What Is a Non-ERISA Plan? Definition and Key Features
Explore non-ERISA plans: employee benefit arrangements operating outside comprehensive federal oversight. Understand their unique characteristics and implications.
Many employer-sponsored plans in the private sector fall under the comprehensive federal regulations of the Employee Retirement Income Security Act (ERISA). However, some benefit plans exist outside ERISA’s scope, offering different structures and protections. Understanding these non-ERISA plans is important for both employers and employees.
Defining Non-ERISA Plans
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law designed to protect the interests of participants in private-sector employee benefit plans. It sets minimum standards for most retirement and health plans, ensuring transparency, financial soundness, and proper management of plan assets. ERISA aims to safeguard workers’ benefits by imposing strict rules on plan administrators and fiduciaries.
Non-ERISA plans are those specifically excluded from or exempt from the requirements of this federal law. These exemptions are generally based on the nature of the employer or the specific type of benefit being provided.
One primary category of non-ERISA plans includes governmental plans, which are established or maintained by federal, state, or local governments for their employees. This exemption applies to plans covering public school employees, state university staff, and municipal workers.
Church plans also fall outside ERISA’s jurisdiction, covering employee benefit plans established and maintained by churches or conventions of churches. These plans are exempt due to their tax-exempt status, though a church plan can elect to be subject to ERISA.
Additionally, plans maintained solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws are exempt from ERISA.
Certain unfunded excess benefit plans are also non-ERISA. These plans are maintained solely to provide benefits exceeding the limitations on contributions and benefits imposed by the Internal Revenue Code for qualified plans, such as Internal Revenue Code Section 415. Finally, “top hat” plans, which are unfunded deferred compensation arrangements for a select group of management or highly compensated employees, are exempt from ERISA’s substantive provisions. Individual Retirement Accounts (IRAs), when established by individuals and not by an employer or employee organization, are also not subject to ERISA.
Distinguishing Features of Non-ERISA Plans
The absence of ERISA oversight leads to several practical differences for non-ERISA plans compared to their ERISA-covered counterparts. These distinctions affect regulatory supervision, reporting requirements, fiduciary duties, and participant protections. The specific framework governing these plans often relies on state contract law or other specialized federal regulations.
Regulatory oversight for non-ERISA plans is not provided by the Department of Labor (DOL) under ERISA.
Non-ERISA plans generally have fewer, if any, federal reporting and disclosure requirements. For instance, they are not required to file the annual Form 5500 with the DOL and IRS, nor do they need to provide Summary Plan Descriptions (SPDs). This can reduce administrative burdens for plan sponsors.
Fiduciary responsibilities in non-ERISA plans differ significantly from ERISA’s strict standards. Plan administrators are not bound by ERISA’s specific fiduciary rules, such as prudence, loyalty, and diversification requirements.
Participant protections are also different in non-ERISA plans. ERISA provides specific rights, including minimum vesting schedules, detailed claims procedures, and the ability to sue in federal court for benefit denials or fiduciary breaches. These protections are absent in non-ERISA plans, meaning participants might rely on state contract law or other legal avenues for recourse.
Many non-ERISA plans, particularly executive compensation arrangements, are unfunded. This means that assets designated for these benefits are not held in a separate trust. Instead, benefits are paid out of the employer’s general assets, making participants general creditors of the company. This structure carries a risk if the employer faces financial difficulties or bankruptcy.
Typical Non-ERISA Plan Structures
Section 457 plans are a common example, specifically designed for employees of state and local governments and certain tax-exempt organizations. Governmental 457 plans are exempt from ERISA, providing a deferred compensation option for public sector workers. These plans allow participants to defer a portion of their salary.
Section 403(b) plans, primarily offered by public schools and tax-exempt organizations, can also be non-ERISA under specific conditions. If employer involvement is minimal, employee participation is entirely voluntary, and contributions are limited to employee elective deferrals, the plan may be exempt. The employer’s role must be limited to administrative activities without discretionary determinations.
Non-Qualified Deferred Compensation (NQDC) plans are frequently structured as non-ERISA plans. These plans allow key personnel to defer income beyond the limits imposed on qualified plans, providing a way to supplement retirement savings or other benefits.