What Employee Welfare Plans Are Not Subject to ERISA?
Understanding the boundaries of ERISA is key for employers. Learn how factors like plan structure and an employer's role determine if a plan is exempt.
The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum standards for most voluntarily established retirement and health plans in private industry. Its reach is extensive, covering aspects like plan funding, information provided to participants, and fiduciary responsibilities for plan managers. Despite its broad application to private-sector employee benefit programs, several specific types of plans are not subject to its comprehensive regulations.
Exemptions Based on Employer Type
Certain employee benefit plans are exempt from ERISA based on the type of organization that establishes them. The most prominent examples are governmental plans and church plans. Governmental plans are those established for the employees of the United States government, the government of any state or political subdivision, or any of their agencies. These plans are governed by the specific laws of the public entities that sponsor them.
Church plans are established and maintained for the employees of a church or a convention of churches that are tax-exempt under Internal Revenue Code section 501. The exemption can also extend to organizations controlled by or affiliated with a church, such as some hospitals and schools. While these plans are automatically exempt, they have the option under Internal Revenue Code section 410 to make an irrevocable election to be covered by ERISA’s provisions.
Exemptions for Legally Mandated or Foreign Plans
Some benefit arrangements are excluded from ERISA’s scope because they are legally mandated by state law or primarily serve individuals outside the United States. A plan is not governed by ERISA if it is maintained solely to comply with applicable workers’ compensation, unemployment, or disability insurance laws. The term “solely” is a strict requirement; if an employer provides benefits beyond what the state law requires, the plan may lose its exempt status and become subject to ERISA.
Another distinct exemption applies to plans maintained outside of the United States primarily for the benefit of nonresident aliens. This provision acknowledges the impracticality of applying ERISA standards to plans designed for a workforce composed mainly of individuals who do not reside in the U.S. These plans are governed by the laws of the country in which they are established and operated.
Non-ERISA Payroll Practices
The Department of Labor has clarified that certain payments an employer makes are “payroll practices” and not employee welfare benefit plans under ERISA. These practices are exempt because the benefits are paid directly from the employer’s general assets, rather than from a separate trust fund. Common examples of exempt payroll practices include compensation for overtime, shift premiums, and holiday or weekend premiums.
Payments for absences, such as jury duty, military leave, or vacation pay, also fall into this category when an employer pays for the time directly from its general business funds. This exemption is narrow and hinges on the funding method. If an employer were to create a separate, dedicated trust to fund employee vacations, that arrangement would likely be considered a welfare benefit plan subject to ERISA’s reporting and disclosure requirements.
The Voluntary Plan Safe Harbor
An exemption known as the voluntary plan safe harbor allows employers to facilitate access to certain insurance products without creating an ERISA-covered plan. For a benefit program to qualify, it must satisfy four specific conditions outlined in Department of Labor regulations.
The first condition is that the employer makes no contributions; the program must be funded solely by the employees who choose to participate. Second, employee participation in the program must be completely voluntary, and the employer cannot mandate enrollment as a condition of employment.
The third condition limits the employer’s involvement to that of a mere conduit. The employer’s role must be restricted to permitting the insurer to publicize the program and collecting premiums through payroll deductions to remit them to the insurer. Actions that constitute “endorsement” of the plan are forbidden, such as recommending a specific plan.
Finally, the employer must not receive any profit or consideration in connection with the program. The employer can be paid reasonable compensation for administrative services, but this payment cannot include profit. If an insurer pays the employer a bonus that exceeds the actual cost of the service, the safe harbor protection is lost.