ERISA Vs. Non-ERISA. What’s the Difference?
If you own a business, you may hear the terms ERISA and non-ERISA. These are two different types of retirement plans you could offer your employees. An ERISA plan is one you will contribute to as an employer, matching participants’ inputs. ERISA plans must follow the rules of the Employee Retirement Income Security Act, from which the plan earned its name. Non-ERISA plans do not involve employer contributions and do not need to follow the stipulations of the Act. Find out which plan federal laws require your enterprise to carry.
What Is ERISA?
ERISA is a federal law enacted in 1974 to set a minimum standard for retirement and health plans in private industries. An ERISA-approved retirement or health plan complies with the standards of the Employee Retirement Income Security Act. Under this act, voluntarily established retirement and health plans by employers, including 403(b) and 401(k) plans, must abide by at least the minimum federal standards. These standards are meant to protect the covered employees and the employer.
- Employees must receive plan information about features and funding.
- Those in control of retirement assets must have fiduciary responsibilities, or the responsibility to look out for participants’ best interests.
- The plan must establish a grievance and appeals process for employees to get benefits.
- Participants must retain the right to file lawsuits for benefits and breaches of fiduciary duty.
- Retirement plan contributions must be tax-deductible.
- Employees must have the right to temporarily retain health coverage after events such as job termination.
- Plans must not discriminate against any employee based on a health or disability factor.
The Employee Retirement Income Security Act establishes specific rules that all companies with ERISA-compliant voluntary retirement plans must obey. The Act institutes fiduciary requirements, reporting rules, fairness protocols and more for the protection of participating employees. ERISA requirements are the best practice for organizations with retirement plans, but it is ultimately up to the enterprise whether or not to establish retirement plans to begin with.
What Is Non-ERISA?
A non-ERISA retirement plan is a 403(b) plan to which the employer does not contribute. All church plans are non-ERISA. If your organization is a church, you will carry a special 403(b)(9) Church Plan that will automatically classify as non-ERISA. Non-ERISA plans do not come with the same protection value as ERISA plans. Both types of plans will need to conform to the regulations the Internal Revenue Service (IRS) established, but only ERISA plans will also need to obey Department of Labor regulations under the Employee Retirement Income Security Act. Only certain types of organizations may lawfully use non-ERISA retirement plans.
Which Plan Is Right for Your Company?
Most non-ERISA plans exist at churches, religious organizations, public schools, hospitals and nonprofit organizations. The typical business enterprise must use ERISA retirement plans for the security of the employer and employees under federal law. The Employee Retirement Income Security Act makes compliant plans mandatory for all corporations that offer health and retirement benefits that are not exempt from the rule. Churches and government entities are the most common organizations ERISA will not cover. If your company establishes a plan outside the U.S. for nonresident alien employees, you also will not need to abide by ERISA requirements.
If you plan on setting up retirement accounts for your employees, work with an attorney to help you understand ERISA vs. non-ERISA requirements. Choosing the wrong retirement plan classification can come with significant penalties for your business from the IRS and/or the Department of Labor. You may also want to consider a simplified employee pension plan, or an individual retirement account that may not be subject to complex ERISA regulations. Consult with a professional for further assistance on establishing retirement benefits for your workers.