The Employee Retirement Income Security Act of 1974 (ERISA) broadly applies to most private-sector employee benefit plans, imposing uniform federal standards on group health plans and other welfare benefits. However, certain plans are exempt from ERISA, and various regulatory safe harbors provide relief from specific compliance obligations. This summary does not provide an exhaustive list of all plans or benefits that may be subject to ERISA but offers an overview of common exemptions and safe harbors that employers should consider when determining whether a particular plan falls under ERISA’s scope.
Plans not subject to ERISA are NOT required to:
- have a formal ERISA plan document;
- prepare and distribute a summary plan description (SPD);
- file a Form 5500 (or distribute a summary annual report (SAR); or
- follow certain claims and appeals procedures.
That being the case, for non-ERISA plans, employers often choose to have some type of documentation in place and may follow processes similar to the claims and appeals processes required under ERISA anyway (or be required to under applicable state law). Keep in mind that a plan not subject to ERISA cannot claim ERISA preemption and therefore may be subject to more state law requirements, including state coverage mandates.
ERISA Plans
ERISA §3(1) defines the terms “employee welfare benefit plan” and “welfare plan” to mean “any plan, fund, or program… established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services…”
Using the above definition, employers should ask themselves the following questions when determining whether benefits are provided under an employee welfare benefit plan subject to ERISA.
- Is there a plan, fund, or program?
- Is the plan, fund or program maintained by the employer?
- Is the type of benefit listed is ERISA §3(1)?
- Is the benefit provided to employees, former employees or their beneficiaries?
- Does a statutory exemption apply?
- Does a regulatory safe harbor exemption apply?
This summary assumes that the answers to questions 1 – 4 above are “yes” and explores circumstances in which a plan that would typically be subject to ERISA may be exempt under various exclusions.
Why It Matters
ERISA imposes significant compliance obligations and protections that impact both employers and employees. ERISA-covered plans must adhere to strict reporting, disclosure, fiduciary, and claims procedure requirements, along with preemption of state laws that might otherwise regulate the plan. Employers who mistakenly treat an ERISA-covered plan as exempt risk noncompliance penalties, litigation exposure, and potential enforcement actions by the Department of Labor (DOL).
Statutory Exemptions
The following types of employee benefit plans are expressly exempt under ERISA §4(b). These plans are not subject to ERISA’s reporting, disclosure, or fiduciary requirements. However, employers should be aware that other state and/or federal laws may impose similar requirements to those under ERISA for such plans.
Governmental Plans
ERISA exempts employee welfare benefit plans maintained by governmental entities. Under ERISA, a governmental plan is any employee benefit plan “established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.” ERISA does not define the terms “political subdivision,” “agency,” or “instrumentality” for purposes of this exemption.
In many cases, the determination of whether a plan falls within the governmental plan exemption will be straightforward. For example, employee benefit plans sponsored by state or local governments such as cities, counties, schools, townships, etc. will generally be exempt. Other plans, such as those sponsored by nonprofits established under state law or other quasi-governmental entities will require a more detailed analysis. In addition, certain plans sponsored by governmental entities that include participation by non-governmental employers may fall outside the ERISA’s exemption depending on the level of participation by the non-governmental entity.
Indian Tribal Governments/Tribal Entities
The definition of “governmental plan” in ERISA includes plans established and maintained by an Indian tribal government, but whether an Indian tribal government plan qualifies for the ERISA exemption for governmental plans depends on the specific facts and circumstances, including the nature of the participants’ activities. ERISA does not apply to plans maintained by Indian tribal governments or tribal entities IF participation is limited to employees who are engaged in traditional governmental/tribal functions. However, if employees engaged in “commercial activities” are allowed to participate in the plan, then the plan would be subject to ERISA. Many tribal sponsored plans cover employees engaged in commercial activities (e.g., operating gaming and hospitality businesses, retail, tourism, etc.), in which case ERISA likely applies.
Church Plans
Plans established and maintained for employees by a church or by a convention or association of churches exempt from tax under Code §501 are exempt from ERISA. To qualify for the church plan exemption, the plan must be established primarily for the benefit of church employees and their beneficiaries and substantially all of the participants must be employees of the church.
In some cases, plans sponsored by tax-exempt organizations affiliated with a church can be exempt due to their relationship with the church. Like the exemption for tribal plans, the determination as to ERISA’s application to a particular church plan will largely be based on the specific facts and circumstances. The following three factors have been identified as important in determining whether an organization shares “common bonds and convictions” with a church: (1) whether the religious institution plays any official role in the governance of the organization; (2) whether the organization receives assistance from the religious institution; and (3) whether a denominational requirement exists for any employee or patient/customer of the organization.
Workers’ Compensation, Unemployment Compensation or Disability Insurance Laws
Plans maintained by employers solely to comply with state disability laws, workers’ compensation or unemployment compensation law are exempt from ERISA under §4(b)(3). Employers relying on this exemption must be aware that if the plan offers additional benefits beyond what is required under state law, the exemption will no longer apply. In addition, if the employer has the option to “opt-out” of the state program, then the program offered will fall outside of the exemption.
Plans Maintained Outside the United States for Nonresident Aliens
Plans will be exempt from ERISA to the extent they are established and maintained outside of the U.S. primarily for the benefit of individuals substantially all of whom are nonresident aliens. Nonresident aliens are generally individuals who are not U.S. citizens or U.S. nationals. However, this exemption would not include plans that are maintained by employers in the U.S. that cover U.S. citizens abroad (e.g., expatriate plans). Nor would the exemption apply to a plan maintained in the U.S. that covers non-U.S. citizens.
Regulatory Safe Harbors
In addition to the statutory exemptions addressed above, the DOL has implemented regulatory safe harbors providing that certain employer-provided benefits that would otherwise meet the definition of an ERISA employee welfare benefit plan may be exempt from ERISA’s requirements.
Payroll Practices
Under DOL regulations, ERISA employee welfare benefit plans do not include certain income replacement programs (referred to as “payroll practices”) that an employer pays to its employees out of the employer’s general assets. An example of a payroll practice that could be exempt from ERISA, assuming the conditions below are satisfied, would be a self-funded short-term disability (STD) benefit. For the payroll practice safe harbor to apply, the arrangement must be for the payment of:
- wages, overtime pay, shift premiums, and holiday or weekend premiums;
- unfunded sick pay (or income replacement) when the employee is physically or mentally unable to perform work or is otherwise absent due to medical reasons (e.g., pregnancy, a physical examination or psychiatric treatment); or
- unfunded payment of compensation when the employee is out due to vacation or holiday, active military duty, jury duty, sabbatical leave, or pursuing further education.
In addition, the requirements in the table below must be met for the plan to be exempt from ERISA.
| Plan cannot be funded | Funded programs include paying benefits out of a separate account (including a TPA account) or trust used for holding assets. Unfunded programs pay benefits out of the employer’s general assets and are funded solely by the employer (i.e., no employee contributions). |
| Plan cannot be insured | Benefit payments must come from the employer’s general assets and not be paid through insurance. |
| Benefit cannot exceed normal compensation | Benefit payments cannot be more than the employee would typically receive as compensation, but payments less than normal compensation are okay. |
| Plan cannot cover former employees | Benefit payments cannot be made to former employees or retirees. |
Voluntary Plan
Certain benefit arrangements that may otherwise be subject to ERISA will fall within the voluntary plan safe harbor because the plan is not considered to be “established or maintained” by the employer. To fall within the safe harbor, the conditions in the table below must be satisfied.
| Employer cannot make contributions | This would prohibit not only direct employer contributions, but also reimbursement of employee premiums (e.g., through an HRA). |
| Participation must be voluntary | Employees must have the option to enroll or waive (i.e., no automatic enrollment). |
| Employer involvement must be limited | The employer’s involvement must be limited to the following:
The employer must perform these functions without endorsing the plan. The following might be considered endorsement: (i) selection of the insurance company or coverage; (ii) use of the employer’s name/logo on any communications or enrollment materials; (iii) designating the employer as plan administrator, sponsor, or trustee; (iv) paying premiums through a cafeteria plan; and (v) assisting employees with claims and disputes. |
| Employer cannot profit from the arrangement | Employers cannot receive consideration in the form of or otherwise in connection with the program, other than reasonable compensation for administrative services rendered in connection with payroll deductions. |
Determining whether the voluntary plan safe harbor applies can be challenging. While the employer’s level of involvement is a crucial factor, the precise definition of “employer endorsement” remains unclear. Employers must assess whether attempting to meet the safe harbor criteria is worthwhile. In many cases, adding a voluntary plan to the list of benefits requiring ERISA compliance will be less burdensome than ongoing monitoring of the voluntary safe harbor requirements.
Summary
Understanding ERISA’s applicability is critical for employers to ensure compliance and mitigate legal risks. While statutory exemptions and regulatory safe harbors provide relief from ERISA’s requirements, determining whether a plan qualifies can be complex and fact-specific. Employers should carefully assess their level of involvement in benefit offerings and review plan structures to avoid unintended ERISA obligations. In many cases, seeking legal guidance can help navigate these nuances and ensure proper classification, ultimately reducing the risk of penalties, litigation, and enforcement actions.
While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it. This publication is distributed on the understanding that the publisher is not engaged in rendering legal, accounting or other professional advice or services. Readers should always seek professional advice before entering into any commitments.
