The Employee Retirement Income Security Act of 1974 (ERISA) was originally enacted to protect participants in retirement plans from forfeiture or reduction of benefits due to mismanagement of retirement funds by their employers. ERISA also governs other types of employee “welfare” plans, and courts have struggled to define its application to health care plans. ERISA is applicable to most private sector employee benefit plans and pensions. It generally does not cover benefit and pension plans established by federal, state or local government employers.
What exactly is an employee benefit plan? For purposes of ERISA, an employee benefit plan is “any plan, fund, or program established or maintained by an employer for the purpose of providing medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death, or unemployment, or vacation benefits.” Within this larger definition, ERISA covers two types of benefit plans: welfare plans, which provide benefits for active employees such as are described in the definition; and pension or retirement plans, which provide post-employment benefits to persons who retire from an employer’s service. Retirement plans also fall into two classifications: defined-benefit plans, which define in advance the amount a beneficiary will receive each month or as a lump sum following retirement (generally based on years of service and final salary); and defined-contribution plans, which define the amount of money contributed periodically (for example, in each pay period) by or on behalf of the beneficiary while he or she is an employee, but do not guarantee any particular amount of benefit. The amount of benefits paid to a beneficiary under a defined-contribution plan will depend on the amount of principal and interest paid into the employee’s account under the plan.