangements (IRC §401(k))
3. Stock bonus plans
a. Traditional stock bonus plans
b. Employee stock ownership plans (ESOPs)
4. Voluntary employee contributions under qualified plans
B. Tax-deferred annuities under IRC §403(b)
C. Deferred compensation plans for state and local governments and tax-exempt organizations under IRC §457
D. Individual retirement accounts (IRAs and Roth IRAs) under IRC §408 and §408A
E. Non-qualified plans (Plans that do not qualify under the Internal Revenue Code)
Source: D. McGill and D. Grubbs, Fundamentals of Private Pensions, 6th edition.

ERISA: An Overview
ERISA consists of four titles. Title I sets out specific protections of employee rights in pensions
and welfare benefit plans. Title II specifies the requirements for plan qualification under the
Internal Revenue Code. Title III assigns responsibilities for administration and enforcement to the

15

For more information, see CRS Report RL33703, Summary of the Pension Protection Act of 2006, by (name redacted).
For more information on WRERA, see CRS Report R40171, The Worker, Retiree, and Employer Recovery Act of
2008: An Overview, by Jennifer Staman.
16

Congressional Research Service

6

Summary of the Employee Retirement Income Security Act (ERISA)

Departments of Labor and Treasury. Title IV of ERISA establishes the Pension Benefit Guaranty
Corporation.

ERISA Title I: Protection of Employee Benefit
Rights
A. Coverage
Title I of ERISA covers employee pension and welfare benefit plans17 established or maintained
by employers in the private sector. The law specifically exempts governmental plans and church
plans. Plans that are maintained only for the purpose of complying with applicable workmen’s
compensation laws, unemployment compensation, or disability insurance laws, as well as plans
that are maintained outside of the United States (primarily for the benefit of persons who are nonresident aliens) are also exempted from ERISA’s Title I requirements.

B. Reporting and Disclosure
Section 2(b) of ERISA states that it is the policy of ERISA “to protect ... the interests of plan
participants and their beneficiaries by requiring disclosure and reporting of financial and other
information.” Both pension and welfare benefit plans can be subject to extensive reporting and
disclosure requirements that can be found under Sections 101 through 111 of ERISA. 18 These
sections may require disclosure of information to plan participants and beneficiaries, as well as
reporting of pension and welfare plan information to governmental agencies. Some of the
reporting and disclosure requirements provide that certain materials must be disseminated or
made available to participants at reasonable times and places. Other requirements arise only upon
the written request of a plan participant or beneficiary or upon the occurrence of a specific event.
Reports and disclosures required by ERISA include summary plan descriptions, annual reports,
and summaries of plan modifications. In addition, the Pension Protection Act of 2006 (PPA)19
made enhancements to the reporting and disclosure requirements, requiring the provision of
17

ERISA § 4, 29 U.S.C. § 1003. It should be noted that the question of whether a plan exists under ERISA can
sometimes be a litigated question. If it is found that a plan does not exist with respect to a particular employee benefit,
then the requirements of ERISA will not apply. See generally, e.g., Massachusetts v. Morash, 490 U.S. 107 (1989)
(vacation pay benefits not considered an employee benefit plan); see also Fort Halifax Packing Co. v. Coyne, 482 U.S.
1 (1987) (Court explains that one-time, lump-sum severance payment lacked an administrative scheme did not create a
plan under ERISA).
18
See ERISA § 101 et. seq., 29 U.S.C. § 1021 et. seq. and accompanying regulations. However, under Section
104(b)(3) of ERISA (29 U.S.C. § 1024(b)(3)), the Secretary may issue regulations exempting any welfare benefit plan
from all or part of the reporting and disclosure requirements under Title I of ERISA, or may provide for simplified
requirements if the Secretary finds that the act’s requirements are inappropriate. Under this authority, the Secretary has
issued regulations containing certain simplified reporting provisions and limited exemptions from reporting and
disclosure requirements for small plans, including unfunded or insured welfare benefit plans, that cover fewer than 100
participants and satisfy certain other requirements. See 29 C.F.R. § 2520.104.
It should also be noted that additional reporting and disclosure provisions exist under other sections of ERISA. See,
e.g., COBRA, P.L. 99-272, 100 Stat. 82 (1986), which requires health plans to issue notices related to continued
medical insurance coverage. ERISA § 606, 29 U.S.C. § 1166.
19
P.L. 109-280, 120 Stat. 780 (Aug. 17, 2006).

Congressional Research Service

7

Summary of the Employee Retirement Income Security Act (ERISA)

statements of a participant’s total accrued benefits,20 an annual funding notice for single-employer
plans, as well as a notice of eligibility to divest employer securities.

1. Summary Plan Description
As a mechanism for informing plan participants of the terms of the plan and its benefits, ERISA
requires that plan administrators furnish to participants a summary plan description (SPD).21 A
SPD is a written summary of the provisions of an employee benefit plan that contains the terms of
the plan and the benefits offered.22 It must be written in a manner that can be understood by the
average plan participant and be sufficiently accurate and comprehensive to reasonably apprise
participants and beneficiaries of their rights and obligations under the plan.23
ERISA specifies what the SPD must contain. 24 It must state when an employee can begin to
participate in the plan, describe the benefits provided by the plan, state when benefits become
vested, and describe the remedies available if a claim for benefits is denied in whole or in part. If
a plan is altered, participants must be informed, either through a revised SPD, or in a separate
document, called a summary of material modifications (discussed below), both of which must
also be given to plan participants.

2. Summary of Material Modifications
Under Section 104(b)(1), a plan administrator must provide a summary of any material
modification (SMM) in the terms of the plan as well as any change in information required to be
included in the SPD.25 This summary must be provided, in most cases, within 210 days after the
close of the plan year in which the modification was adopted, and also must be furnished to the
Labor Department upon request. 26 Similar to the SPD, the materials must be written in a manner
that can be understood by the average plan participant. While ERISA does not define “material
modification” and does not specifically cover what changes warrant an SMM,27 courts have
addressed this issue. 28 Courts have held plan amendments such as the establishment and
elimination of benefits are material modifications. 29 However, as courts have also pointed out, not
all plan amendments are material modifications.30

20

29 U.S.C. § 1025(a)(1).
ERISA § 101, 29 U.S.C. § 1021; 124 A.L.R. Fed. 355 (citing Hicks v Fleming Cos., 961 F.2d 537 (5th Cir. 1992)).
22
124 A.L.R. Fed. 355.
23
ERISA § 102(a)(1), 29 USC 1022(a)(1); See also S.Rept. 93-127, 2d Sess, (Apr. 18, 1973).
24
Hicks v. Fleming Cos., 961 F.2d 537 (5th Cir. 1992).
25
29 U.S.C. § 1024(b)(1), ERISA § 102(a); 29 U.S.C. § 1022(a); 29 C.F.R. § 2520.104b-3.
26
ERISA § 104(b)(1), 29 U.S.C. § 1024(b)(1); 29 C.F.R. § 2520.104a-8.
21

27
However, regulations provide a special rule for health plans. Subject to an exception, an SMM shall be furnished if
there is a “material reduction in covered services or benefits.” 29 C.F.R. § 2520.104b-3.
28
EMPLOYEE BENEFITS LAW (Matthew Bender 2d ed.)(2000).
29
See, e.g., Baker v. Lukens Steel Co., 793 F.2d 509 (3rd Cir. 1986)(elimination of an early retirement benefit option
was a material modification); American Fed’n of Grain Millers v. International Multifoods Corp., 1996 U.S. Dist.
LEXIS 9399 (W.D.N.Y. 1996) aff’d, 116 F.3d 976 (2d Cir. 1997) (amendment to a medical plan requiring retirees to
pay a portion of premiums considered a material modification).
30
See, e.g., Hasty v. Central States, Southeast and Southwest Areas Health and Welfare Fund, 851 F. Supp. 1250, 1256
(N.D. Ind. 1994) (amendments more specifically providing for a trustee’s discretionary authority under an employee
(continued...)

Congressional Research Service

8

Summary of the Employee Retirement Income Security Act (ERISA)

3. Annual Report
Section 103 of ERISA provides that certain employee benefit plans must file an annual report
with the Department of Labor.31 The annual report is considered to be a primary source of
information concerning the operation, funding, assets, and investments of employee benefit
plans.32 It is regarded as a compliance and research tool for the Labor Department, and a source
of information and data for use by other federal agencies, Congress, and private groups in
assessing employee benefit, tax, and economic trends and policies.33 While the annual report can
also be an important disclosure document for plan participants, participants must request a copy
from a plan administrator.34
The annual report must include a detailed financial statement containing information on the plan’s
assets and liabilities, an actuarial statement, as well as various other information, depending on
the type of the plan and the number of participants. Plan administrators must make copies of the
annual report available at the principal office of the plan administrator and at other places as may
be necessary to make pertinent information readily available to plan participants.35
The annual report must be filed within seven months after the close of a plan year, and extensions
may be available under certain circumstances. 36 The annual report is to be filed with the
Department of Labor on Form 5500.37 In 2006, the DOL published a rule requiring electronic
filing of Form 5500 annual reports for plan years beginning on or after January 1, 2008.38

4. Benefit Statements
Under Section 105 of ERISA, plan administrators are required to periodically furnish a pension
benefit statement to participants and beneficiaries.39 For defined contribution plans, a pension
benefit statement must be provided (1) every calendar quarter to participants and beneficiaries
who have the right to direct the investments of the account, or (2) once each calendar year for
participants and beneficiaries who have accounts with the plan, but do not have control over the
investment in the account.40 Section 105 also provides that plan administrators of defined benefit
(...continued)
benefit plan were not a material modification because the amendments “simply clarify a power”).
31
ERISA § 103; 29 U.S.C. § 1023. Labor Department regulations exempt some plans from the annual reporting
requirement. For example, welfare benefit plans having fewer than 100 participants may be exempted if certain
conditions are met. 29 C.F.R. § 2520.104-20.
32
72 Fed. Reg. 64710 (Nov. 16, 2007).
33
Id.
34
ERISA § 104(b), 29 U.S.C.§ 1024(b).
35
ERISA § 104(b)(2), 29 U.S.C.§ 1024(b)(2). Under this section, other materials, such as a bargaining agreement or
trust agreement affecting the plan may also be made available.
36
See 29 C.F.R. § 2520.104a-5.
37
While ERISA and the Internal Revenue Code provide that other annual reports must be filed with the PBGC and the
Internal Revenue Service, these reporting requirements can be satisfied by filing Form 5500 with the Labor
Department.
38
29 C.F.R. § 2520.104a-2.
39
ERISA provides an exception to this requirement for one-participant retirement plans. ERISA § 105; 29 U.S.C. §
1025.
40
Under this section, beneficiaries of a plan that do not fall into either category can request a pension benefit statement
(continued...)

Congressional Research Service

9

Summary of the Employee Retirement Income Security Act (ERISA)

plans must furnish benefit statements to participants and beneficiaries at least once every three
years to any individual who has both a non-forfeitable accrued benefit and is employed by the
employer maintaining the plan at the time the statement is furnished. Statements to participants in
defined benefit plans must also be provided upon request. Pension benefit statements must
indicate information such as amount of non-forfeitable benefits, accrued benefits, and the earliest
date on which accrued benefits become non-forfeitable. Benefit statements covering a defined
contribution plan must also include the value of each investment to which assets have been
allocated in a participant or beneficiary’s account.

5. Annual Funding Notice
Defined benefit plan administrators must also provide an annual plan funding notice. 41 While in
previous years funding notices have been furnished by multiemployer plans, single-employer
plans must provide this notice beginning in 2008. The required annual notices include
information about the plan’s funding policy, assets, and liabilities; a statement of the number of
participants; and a general description of the benefits that are eligible to be guaranteed by the
PBGC.42 The notice must be provided to the PBGC, plan participants and beneficiaries, labor
organizations representing such participants or beneficiaries, and, in the case of a multiemployer
plan, to each employer who has an obligation to contribute to the plan.

6. Notice of Freedom to Divest Employer Securities
The PPA amended the disclosure provisions of ERISA to require plan administrators to provide
participants with a notice of their eligibility to divest employer securities held in a defined
contribution plan. Section 101(m) of ERISA requires plan administrators to provide this notice to
applicable individuals at least 30 days before the date on which the individual is eligible to divest
these securities.43 The notice must inform the participant that he or she has the right to direct
divestment of the employer securities and informed of the importance of diversifying the
investment of retirement account assets. The notice must be written in a manner that can be
understood by the average plan participant. It may be delivered in written, electronic, or other
appropriate form that is reasonably accessible to the recipient.

C. Participation Requirements
ERISA restricts the amount of time an employee can be excluded from participating in a pension
plan.44 Under ERISA Section 202(a)(1)(A), an employee can only be excluded from an ERISA
pension plan on account of age or service if the employee is under age 21 or has not yet
(...continued)
from a plan administrator. ERISA § 105, 29 U.S.C. § 1025.
41
ERISA§ 101(f), 29 U.S.C. § 1021(f).
42
Information required to be on a plan’s funding notice is different, depending on whether the plan in question is a
single-employer or multi-employer plan. See ERISA § 101(f)(2)(B), 29 U.S.C. § 1021(f)(2)(B).
43
29 U.S.C. § 1021(m).
44
Section 410 of the Internal Revenue Code contains similar participation requirements. See 26 U.S.C. § 410(a).
Section 410 also contains coverage rules intended to ensure that a pension plan covers both highly compensated
employees and other employees proportionately. 26 U.S.C. § 410(b). Participation and coverage requirements must be
met in order for a plan to be considered qualified (i.e., eligible for favorable tax treatment).

Congressional Research Service

10

Summary of the Employee Retirement Income Security Act (ERISA)

completed a year of service. 45 The term “year of service” is defined as a 12-month period during
which the employee has worked at least 1,000 hours.46
Alternatively, in the case of a plan under which a participant’s benefits are 100% vested47 after no
more than two years of service, a plan may require two years of service prior to participating in
the plan. 48 Plans maintained for employees of certain educational institutions which provide for
100% vesting after one year may condition participation on an employee’s becoming 26 years old
or completing one year of service, whichever is later.49
Once an employee becomes eligible to participate, a plan must enroll the employee no later than
(1) the first day of the plan year or (2) six months after the date of satisfaction of the participation
requirements, whichever is earlier.50 ERISA also prohibits pension plans from excluding
employees from participation in the plan after an employee has attained a certain age.51

D. Benefit Accrual
Section 204 of ERISA governs benefit accrual, which generally refers to the rate at which benefits
are earned by a plan participant.52 An “accrued benefit” is defined differently for defined benefit
and defined contribution plans. For defined benefit plans, accrued benefit means an individual’s
benefit determined under the plan and expressed in the form of an annual benefit commencing at
normal retirement age, subject to exceptions.53 ERISA provides three primary methods for benefit
accrual under a defined benefit plan:
•

Under the “133-1/3 rule,” generally, a later rate of accrual for one year of plan
participation cannot be more than 133-1/3 percent of the rate for any other plan
year.

45

Courts have found that ERISA’s minimum participation requirements only prevent employers from denying
participation in a plan on basis of age or length of service. These requirements do not prevent employers from denying
plan participation on any other basis. As stated by the Third Circuit in Bauer v. Summit Bancorp, “In fact, an employer
could even exclude all persons whose names begin with the letter ‘H,’ as long as this was not deemed to be
discriminatory in application.” 325 F.3d 155, 166 n.2 (3rd Cir. 2003).
46
An employee’s eligibility to participate in a pension plan may be affected if there is a break in the employee’s period
of service. ERISA 202(b), 29 U.S.C. § 1052(b). For example, if an employee has had a one-year break in service, a
plan is not required to take into account any previous service performed in calculating the employee’s period of service.
A one-year break in service is a 12-consecutive-month period in which the employee has not completed more than 500
hours of service. ERISA § 203(b)(3)(A), 29 U.S.C. § 1053(b)(3)(A).
47
For information on the vesting of benefits under ERISA, see discussion under “E. Minimum Vesting Standards” in
section IV infra.
48
This variation is not available for 401(k) plans. Under §401(k)(2)(D), an employee with one year of service must be
allowed to elect to make pre-tax contributions to the plan.
49
ERISA § 202(a)(1)(B)(ii), 29 U.S.C. § 1052(a)(1)(B)(ii).
50
ERISA § 202(a)(4), 29 U.S.C. § 1052(a)(4).
51
ERISA § 202(a)(2), 29 U.S.C. § 1052(a)(2).
52

In DiGiacomo v. Teamsters Pension Trust Fund, 420 F.3d 220, 223 (3rd Cir. 2005), Justice Alito, in his former
position as a Third Circuit Judge, stated that accrued benefits, “are like chalk marks beside the employee’s name ... they
are conditional rights that do not become irrevocabl[e] ... until they vest.”
53
ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A).

Congressional Research Service

11

Summary of the Employee Retirement Income Security Act (ERISA)

•

Under the “3% rule,” a participant must accrue at least 3% of the participant’s
anticipated normal retirement benefit in each year of participation, up to a
maximum of 33-1/3 years.

•

Under the “fractional rule,” benefit accrual is focused on a worker’s
proportionate years of service under the plan. For example, if benefits can accrue
for a maximum of 40 years up to the date of the plan’s normal retirement age
(such as 65), a worker starting under the plan at age 25 and working to age 60
would get 35/40 of the maximum credit toward a pension.54

These tests limit the amount of “backloading,” a practice of providing a higher benefit accrual
rate for later years of service than for earlier years. “Front loading” benefits (providing a higher
accrual rate for earlier years of service than for later years) is permitted, but decreases in the rate
of benefit accrual cannot be based on the participant’s age.
In a defined contribution plan, the participant’s accrued benefit is the balance in his or her
account.55 Participants begin accruing a benefit in a defined contribution plan once they have met
the participation requirements under the terms of the plan.56 However, if an employer makes
contributions to an employee’s account, the accrued benefit received may be treated differently
for vesting purposes than the accrued benefit from employee contributions.57

1. Anti-cutback Rule
ERISA Section 204(g) prohibits plan amendments that eliminate or reduce benefits already
accrued by plan participants.58 This prohibition is commonly referred to as the “anti-cutback
rule.”59 Benefits subject to the anti-cutback rule include basic accrued benefits, as well as any
early retirement benefits, “retirement-type” subsidies, and other optional forms of benefits that an
individual who has met certain requirements (as defined by the plan) is eligible to receive.
However, the anti-cutback rule does not prevent a plan from freezing accrued benefits, reducing
the rate at which benefits will accrue in the future, or eliminating future benefit accruals
altogether.
Although an accrued benefit is generally defined in monetary terms, the Supreme Court has held
that the anti-cutback rule applies not only to a particular sum of money, but to a plan amendment
which hinders a participant’s receipt of benefits.60 In Central Laborers’ Pension Fund v. Heinz,61 a
retired plan participant’s benefits were suspended by the plan following a plan amendment that
prohibited participants from engaging in the type of post-retirement employment he performed.
54

ERISA § 204(b)(1), 29 U.S.C. § 1054(b)(1), 26 U.S.C. § 411(b). See also 26 C.F.R. § 1.411(b)-1.
See ERISA § 3(23), 29 U.S.C. § 1002(23)(B).
56
See section I(C) discussing ERISA’s participation requirements.
57
See ERISA § 204(c), 29 U.S.C. § 1054(c).
58
29 U.S.C. § 1054(g).
59
Certain exceptions to the anti-cutback rule may apply. For example, ERISA allows for a plan to reduce accrued
benefits by a retroactive amendment in certain cases where a plan is confronted with a “substantial business hardship.”
ERISA § 204(g)(1), 29 U.S.C. § 1054(g)(1) (citing ERISA § 302(d)(2), 29 U.S.C. § 1082(d)(2)).
60
Patrick C. DiCarlo, ERISA’S ANTI-CUTBACK RULE : THE PITFALLS OF PLAN MODIFICATION, 60 Employee Benefit Plan
Review 5 (2006).
61
Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004).
55

Congressional Research Service

12

Summary of the Employee Retirement Income Security Act (ERISA)

The plaintiff claimed that this suspension violated ERISA’s anti-cutback rule. The plan argued,
among other things, that the anti-cutback rule applies only to amendments affecting the dollar
amount the plan was obligated to pay, and that a mere suspension of benefits did not eliminate or
reduce an accrued benefit. The Court rejected this argument and affirmed the decision of the
lower court, stating that “as a matter of common sense, a participant’s benefits cannot be
understood without reference to the conditions imposed on receiving those benefits, and an
amendment placing materially greater restrictions on the receipt of the benefit ‘reduces’ the
benefit just as surely as a decrease in the size of the monthly benefit payment.”62

2. Benefit Accrual and Age Discrimination
ERISA contains provisions designed to prevent age discrimination in benefit accrual.63 Section
204(b)(1)(H) of ERISA prohibits a defined benefit plan from ceasing accruals or reducing the rate
of accrual on account of the employee’s age. Section 204(b)(2)(A) of ERISA provides that for
defined contribution plans, allocations to an employee’s account may not cease, and the rate at
which amounts are allocated to an employee’s account may not be reduced on account of age.
Over the past few years, several courts have evaluated these provisions in determining whether
cash balance plans64 are age-discriminatory. Discrimination has been alleged, among other things,
because of the structure of a cash balance plan, under which employees receive both pay credits
and interest credits. After the employee terminates employment, pay credits will generally cease,
but an employee will typically continue to earn interest credits. Because a younger employee has
more time before retirement age in which to earn interest than an older employee, an accrued
benefit may be greater for a younger employee. This result, some have argued, violates the age
discrimination provisions. While certain district court decisions have held that cash balance plans
violate the age discrimination provisions, all appellate courts to evaluate this issue have found
that the plans are not age discriminatory.65
The PPA amended the benefit accrual requirements of ERISA, as well as other federal laws, by
adding new standards under which a plan can be considered inherently non-age discriminatory.66
Under the act, a plan is not considered age discriminatory if a participant’s entire accrued benefit,
as determined under the plan’s formula, is at least equal to that of any similarly situated, younger
individual. A “similarly situated” individual is defined as an individual who is identical to the
participant in every respect, including length of service, compensation, position, and work
history, except for age. The PPA provides that cash balance plans do not discriminate against
older workers if, among other things, benefits are fully vested after three years of service and
62

Id. at 745.
Age discrimination provisions are also included in the Internal Revenue Code and the Age Discrimination in
Employment Act. See IRC § 411(b)(1)(H); 29 U.S.C. § 623(i)(1). Although the language under all three laws is not
identical, these laws are intended to be interpreted in the same manner. H. Rep. 99-727 at 378-79; P.L. 99-509, §
9204(d).
64
A cash balance plan is a “hybrid plan,” (i.e., a plan that has characteristics of both defined benefit and defined
contribution plans). Cash balance plans are defined benefit plans that look like defined contribution plans because the
employee’s accrued benefit is stated as an account balance. In a cash balance plan, the “account balance” is a record of
the benefit accrued by the participant, but it is not an individual account owned by the participant.
65
See, e.g., Hirt v. Equitable Ret. Plan for Employees, Managers and Agents, 533 F.3d 102 (2d Cir. 2008); Register v.
PNC Fin. Servs. Group, Inc., 477 F.3d 56 (3rd Cir. 2007); Drutis v. Rand McNally & Co., 499 F.3d 608, 610 (6th Cir.
2007); IBM Pers. Pension Plan v. Cooper, 457 F.3d 636 (7th Cir. 2006), cert. denied, 549 U.S. 1175 (2007).
66
ERISA § 204(b)(5), 29 U.S.C. § 1054(c); IRC § 411(b)(5); 29 U.S.C. § 623(i)(10).
63

Congressional Research Service

13

Summary of the Employee Retirement Income Security Act (ERISA)

interest credits do not exceed a market rate of return. In general, the new provisions regarding
cash balance plans are effective for periods beginning on or after June 29, 2005. Thus, cash
balance plans in existence prior to this date may still be subject to legal challenge. 67

E. Minimum Vesting Standards
While benefit accrual refers to the amount of benefits earned under ERISA, vesting occurs when
a plan participant’s accrued benefit is considered to be nonforfeitable.68 Once benefits have
vested, the participant may be able to receive the vested portion of his or her retirement benefits
even if he or she leaves the job before retirement. Vesting requirements apply only to benefits
derived from employer contributions to a plan. Participant contributions to a pension plan must be
automatically nonforfeitable to the participant.69
ERISA imposes two general vesting requirements: one depending on age and one depending on
length of service. First, under Section 203(a) of ERISA, all plans must provide that the
employees’ rights to their “normal retirement benefits”70 are fully vested upon attainment of
“normal retirement age.”71 While a plan may choose a “normal retirement age” for purposes of
determining when a participant’s benefits vest, ERISA provides that this age must be the earlier
of: (1) the time a participant attains normal retirement age as specified under a plan or (2) the
later of the time the participant attains age 65 or the fifth anniversary of the time the participant
commenced participation in the plan. 72
Second, ERISA’s vesting provisions also require benefits to vest based on an employee’s years of
service to the employer. Under ERISA § 203(b), a qualified defined benefit plan must meet one of
two vesting schedules. 73 The first schedule is met if a participant’s benefits are fully vested after
five years of service, commonly referred to as five-year “cliff” vesting. Alternatively, a
participant’s benefits may vest under the following graded vesting schedule: 74

67

For more information on this issue, see CRS Report RL33004, Cash Balance Pension Plans and Claims of Age
Discrimination, by Jennifer Staman and (name redacted).
68
There can be confusion in understanding the difference between when benefits accrue and when benefits vest. As
articulated by the Supreme Court, accrual is “the rate at which an employee earns benefits to put in his pension
account.” Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739, 749 (2004). Vesting, on the other hand, is “the
process by which an employee’s already-accrued pension account becomes irrevocably his property.” Id.
69
Parallel vesting provisions may be found in Internal Revenue Code § 411.
70
“Normal retirement benefit,” as defined by Section 3(22) of ERISA, means the greater of an early retirement benefit
offered under the plan or the benefit under the plan commencing at normal retirement age.
71
While normal retirement age under a plan can be a specific age, it also may include service requirements (e.g., 55
years old with at least five years of service). See also 26 U.S.C. § 411(a)(8).
72
ERISA § 3(24), 29 U.S.C. § 1002(24). It should also be noted that the Treasury Department has recently issued
regulations regarding distributions from a qualified pension plan upon attainment of normal retirement age. See 72 Fed.
Reg. 28604 (May 22, 2007), 26 C.F.R. § 1.401(a)-1(b).
73
29 U.S.C. § 1053.
74
ERISA § 203(a)(2)(A); 29 U.S.C. § 1053(a)(2)(A). See ERISA § 203(b); 29 U.S.C. § 1053(b), for requirements
relating to computing a participant’s period of service. This section provides that in computing the period of service for
purposes of the vesting requirement, all years of service must be taken into account, subject to certain exceptions and
limitations.

Congressional Research Service

14

Summary of the Employee Retirement Income Security Act (ERISA)

Years of service75

Vesting percentage

3

20%

4

40%

5

60%

6

80%

7

100%

Most defined contribution plans are subject to similar vesting requirements. Exceptions include
the SIMPLE 401(k) and the Safe Harbor 401(k) plans, in which participants are immediately
vested in employer contributions. For other defined contribution plans, employers have a choice
between two vesting schedules for employer contributions.76 Under cliff vesting, participants
must be 100% vested in employer contributions after no more than three years of service. Under
graduated or graded vesting, an employee must be at least 20% vested after two years, 40% after
three years, 60% after four years, 80% after five years, and 100% vested after six years. Both
employer matching contributions (i.e., employer plan contributions made on behalf of an
employee and on account of an employee’s elective contributions)77 as well as employer
nonelective contributions (such as profit-sharing contributions) must vest under these rules.

Breaks in Service
ERISA protects plan participants from losing credit for earlier service in cases in which workers
leave their jobs and then return to work within five years.78 Once an employee becomes eligible
to participate in a pension plan, all years of service with the employer during which the employer
maintained the plan (including service before becoming a plan participant) must be taken into
account for purposes of determining how much service will be counted toward meeting the plan’s
vesting requirement. In the case of a nonvested participant, years of service before any break in
service must be taken into account upon re-employment. In a defined contribution plan, if a
participant who is not 100% vested incurs a break in service of less than five years and
subsequently returns to work, all service after returning to work must be added to the pre-break
service in determining the vested portion of the pre-break benefit. A break in service occurs in
any year in which the employee completes less than 500 hours of service. Generally, workers will
not incur a break in service for up to one year’s absence due to pregnancy, childbirth, infant care,
or adoption.79

F. Benefit Protections for Spouses
The Retirement Equity Act of 1984 (REA)80 amended ERISA to increase pension protections for
the survivors of deceased plan participants. As amended by the REA, ERISA requires defined
75
A year of service means a consecutive 12 month period during which a participant has completed 1,000 hours of
service.
76
ERISA § 203(a)(2)(B), 29 U.S.C. § 1053(a)(2)(B).
77
See 26 U.S.C. § 401(m)(4).
78
ERISA § 203(b), 29 U.S.C. § 1053(b).
79
ERISA § 203(b)(3)(E), 29 U.S.C. § 1053(b)(3)(E).
80
P.L. 98-397, 98 Stat. 1451 (1984).

Congressional Research Service

15

Summary of the Employee Retirement Income Security Act (ERISA)

benefit plans and money purchase plans to provide preretirement and postretirement survivor
annuities to married employees unless a written election to waive the survivor annuity is signed
by both the employee and his or her spouse. 81 In the event of divorce, ERISA requires plan
administrators to honor qualified domestic relations orders (QDROs) issued by state courts that
divide the pension or account balance between the two parties. 82 This requirement ensures that a
court order awarding a share of a vested pension benefit to the former spouse of a divorced plan
participant will be honored by the plan.

1. Preretirement Survivor Benefits
ERISA requires defined benefit plans to provide a survivor annuity to the spouse of a vested
active participant or vested former participant. The cost of the preretirement survivor annuity may
be paid by the employer or passed on to covered participants through reduced benefits or
increased contributions. To waive the preretirement survivor benefit, both participant and spouse
must sign a waiver form. The plan can defer payment of the survivor annuity until the month in
which the deceased participant would have reached the plan’s earliest retirement age. Profitsharing plans (including 401(k) plans) and stock bonus plans must provide for automatic payment
of the participant’s vested account balance to his or her spouse upon the death of the participant
unless both parties designate an alternate beneficiary in writing. If either a profit-sharing plan or
stock bonus plan offers a life annuity option, it must provide a pre-retirement survivor annuity.

2. Postretirement Survivor Benefits
ERISA requires the default form of benefit paid to a married participant in a defined benefit plan
to be a joint and survivor annuity that provides a life annuity to the survivor equal to at least 50%
of the joint benefit paid while the participant was living. Beginning in 2008, the PPA requires
plans to offer a 75% survivor annuity option if the plan’s survivor annuity is less than 75%, and to
offer a 50% survivor annuity option if the plan’s survivor annuity is greater than 75%.83 Waiving
the survivor benefit requires the written consent of both the participant and spouse. The
participant and spouse must have at least 90 days ending on the annuity starting date to waive the
survivor annuity. The decision to waive the survivor annuity also can be revoked during this
period.
Because a joint and survivor annuity is based on the joint life expectancy of the participant and
spouse instead of a single life, the amount of the joint annuity is lower than it would be if it were
a single-life annuity. Once a joint and survivor annuity is in effect and the retirement annuity has
commenced, the spouse to whom the participant was married on the date that the annuity started
is entitled to the survivor annuity, even if the couple is no longer married when the participant
dies.
Before the annuity begins, the employer must provide each participant with a written notice that
states:

81
ERISA § 205, 29 U.S.C. § 1055, and 26 U.S.C. § 417. Payment to a married participant in a DB plan of a single-life
annuity or a lump sum requires the spouse’s written consent.
82
ERISA § 206, 29 U.S.C. § 1056.
83
ERISA § 205(d), 29 U.S.C. § 1055(d), as amended by Section 1004 of the PPA.

Congressional Research Service

16

Summary of the Employee Retirement Income Security Act (ERISA)

•

the terms and conditions of the qualified joint and survivor annuity;

•

the right of the participant and spouse to decline the survivor annuity and the
effect of the decision;

•

the rights of the spouse; and

•

the right to reverse the decision and the effect of reversing it.

3. Qualified Domestic Relations Orders
The REA of 1984 amended ERISA to allow plans to honor state court orders awarding a share of
a worker’s pension to a former spouse. 84 ERISA sets forth procedures the plan administrator must
follow to determine if a court order is a qualified domestic relations order (QDRO). While
ERISA generally requires pension plans to provide that “benefits under the plan may not be
assigned or alienated,” an exception to this requirement is made for QDROs.85 Payments to the
former spouse of a participant may begin when the participant becomes eligible to retire, even if
the participant is still employed.
A QDRO must specify:
•

the name and last known address of the participant and each person to receive
money,

•

the amount or percentage of the participant’s benefits to be paid to each person,

•

the number of payments or the time period to which the order applies, and

•

each plan to which the order relates.

A QDRO generally will qualify only if it does not require the plan to:
•

provide a form of benefit not otherwise provided by the plan,

•

pay more benefits than it would have paid in the absence of the order, or

•

pay benefits that the plan must already pay to another beneficiary because of an
earlier QDRO.

The PPA directed the Secretary of Labor to issue regulations to clarify whether a domestic
relations order that supersedes or revises an earlier QDRO will be considered to be qualified, and
to state the conditions under which a QDRO will not be treated as qualified because of the time at
which it was issued.86

G. Buyouts, Mergers, and Consolidations
If a company is purchased by another firm, participants and beneficiaries in the acquired
company may not be denied pension benefits already earned, and PBGC insurance protections
continue to apply to those benefits. In the event of a plan merger, consolidation, or transfer of
84

ERISA § 206, 29 U.S.C. § 1056, as amended by § 104 of the REA of 1984.
ERISA § 206(d)(3), 29 U.S.C. § 1056(d)(3).
86
§1001 of the PPA.
85

Congressional Research Service

17

Summary of the Employee Retirement Income Security Act (ERISA)

plan assets or liabilities, the participant’s benefit must be equal to, or greater than, the benefit to
which the participant would have been entitled had the plan been terminated immediately before
the merger, consolidation, or transfer.87

H. Plan Funding
To ensure that sufficient money is available to pay promised pension benefits to participants and
beneficiaries, ERISA sets rules that require plan sponsors to fully fund the pension liabilities of
defined benefit plans. 88 These rules were substantially modified by the PPA. The funding
requirements of ERISA recognize that pension liabilities are long-term liabilities. Consequently,
plan liabilities need not be funded immediately, but instead can be amortized (paid off with
interest) over a period of years. Single-employer plans generally are required to amortize initial
past service liabilities and past service liabilities arising under plan amendments over no more
than seven years. Defined contribution plans do not promise a specific benefit, and so these plans
have no funding requirements.
ERISA requires employers that sponsor defined benefit plans to fund the pension benefits that
plan participants earn each year. This is referred to as funding the normal cost of the plan. In
addition, DB plan sponsors must amortize the cost of any pension benefits granted to employees
for past service, but for which no monies were set aside. Furthermore, if a DB plan retroactively
increases the level of benefits by plan amendment, these new liabilities must be amortized as
well. The assets of the pension plan must be kept in a trust that is separate from the employer’s
general assets. Assets in the pension trust fund are protected from the claims of creditors in the
event that the plan sponsor files for bankruptcy.

1. Funding Requirements for Single-employer Plans
ERISA requires companies that sponsor defined benefit pension plans to fully fund the benefits
that plan participants earn each year. If a plan is underfunded, the plan sponsor must amortize this
unfunded liability over a period of years. The PPA established new rules for determining whether
a defined benefit plan is fully funded, the contribution needed to fund the benefits that plan
participants will earn in the current year, and the contribution to the plan that is required if
previously earned benefits are not fully funded. In general, the new rules are effective with plan
years beginning in 2008, but many provisions of the PPA will be phased in over several years.

a. Minimum funding standards for single-employer plans
Pension plan liabilities extend many years into the future. Determining whether a pension is
adequately funded requires converting the future stream of pension payments into the amount that
would be needed today to pay off those liabilities all at once. This amount—the “present value”
of the plan’s liabilities—is then compared with the value of the plan’s assets. An underfunded
plan is one in which the value of the plan’s assets falls short of the present value of its liabilities.
Converting a future stream of payments (or income) into a present value requires the future
87

ERISA § 208, 29 U.S.C. § 1058.

88

ERISA §§302 through 308 govern funding of defined benefit pension plans. (Also see 26 U.S.C. § 412, §430, §431,
and §432.) Funding requirements for single-employer plans were amended by §§101 to 116 of the PPA. Funding
requirements for multiemployer DB plans were amended by §§201 to 221 of the PPA.

Congressional Research Service

18

Summary of the Employee Retirement Income Security Act (ERISA)

payments (or income) to be discounted using an appropriate interest rate. Other things being
equal, the higher the interest rate, the smaller the present value of the future payments (or
income), and vice versa.
When fully phased in, the new funding requirements established by the PPA will require plan
assets to be equal to 100% of plan liabilities. Any unfunded liability will have to be amortized
over no more than seven years. Sponsors of severely underfunded plans that are at risk of
defaulting on their obligations will be required to fund their plans according to special rules that
will result in higher employer contributions to the plan. Plan sponsors are allowed to use credit
earned for past contributions (called “credit balances”) to offset required contributions, but only if
the plan is funded at 80% or more. The value of credit balances must be adjusted to reflect
changes in the market value of plan assets since the date the contributions that created the credit
balances were made.
A plan sponsor’s minimum required contribution is based on the plan’s target normal cost and the
difference between the plan’s funding target and the value of the plan’s assets. The target normal
cost is the present value of all benefits that plan participants will accrue during the year. The
funding target is the present value of all benefits—including early retirement benefits—already
accrued by plan participants as of the beginning of the plan year. If a plan’s assets are less than
the funding target, the plan has an unfunded liability. This liability—less any permissible credit
balances—must be amortized in annual installments over no more than seven years. The plan
sponsor’s minimum required annual contribution is the plan’s target normal cost for the plan year,
but not less than zero. The 100% funding target is being phased in at 92% in 2008, 94% in 2009,
96% in 2010, and 100% in 2011 and later years.89 The phase-in does not apply to underfunded
plans that were required to make deficit reduction contributions in 2007.90 Those plans have a
100% funding target in 2008.
ERISA requires plans to discount future liabilities using three different interest rates, depending
on the length of time until the liabilities must be paid. 91 A short-term interest rate is used to
calculate the present value of liabilities that will come due within five years. A mid-term interest
rate is used for liabilities that will come due in five to 20 years, and a long-term interest rate is
applied to liabilities that will come due in more than 20 years. The Secretary of the Treasury
determines these rates, which are derived from a “yield curve” of investment-grade corporate
bonds averaged over the most recent 24 months. 92 The yield curve is being phased in over three
89

The PPA, through this transition rule, gave pension plans a three-year period to ease into the new plan funding
requirements, in which plans could gradually increase the value of the plan assets, thus relieving them from the burden
of having to contribute a large part of the funding shortfall in one year. The PPA, however, placed a limitation on this
transition rule, under which the rule will not apply with respect to any plan year after 2008 unless the shortfall
amortization base was zero (e.g., the plan failed to meet the transition rule, or be 92% funded in 2008). Section 202 of
the Worker, Retiree, and Employer Recovery Act (WRERA), enacted in December 2008, allows plans to follow the
transition rule even if the plan’s shortfall amortization base was not zero in the preceding year. 29 U.S.C. § 1083(c)(5);
26 U.S.C. § 430(c)(5). Thus, a plan that was not 92% funded in 2008 would only be required to be 94% funded in
2009, instead of 100%. This provision gives plans some additional time to be 100 percent funded, a requirement that
may have become more difficult to fulfill because of the decline in the financial markets and the resulting loss of value
of plan assets.
90
Deficit reduction contributions (DRCs) were additional contributions required of underfunded plans prior to
enactment of the PPA. The PPA eliminated DRCs after 2007.
91
ERISA § 303, 29 U.S.C. § 1083, as amended by §102 of the PPA.
92
A yield curve is a graph that shows interest rates on bonds plotted against the maturity date of the bond. Normally,
long-term bonds have higher yields than short-term bonds because both credit risk and inflation risk rise as the maturity
(continued...)

Congressional Research Service

19

Summary of the Employee Retirement Income Security Act (ERISA)

years beginning in 2007. It will replace the four-year average of corporate bond rates established
under the Pension Funding Equity Act of 2004,93 which expired on December 31, 2005.94

b. “At risk” plans
Pension plans that are determined to be at risk of defaulting on their liabilities must use specific
actuarial assumptions to determine plan liabilities.95 A plan is deemed to be at-risk if it is unable
to pass either of two tests. Under the first test, a plan is at-risk if it is less than 70% funded under
the “worst-case scenario” assumptions that (1) the employer is not permitted to use credit
balances to reduce its cash contribution and (2) employees will retire at the earliest possible date
and will choose to take the most expensive form of benefit. If a plan does not pass this test, it will
be deemed to be at-risk unless it is at least 80% funded under standard actuarial assumptions.
This latter test will be phased in over four years, with the minimum funding requirement starting
at 65% in 2008 and rising to 70% in 2009, 75% in 2010, and 80% in 2011. If a plan passes either
of these two tests, it is not deemed to be at-risk; however, it is required to make up its funding
shortfall over no more than seven years. Plans that have been at-risk for at least two of the
previous four years also will be subject to an additional “loading factor” equal to 4% of the plan’s
liabilities plus $700 per participant, which is added to the plan sponsor’s required contribution to
the plan. Plan years prior to 2008 will not count for this determination. Plans with 500 or fewer
participants in the preceding year are exempt from the at-risk funding requirements.

c. Mortality tables
To estimate a pension plan’s future obligations, the plan’s actuaries use mortality tables to project
the number of participants who will claim a pension and the average length of time that
participants and their surviving beneficiaries will receive pension payments. ERISA requires the
Secretary of the Treasury to prescribe the mortality tables to be used for these estimates.96 Large
plans can petition the IRS to use a plan-specific mortality table.

2. Valuation of Plan Assets
Prior to enactment of the PPA, a plan sponsor could determine the value of a plan’s assets using
actuarial valuations, which can differ from the current market value of those assets. For example,
in an actuarial valuation, the plan’s investment returns could be “smoothed” (averaged) over a
five-year period, and the average asset value could range from 80% to 120% of the fair market
value. Averaging asset values reduces volatility in the measurement of plan assets that can be
caused by year-to-year fluctuations in interest rates and the rate of return on investments.
Averaging therefore reduces the year-to-year volatility in the plan sponsor’s required minimum
contributions to the pension plan. The PPA narrowed the range for actuarial valuations to no less
than 90% and no more than 110% of fair market value and it reduced the maximum smoothing
(...continued)
dates extend further into the future. Consequently, the yield curve usually slopes upward from left to right.
93
P.L. 108-218, 118 Stat. 596 (Apr. 10, 2004).
94
The PPA extended the interest rates permissible under P.L. 108-218 through 2007 for purposes of the current liability
calculation.
95
ERISA § 303, 29 U.S.C. § 1083, as amended by §102 of the PPA.
96
ERISA § 303, 29 U.S.C. §1083 as amended by §102 of the PPA.

Congressional Research Service

20

Summary of the Employee Retirement Income Security Act (ERISA)

period to two years. Plans with more than 100 participants are required to use the first day of the
plan year as the basis for calculations of plan assets and liabilities. Plans with 100 or fewer
participants can choose another date.

Plan contributions and credit balances
Within limits, plan sponsors can offset required current contributions with previous contributions.
However, these so-called “credit balances” can be used to reduce the plan sponsor’s minimum
required contribution to the plan only if the plan’s assets are at least 80% of the funding target,
not counting prefunding balances that have arisen since the PPA became effective. 97 Existing
credit balances and new prefunding balances must both be subtracted from assets in determining
the “adjusted funding target attainment” percentage that is used to determine whether certain
benefits can be paid and whether benefit increases are allowed. Credit balances also have to be
adjusted for investment gains and losses since the date of the original contribution that created the
credit balance. Credit balances must be separated into balances carried over from 2007 and
balances resulting from contributions in 2008 and later years.

3. Benefit Limitations in Underfunded Plans
ERISA places limits on (1) plan amendments that would increase benefits, (2) benefit accruals,
and (3) benefit distribution options (such as lump sums) in single-employer defined benefit plans
that fail to meet specific funding thresholds.98

a. Shutdown Benefits
Shutdown benefits are payments made to employees when a plant or factory is shut down. These
benefits typically are negotiated between employers and labor unions, and usually they are not
prefunded. ERISA prohibits shut-down benefits and other “contingent event benefits” from being
paid by pension plans that are funded at less than 60% of full funding unless the employer makes
a prescribed additional contribution to the plan. The PBGC guarantee for such benefits is phased
in over a five-year period commencing when the event occurs.99

b. Restrictions on benefit accruals
ERISA requires benefit accruals to cease in plans funded at less than 60% of full funding. Once a
plan is funded above 60%, the employer—and the union in a collectively bargained plan—must
decide how to credit past service accruals. This provision does not apply if the employer makes
an additional contribution prescribed by statute. However, Section 203 of WRERA provides that
for the first plan year beginning during the period of October 1, 2008, through September 30,
2009, this restriction on benefit accruals is determined using the funding levels from the
97
A credit balance in a plan at the end of the 2007 plan year is referred to as a “carryover balance.” A credit balance
created after 2007 is referred to as a “prefunding balance.”
98
ERISA § 206, 29 U.S.C. § 1056 as amended by §103 of the PPA.
99
In 2004, the 6th Circuit Court of Appeals ruled that the PBGC could set a plan termination date that would prevent
the agency from being liable for shutdown benefits. PBGC v. Republic Technologies International, LLC, et al., 386
F.3d 659 (6th Cir. 2004). In March 2005, the Supreme Court declined to hear the case, leaving the Circuit Court’s
decision in place.

Congressional Research Service

21

Summary of the Employee Retirement Income Security Act (ERISA)

preceding year, instead of the current year, if the funding levels for the preceding year are greater.
Thus, for plans that have lost a lot in the value of plan assets, looking to the funding levels for the
previous year may allow some plans to continue providing future benefit accruals that would
otherwise have to cease them.

c. Restrictions on benefit increases
Plan amendments that increase benefits are prohibited if the plan is funded at less than 80% of the
full funding level, unless the employer makes additional contributions to fully fund the new
benefits. Benefit increases include—but are not limited to—increases in the rate of benefit accrual
and increasing the rate at which benefits become vested.

d. Restrictions on lump-sum distributions
Lump-sum distributions are prohibited if the plan is funded at less than 60% of the full funding
level or if the plan sponsor is in bankruptcy and the plan is less than 100% funded.100 If the plan is
funded at more than 60% but less than 80%, the plan may distribute as a lump sum no more than
half of the participant’s accrued benefit.

e. Notice to participants
ERISA requires plan sponsors to notify participants of restrictions on shutdown benefits, lumpsum distributions, or suspension of benefit accruals within 30 days of the plan being subject to
any of these restrictions. The restrictions on benefits in underfunded plans are effective in 2008,
but not before 2010, for collectively bargained plans.

4. Lump-sum Distributions
ERISA requires defined benefit pensions to offer participants the option to receive their accrued
benefit as a life annuity: a series of monthly payments guaranteed for life. Many defined benefit
plans also offer participants the option to take their accrued benefit as a lump sum at the time they
separate from the employer. The amount of a lump-sum distribution from a defined benefit
pension is inversely related to the interest rate used to calculate the present value of the benefit
that has been accrued under the plan: the higher the interest rate, the smaller the lump sum and
vice versa. To protect employees’ accrued benefits, ERISA prescribes interest rates and mortality
tables to be used in determining the minimum value of a participant’s benefit expressed as a lump
sum. Before the PPA, minimum lump-sum values were calculated using the interest rate on 30year Treasury bonds. As amended by the PPA, ERISA requires lump-sum payments from defined
benefit plans to be no less than the amount that would result from using the applicable corporate
bond interest rate.101 It requires plans that use an interest rate that results in larger lump sums to
treat these larger payments as a subsidy to plan participants, which must be funded by the plan
sponsor. The new rules for lump sums are being phased in over five years, beginning in 2008.
100

However, lump-sum payments of $5,000 or less may be paid by an underfunded plan that is otherwise precluded
from paying larger lump-sum distributions. See 29 U.S.C. § 1056(g)(3)(E); 26 U.S.C. § 436(d)(5), as amended by
Section 101 of WRERA.
101
ERISA § 205(g), 26 U.S.C. § 417(e), as amended by § 302 of the PPA.

Congressional Research Service

22

Summary of the Employee Retirement Income Security Act (ERISA)

When fully phased in, minimum permissible lump-sum distributions will be based on a threesegment interest rate yield curve, derived from the rates of return on investment-grade corporate
bonds of varying maturities. Plan participants of different ages will have their lump-sum
distributions calculated using different interest rates. Other things being equal, a lump-sum
distribution paid to a worker who is near the plan’s normal retirement age will be calculated using
a lower interest rate than will be used for a younger worker. As a result, all else being equal, an
older worker will receive a larger lump sum than a similarly situated younger worker. The interest
rates used to calculate lump sums will be based on current bond rates rather than the three-year
weighted average rate used to calculate the plan’s funding target. Plans funded at less than 60%
are prohibited from paying lump-sum distributions. Plans funded at 60% to 80% can pay no more
than half of a participant’s accrued benefit as a lump-sum distribution.
The PPA also established a new interest rate floor for testing whether a lump sum paid from a
defined benefit plan complies with the benefit limitations under IRC §415(b).102 In general, IRC
§415(b) limits the annual single-life annuity payable from a qualified defined benefit plan to the
lesser of 100% of average compensation over three years or $195,000 (in 2009). A benefit paid as
a lump sum must be converted to an equivalent annuity value for purposes of applying this limit.
As amended by the PPA, ERISA requires plans making this calculation to use an interest rate that
is no lower than the highest of (1) 5.5%, (2) the rate that results in a benefit of no more than
105% of the benefit that would be provided if the interest rate required for determining a lump
sum distribution were used, or (3) the interest rate specified in the plan documents.103

5. Funding Requirements for Multiemployer Plans
A multiemployer plan is a collectively bargained plan maintained by several employers—usually
within the same industry—and a labor union. Multiemployer defined benefit plans are subject to
funding requirements that differ from those for single-employer plans. The PPA established a new
set of rules for improving the funding of multiemployer plans that the law defines as being in
“endangered” or “critical” status.104 These new requirements will remain in effect through 2014.
As amended by the PPA, ERISA requires each multiemployer plan to certify the plan’s current
funding status and project its funding status for the following six years within 90 days after the
start of the plan year. If the plan is underfunded, it has 30 days after the certification date to notify
participants and eight months to develop a funding schedule that meets the statutory funding
requirements and to present it to the parties of the plan’s collective bargaining agreement.
Multiemployer plans must amortize any increases in plan liabilities that are due to benefit
increases or to changes in the actuarial assumptions used by the plan over a period of 15 years.
The PPA increased the limit on tax-deductible employer contributions to multiemployer plans to
140% of the plan’s current liability (up from 100%), and it eliminated the 25%-of-compensation
combined limit on contributions to defined benefit and defined contribution plans. The PPA also
allows the Internal Revenue Service to permit multiemployer plans that project a funding
deficiency within ten years to extend the amortization schedule for paying off its liabilities by

102

IRC §415 sets limitations on benefits and contributions in qualified plans.

103

For more detailed information of the effect of the PPA on lump-sums, see CRS Report RS22765, Lump-Sum
Distributions Under the Pension Protection Act, by (name redacted).
104
Funding requirements for multiemployer plans were amended by §§201-221 of the PPA.

Congressional Research Service

23

Summary of the Employee Retirement Income Security Act (ERISA)

five years, with a further five-year extension permissible. It requires the plans to adopt a recovery
plan and to use specific interest rates for plan funding calculations.

a. Requirements for underfunded multiemployer plans
The PPA established mandatory procedures, effective through 2014, to improve the funding of
seriously underfunded multiemployer plans. A multiemployer plan is considered to be
endangered if it is less than 80% funded or if the plan is projected to have a funding deficiency
within seven years. A plan that is less than 80% funded and is projected to have a funding
deficiency within seven years is considered to be seriously endangered. An endangered plan has
one year to implement a “funding improvement plan” designed to reduce the amount of underfunding. Endangered plans have 10 years to improve their funding. They must improve their
funding percentage by one-third of the difference between 100% funding and the plan’s funded
percentage from the earlier of (1) two years after the adoption of the funding improvement plan or
(2) the first plan year after the expiration of collective bargaining agreements that cover at least
75% of the plan’s active participants.
Seriously endangered plans that are less than 70% funded have 15 years to improve their funding.
They must improve their funding percentage by one-fifth of the difference between 100% funding
and the plan’s funded percentage from the earlier of (1) two years after the adoption of the
funding improvement plan or (2) the first plan year after the expiration of collective bargaining
agreements that cover at least 75% of the plan’s active participants. A plan that is endangered or
seriously endangered may not increase benefits. If the parties to the collective bargaining
agreement are not able to agree on a funding improvement plan, a default funding schedule
applies that will reduce future benefit accruals. A multiemployer plan is not endangered in any
plan year in which the required funding percentages are met.
A multiemployer plan is considered to be in critical status if (1) it is less than 65% funded and it
has a projected funding deficiency within five years or will be unable to pay benefits within seven
years; (2) it has a projected funding deficiency within four years or will be unable to pay benefits
within five years (regardless of its funded percentage); or (3) its liabilities for inactive participants
are greater than its liabilities for active participants, its contributions are less than carrying costs,
and a funding deficiency is projected within five years. A plan in critical status has one year to
develop a rehabilitation plan designed to reduce the amount of underfunding. 105

b. Reductions in adjustable benefits
In general, ERISA’s anti-cutback rule prohibits reductions in accrued, vested benefits. The PPA
relaxed the anti-cutback rule so that multiemployer plans in critical status are permitted to reduce
or eliminate early retirement subsidies and other “adjustable benefits” to help improve their
funding status if this is agreed to by the bargaining parties. Benefits payable at normal retirement
age cannot be reduced, and plans are not permitted to cut any benefits of participants who retired
before they were notified that the plan is in critical status. Adjustable benefits include certain
105

WRERA provides temporary relief from the multi-employer plan funding rules created by the PPA. For example,
under Section 204 of WRERA, a sponsor of a multiemployer defined benefit pension plan may elect for the status of
the plan year that begins during the period between October 1, 2008, and September 30, 2009, to be the same as the
plan’s certified status for the previous year. Accordingly, if a plan was not in endangered or critical status for the prior
year, the sponsor may elect to retain this status and may avoid additional plan funding requirements.

Congressional Research Service

24

Summary of the Employee Retirement Income Security Act (ERISA)

optional forms of benefit payment, disability benefits, early retirement benefits, joint and survivor
annuities (if the survivor benefit exceeds 50%), and benefit increases adopted or effective less
than five years before the plan entered critical status.

c. Disclosure requirements
As amended by the PPA, ERISA requires multiemployer plans to send funding notices to
participants within 120 days after the end of the plan year. The Department of Labor will post
information from plans’ annual reports on its website, and plans are required to provide certain
information to participants on request. For plans in endangered or critical status, the plan actuary
must certify that the funding improvement is on schedule. Annual reports must contain
information on funding improvement plans or rehabilitation plans. Notification must be provided
to participants, beneficiaries, bargaining parties, the PBGC, and the Secretary of Labor within 30
days after the plan determines that it is in endangered or critical status.

I. Fiduciary Responsibility
ERISA imposes certain obligations on plan fiduciaries, persons who are generally responsible for
the management and operation of employee benefit plans. ERISA Section 3(21)(A) provides that
a person is a “fiduciary” to the extent that the person: (1) exercises any discretionary authority or
control with respect to the management of the plan or exercises any authority with respect to the
management or disposition of plan assets; (2) renders investment advice for a fee or other
compensation with respect to any plan asset or has any authority or responsibility to do so;106 or
(3) has any discretionary responsibility in the administration of the plan. 107 Every plan governed
by ERISA must have one or more named fiduciaries, and these fiduciaries must be named in the
plan document. 108 Section 404(a)(1) of ERISA establishes the duties owed by a fiduciary to
participants and beneficiaries of a plan. This section identifies four standards of conduct: (1) a
duty of loyalty, (2) a duty of prudence, (3) a duty to diversify investments, and (4) a duty to
follow plan documents to the extent that they comply with ERISA. 109

1. Duty of Loyalty
Section 404(a)(1)(A) of ERISA requires plan fiduciaries to discharge their duties “solely in the
interest of the participants and beneficiaries” and for the “exclusive purpose” of providing
benefits to participants and beneficiaries and defraying reasonable expenses of administering the
plan.110 The duty of loyalty applies in situations where the fiduciary is confronted with a potential

106

See 29 C.F.R. § 2510.3-21, which provides guidance as to when a person shall be deemed to be rendering
investment advice to an employee benefit plan.
107
Plan fiduciaries may include plan trustees, plan administrators, and a plan’s investment managers or advisors. See
Department of Labor, Fiduciary Responsibilities, available at https://www.dol.gov/dol/topic/retirement/
fiduciaryresp.htm#doltopics.
108
ERISA § 402(a), 29 U.S.C. § 1102(a).
109
ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1).
110
This section is supplemented by Section 403(c)(1) of ERISA, which provides that the “assets of a plan shall never
inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits ... and defraying
reasonable expenses of administering the plan.” 29 U.S.C. § 1103(c)(1).

Congressional Research Service

25

Summary of the Employee Retirement Income Security Act (ERISA)

conflict of interest, for instance, when a pension plan trustee has responsibilities to both the plan
and the entity (such as the employer or union) sponsoring the plan.111
However, just because an ERISA fiduciary engages in a transaction that incidentally benefits the
fiduciary or a third party does not necessarily mean that a fiduciary breach has occurred. 112 One
case to address this idea is Donovan v. Bierwirth, a case under which pension plan trustees, who
were also corporate officers, were responsible for deciding whether they should tender shares of
company stock in order to thwart a hostile takeover attempt.113 The trustees not only decided
against tendering the stock, but also decided to purchase additional company stock for the
pension plan. In finding that the trustees had breached their fiduciary duties, the court in Donovan
noted that it is not a breach of fiduciary duty if a trustee who, after careful and impartial
investigation, makes a decision that while benefitting the plan, also incidentally benefits the
corporation, or the fiduciaries themselves. However, fiduciary decisions must be made with an
“eye single to the interests of the participants and beneficiaries.”114 The court articulated that the
trustees have a duty to “avoid placing themselves in a position where their acts as officers and
directors of the corporation will prevent their functioning with the complete loyalty to
participants demanded of them as trustees of a pension plan.”115
In addition to providing benefits, a plan fiduciary must “defray[] reasonable expenses of
administering the plan.”116 The Department of Labor has stated that “in choosing among potential
service providers, as well as in monitoring and deciding whether to retain a service provider, the
trustees must objectively assess the qualifications of the service provider, the quality of the work
product, and the reasonableness of the fees charged in light of the services provided.”117
On November 16, 2007, the Department of Labor issued a final regulation that revises the Form
5500, which plans file each year to report their funding status and other financial information that
ERISA requires to be disclosed to the Department. The regulation will require disclosure of
information regarding the fees paid by the plan to administrators, record keepers, and other
service providers.118 On December 13, 2007, the Department of Labor published a proposed
regulation that would require service providers to disclose to plan fiduciaries, in advance of
entering into a contract with the plan, all fees and any other direct or indirect compensation that
the service provider would receive while under contract to the plan.119

2. Duty of Prudence
Section 404(a)(1)(B) of ERISA requires fiduciaries to act “with the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent man would use in the conduct of
111

Craig C. Martin & Elizabeth L. Fine, ERISA Stock Drop Cases: An Evolving Standard, 38 J. Marshall L. Rev. 889
(2005).
112
Id.
113
680 F.2d 263 ( 2nd Cir. 1982).
114
680 F.2d at 271.
115
Id.
116
ERISA § 404(a)(1)(A)(ii), 29 U.S.C. § 1104(a)(1)(A)(ii).
117
U.S. Department of Labor, Employee Benefits Security Administration, Information Letter, July 28, 1998.
http://www.dol.gov/ebsa/regs/ILs/il072898.html.
118
72 Fed. Reg. 64731 (Nov. 16, 2007).
119
72 Fed. Reg. 70988 (Dec. 13, 2007).

Congressional Research Service

26

Summary of the Employee Retirement Income Security Act (ERISA)

an enterprise of a like character with like aims.”120 When examining whether a fiduciary has
violated the duty of prudence, courts typically examine the process that a fiduciary undertook in
reaching a decision involving plan assets.121 If a fiduciary has taken the appropriate procedural
steps, the success or failure of an investment can be irrelevant to a duty of prudence inquiry.122
Regulations promulgated by the Department of Labor provide clarification as to the duty of
prudence in regard to investment decisions. These regulations indicate that a fiduciary can satisfy
his duty of prudence under ERISA by giving “appropriate consideration” to the facts and
circumstances that the fiduciary knows or should know are relevant to an investment or
investment course of action. 123 “Appropriate consideration” includes (1) “a determination by the
fiduciary that the particular investment or investment course of action is reasonably designed, as
part of the portfolio ... to further the purposes of the plan, taking into consideration the risk of loss
and the opportunity for gain (or other return) associated with the investment,” and (2)
consideration of the portfolio’s composition with regard to diversification, the liquidity and
current return of the portfolio relative to the anticipated cash flow requirements of the plan, and
the projected return of the portfolio relative to the plan’s funding objectives. 124

3. Duty to Diversify Investments
Section 404(a)(1)(C) of ERISA requires fiduciaries to diversify the investments of a plan “so as to
minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do
so.”125 In general, it is believed that fiduciaries should not invest an unreasonably large proportion
of a plan’s portfolio in a single security, in a single type of security, or in various securities
dependent upon the success of a single enterprise or upon conditions in a single locality.126
Courts have agreed that ERISA Section 404(a)(1)(C) does not create a diversification obligation
in terms of fixed criteria, but instead requires a determination based on the specific facts of each
individual case. 127 In GIW Industries, Inc. v. Trevor Stewart,128 the court concluded that the
defendant investment manager breached its duty to diversify investments by investing too heavily
in long-term government bonds. By investing 70 percent of the plan’s assets in long-term bonds
rather than short-term bonds, the firm exposed the fund to a greater degree of risk. Expert
testimony had indicated that short-term bonds or bonds with staggered maturity dates would have

120

29 U.S.C. § 1104(a)(1)(B).
See, e.g., GIW Industries v. Trevor, Stewart, Burton & Jacobsen, 895 F.2d 729 (11th Cir. 1990) (investment
management firm breached its duty of prudence after investing primarily in long-term, low risk government bonds and
failing to take into account the liquidity needs of the plan); Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983)
(court stated that test of prudence is whether “at the time they engaged in the challenged transactions, [fiduciaries]
employed the appropriate methods to investigate the merits of the investment and to structure the investment”).
122
See, e.g., Unisys, 74 F.3d at 434 (“[I]f at the time an investment is made, it is an investment a prudent person would
make, there is no liability if the investment later depreciates in value”).
123
See 29 C.F.R. § 2550.404a-1.
124
Id.
125
29 U.S.C. § 1104(a)(1)(C).
126
See generally, H.R. Rep. No. 1280 at 304 (1974), reprinted in 1974 U.S.C.C.A.N. 5085.
127
155 A.L.R. Fed. 349 (2007).
128
895 F.2d 729 (11th Cir. 1990).
121

Congressional Research Service

27

Summary of the Employee Retirement Income Security Act (ERISA)

minimized exposure if the bonds were sold before maturity. The court maintained that Trevor
Stewart’s investment exposed the fund “to greater risk of cash outflows than was prudent.”129
Similarly, in Brock v. Citizens Bank of Clovis,130 the Tenth Circuit determined that trustees of the
Citizens Bank of Clovis Pension Plan breached their duty to diversify investments by investing
over 65 percent of the plan’s assets in commercial real estate mortgages. The court maintained
that the trustees’ significant investment in one type of security exposed the plan to a multitude of
risks. Moreover, the court found that the trustees failed to establish that the investments were
prudent notwithstanding the lack of diversification. However, in Metzler v. Graham,131 the court
found that a plan trustee had not breached his duty under Section 404(a)(1)(C), even though he
had invested more than half of the plan’s assets in one piece of real estate. While the court found
that the trustee had not diversified investments, the court concluded that the lack of
diversification of the plan’s investments was prudent under the facts and circumstances of the
case.132

4. Duty to Act in Accordance with Plan Documents
Section 404(a)(1)(D) of ERISA requires fiduciaries to discharge their duties “in accordance with
the documents and instruments governing the plan insofar as such documents and instruments are
consistent with [ERISA].”133 Courts have interpreted this section to apply not only to a document
or instrument that establishes a plan or maintains a plan, but also to other writings that have a
substantive effect on the plan. 134 These writings have included investment management
agreements, collective bargaining agreements, and even internal memoranda regarding the sale of
plan assets.135
Under Section 404(a)(1)(d), if a plan provision conflicts with ERISA, a fiduciary is obligated to
ignore the plan provision. 136 Courts have evaluated this requirement in the context of when
compliance with a plan provision leads to a breach of other fiduciary duties. The Department of
129

GIW Industries, 895 F.2d at 733.
841 F.2d 344 (10th Cir. 1988).
131
Metzler v. Graham, 112 F.3d 207 (5th Cir. 1997).
132
The court in Graham maintained that the trustee’s investment was prudent under the circumstances and thus, within
the exception in Section 404(a)(1)(C). The court identified four factors that supported the position that Graham did not
“imprudently introduce a risk of large loss by purchasing the Property.” Graham, 112 F.3d at 210. First, there was no
requirement that the plan make payments to beneficiaries until age 65, death, or disability, and the average age of the
plan participants was 37 when the property was purchased. Remaining plan assets were available to cover projected
payouts for the next twenty years. Second, the purchase was better insulated from the possible return of high inflation:
“when the plan’s holdings consisted solely of cash and short term instruments, there was little hedge against inflation.”
Id. at 211. Third, there was a significant cushion between the purchase price and the property’s appraised value.
Finally, the trustee’s expertise in the development of industrial property supported the conclusion that the investment
was prudent. After considering these factors, the court was persuaded that the investment did not carry a risk of large
loss.
133
29 U.S.C. § 1104(a)(1)(D).
134
See Employee Benefits Guide, Matthew Bender & Company, Inc. §24.15 (2007).
130

135

See George A. Norwood, Who Is Entitled to Receive a Deceased Participant’s ERISA Retirement Plan Benefits - an
Ex-Spouse or Current Spouse? The Federal Circuits Have an Irreconcilable Conflict, 33 Gonz. L. Rev. 61, 75 (19971998).
136
See, e.g., Cent. States v. Cent. Transp., 472 U.S. 559, 569 (1985)(stating that “trust documents cannot excuse
trustees from their duties under ERISA, and ... trust documents must generally be construed in light of ERISA’s
policies. [S]ee 29 U. S. C. § 1104(a)(1)(D)...”).

Congressional Research Service

28

Summary of the Employee Retirement Income Security Act (ERISA)

Labor has argued that “if obeying a plan provision requires the fiduciary to act imprudently and
disloyally in violation of ERISA section 404(a)(1)(A) and (B) ... the provision is not consistent
with ERISA and the fiduciary has a duty to disregard it.”137 This situation was addressed in Tittle
v. Enron,138 in which the pension plan in question required employer contributions to be made
“primarily in Enron stock.” The court in Enron held that the plan fiduciaries had a duty to ignore
this provision if it would be imprudent to follow it.139
In interpreting Section 404(a)(1)(D), courts have also held that fiduciaries do not breach the duty
to act in accordance with plan documents if their failure to follow such documents results from
erroneous interpretations made in good faith. In Morgan v. Independent Drivers Association
Pension Plan,140 the Tenth Circuit found that the trustees of a pension plan did not violate Section
404(a)(1)(D) because their decision to terminate the plan based on an erroneous interpretation of
the effect of a new plan funding method was both considered in good faith and based on
consultation with experts.

5. Prohibited Transactions
In addition to requiring plan fiduciaries to adhere to certain standards of conduct, ERISA
prohibits fiduciaries from engaging in specified transactions deemed likely to injure a pension
plan.141 Engaging in a prohibited transaction is a per se violation of ERISA. Thus, in evaluating a
fiduciary’s role in a prohibited transaction, it may be considered irrelevant to examine whether
the transaction would be considered prudent had it occurred between independent parties.142
Section 406(a) of ERISA bars certain transactions between a plan and a party in interest143 with
respect to a plan. Subject to certain exemptions, 144 a fiduciary must not cause a plan to engage in
any transaction with a party in interest if the fiduciary knows or should know that the transaction
is a:
•

sale or exchange, or leasing, of any property;

•

lending of money or other extension of credit;

•

furnishing of goods, services, or facilities;

•

transfer or use of any plan assets; or

•

acquisition, on behalf of the plan, of any employer security or employer real
property in violation of ERISA § 407, which limits the amount of employer
securities and property that may be held by a plan.

137

Department of Labor Brief for Amicus, Nos. 04-1082, 03-155331 (4th Cir. 2004).
138
284 F. Supp. 2d 511, 2003 U.S. Dist. LEXIS 17492, 31 Employee Benefits Cas. (BNA) 2281 (S.D. Tex. 2003).
139
Id. at 669-70 (as cited in Department of Labor Brief for Amicus, Nos. 04-1082, 03-155331 (4th Cir. 2004)).
140
975 F.2d 1467(10th Cir. 1992).
141

Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000). The Internal Revenue Code also
contains certain prohibited transaction provisions. See 26 U.S.C. § 4975.
142
See, e.g., Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).
143
ERISA defines “party in interest” quite broadly to include a number of individuals who could affect a plan or its
fiduciaries. See ERISA § 3(14), 29 U.S.C. § 1002(14).
144
Exceptions to the prohibited transactions provisions may be found in Section 408 of ERISA (29 U.S.C. § 1108).

Congressional Research Service

29

Summary of the Employee Retirement Income Security Act (ERISA)

Section 406(b) prohibits certain transactions between a plan and a plan fiduciary. A fiduciary may
not:
•

deal with the assets of the plan in his own interest or for his own account;

•

act in any transaction involving the plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of the plan or the interests of its
participants or beneficiaries, or

•

receive any consideration for his own personal account from any party dealing
with such plan in connection with a transaction involving the assets of the plan. 145

ERISA also places a limit on the amount of investment in the sponsoring employer’s stock and
property held in a defined benefit plan. Section 407 generally provides that a plan may not invest
in securities of an employer unless they are “qualifying employer securities.”146 Further, under
this section, a plan may not acquire or hold employer real property unless it is “qualifying
employer real property.”147 However, a plan may not acquire qualifying employer securities or
qualifying employer property, if immediately after the acquisition, the aggregate fair market value
of employer securities and employer real property held by the plan is more than 10% of the fair
market value of the assets of the plan.
The Section 407 requirements generally do not apply to defined contribution plans, unless the
plan requires a portion of an elective deferral to be invested in qualifying employer securities or
qualifying employer real property.148 However, the PPA created new diversification requirements
for qualifying employer securities held in defined contribution plans. Section 204(j) of ERISA
provides that an individual must be allowed to elect to direct a plan to divest employee
contributions and elective deferrals invested in employer securities, and reinvest these amounts in
other investment options. 149 A plan must offer at least three investment options (besides employer
securities) to which an individual may direct the proceeds from the divestment. Individuals must
be allowed to diversify their employee contributions out of employer stock as often as other
investment changes are allowed, but at least quarterly. In addition, employees who have
completed three years of service must also be allowed to diversify employer matching
contributions and employer nonelective contributions out of employer stock. This requirement is
phased in over three years for existing amounts contributed in plan years before 2007.150 The
145

29 U.S.C. § 1106(b).
“Qualifying employer security,” as defined in Section 407(d)(5) (29 U.S.C. § 1107(d)(5)) means an employer
security which is (A) stock, (B) a marketable obligation (i.e., a bond, debenture, note, or certificate, or other evidence
of indebtedness, subject to certain acquisition requirements described in 407(e)), or (C) an interest in a publicly traded
partnership (as defined in Section 7704(b) of the Internal Revenue Code) if it is an “existing partnership.” See 26
U.S.C. § 7704 note. Qualifying employer securities may have to meet additional requirements. See ERISA §
407(d)(5)(C).
147
Property may be deemed “qualifying employer real property” under Section 407(d)(4) of ERISA (29 U.S.C. §
1107(d)(4)) if a substantial number of the parcels are dispersed geographically; each parcel of real property and the
improvements thereon are suitable (or adaptable without excessive cost) for more than one use; without regard to
whether all of such real property is leased to one lessee; and if the acquisition and retention of such property comply
with the provisions of ERISA (subject to certain exceptions).
148
See ERISA § 407(b)(1), 29 U.S.C. 407(b)(1), which is applicable to plans that require a portion of an elective
deferral to be used to acquire qualifying employer securities, qualifying real property, or both.
149
29 U.S.C. § 1054(j). The requirements of this section may not apply to certain defined contribution plans, including
certain ESOPs and one-participant plans (as defined in ERISA § 101(i)(8)(B), 29 U.S.C. § 1021(i)(8)(B)).
150
Thus, employer contributions acquired in a plan year before January 1, 2007, may be divested as follows: 33% in
(continued...)
146

Congressional Research Service

30

Summary of the Employee Retirement

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3ARL34443. Public record. Not legal advice.