ERISA Introduction



The Employee Retirement Income and Security Act (“ERISA”) is the comprehensive federal law that regulates pensions, retirement plans, and welfare employee benefits. Title I of ERISA imposes requirements specifically on employee health and welfare plans.

Most employer and multiemployer sponsored health and welfare plans are covered under ERISA. This is true whether the plans are small or large, fully insured or self-insured, although certain obligations may vary according to the size and type of plan. Employers assume various roles under ERISA (whether named or by default) and should be aware of what plans ERISA covers and the associated compliance responsibilities and obligations.

Covered Plans

Plans Funded and Unfunded, Insured and Self-Insured

Fiduciaries and Their Duties

Reporting & Disclosure

Employer Roles

Covered Plans

While most employers are aware that their health plan is covered under ERISA, they may be surprised to learn that many of their other welfare plans are also subject to this federal statute and its regulations.

ERISA Plan Criteria

To qualify as a health and welfare plan subject to ERISA, the plan must meet the following criteria:

ERISA Welfare Plans

The plans and categories shown in this section are not all-inclusive, and whether a certain type of benefit falls into these categories is fact-sensitive. Any doubts or questions concerning ERISA’s application should be resolved by legal counsel.

Plan Exemptions

Red Flags for Employers

Employers need to be careful that they do not inadvertently act in a way that transforms a voluntary, employee-pay-all plan into an ERISA plan. Circumstances that should cause an employer to take a close look at an arrangement include:

The presence or absence of any one of these types of factors may not be determinative of voluntary status. Rather all relevant factors should be viewed in aggregate, keeping in mind the perspective of an employee on the degree of employer involvement.

There are certain criteria that exempt plans from being subject to ERISA.

These exemptions include:

Plan Documents

Every ERISA employee benefit plan must be established and maintained pursuant to a written instrument or plan document.  This document must give plan participants the most important facts they need to know about their health benefit plan including plan rules, financial information, and documentation on the operation and management of the plan.

Plans Funded and Unfunded, Insured and Self-Insured

There is a certain amount of looseness among employers, insurers, TPAs and others over how plans are described. The following box sets out the terminology used in ERISA to characterize plans. This will be the terminology used in Compliancedashboard as well.

What’s Your Plan?

A plan is FUNDED if it uses plan assets to provide benefits. A plan is UNFUNDED if it provided benefits solely from the employer’s general assets.

A plan is INSURED if plan benefit claims are paid through insurance policies.

A plan is SELF-INSURED if plan benefit claims are paid directly from plan assets or the employer’s general assets.

See the material below for further elaboration of these concepts.

Note that this list of descriptors does not include the term “self-funded” although it is commonly used. To remain consistent with most government web sites, we will use the term “self-insured” rather than “self-funded.”

How to Create a Funded Plan (Whether You Want To or Not)

A plan will be considered funded if it has plan assets. The assets of a plan generally include any property, tangible or intangible, in which the plan has a beneficial ownership interest. For example, a welfare plan generally will have a beneficial interest in particular assets if the employer:

The law does not require that the employer expressly intend to create a funded plan. For example, the mere fact that the employer has created a separate account in the plan’s name or represented to employees that there is a fund from which claims are to be paid may be sufficient to create a funded plan. Employers using a TPA should carefully review any payment mechanism that involves the deposit of employer funds into a TPA-owned account.

As noted in the box above, employee contributions are always plan assets and a plan that accepts them is therefore deemed funded.

A funded plan is subject to certain requirements that do not apply to unfunded plans. Most of these requirements relate to the establishment of trusts, exclusivity of benefits and reporting and disclosure requirements.

Funded Plans Have To Keep Plan Assets In A Trust (Unless They Don’t Have To)

A basic requirement for funded plans is that they must hold their assets in a trust. A trust may be found to exist despite the absence of formal trust documents and even absent any intent on the part of an employer to create a trust. What’s more, employee contributions are always considered plan assets and since most employers do require some form of employee participation in the cost of health plan coverage, one might conclude that there are – or should be – a lot of trusts floating around. In fact, many employer-sponsored health plans do not have trusts and the reason is that the DOL has provided significant relief from the trust requirement through a “non-enforcement policy” announced in Technical Release 92-01 (TR 92-01).

Importance of Only

TR 92-01 is not available if a plan has assets for reasons other then the acceptance of employee contributions. Note in particular the warnings of the previous section that employers can inadvertently create plan assets through the segregation or identification of funds (regardless of whether it accepts employee contributions.

TR 92-01: This technical release states that the DOL will not view a health plan as being in violation of ERISA’s trust requirement if the only reason for the plan to have a trust is its acceptance of employee contributions, provided that certain requirements are met

There are two prongs to the non-enforcement policy. The first applies to cafeteria plans. It simply states that if an employer withholds employee contributions in accordance with a cafeteria plan established pursuant to IRC Section 125, the Department will not assert a violation in any enforcement proceeding solely because of a failure to hold participant contributions in trust. This relief is available regardless of whether the health plan is insured or self-insured. This is the part of TR 92-01 that will be of use to most employers.

The second prong applies to fully insured plans with respect to which participant contributions are not withheld pursuant to a cafeteria plan and are applied only to the payment of premiums. In order to qualify under this prong of the relief:

Funded Plans Must Use Plan Assets Exclusively for Plan Purposes

ERISA provides that “the assets of a plan shall never inure to the benefit of an employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.” This is known as ERISA’s “exclusive benefit rule”.

Accounting for the use of plan assets in cases where those assets are held in trust is relatively straightforward. Accounting is more difficult in cases where a plan has assets from employee contributions but does not have a trust as permitted by TR 92-01 (see above). TR 92-01 does not offer any relief from the exclusive benefit rule. This raises the question of how an employer should account for the expenditure of plan assets that never become separate from its general assets.

The DOL has not provided any guidance on this point. At least one court has held that where the amount paid in benefits exceeded the amount received in employee contributions, it is reasonable to regard all employee contributions as having been spent for benefits. Of course, the same kind of reasoning could lead to the conclusion that in any case involving a shortfall in benefits (e.g., claims payments or premiums), the employer must have used plan assets for non-plan purposes. Complications could also arise in cases where the employer receives employee contributions for both ERISA and non-ERISA benefits.

Employers with funded plans that do not use a trust should work with their accountants to ensure that they will be able to respond effectively to any DOL inquiry or enforcement action by a participant.

Payment of Expenses

ERISA permits the use of plan assets to defray reasonable administrative expenses.

It is important to distinguish between settlor expenses (which are not administrative functions) and management expenses (which may be administrative functions).

Settlor expenses are those incurred in connection with the formation, design and termination of a plan. These include:

Administrative expenses are those incurred to actually run the plan. These include:

The DOL has provided guidance on some of the nuances of the distinction between settlor and administrative expenses. See: Guidance on Settlor v. Plan Expenses.

Fiduciaries and Their Duties

Fiduciary Status


Third party administrators of self-insured health plans often resist the notion that they are plan fiduciaries. They argue that they are merely providing “ministerial” services and include language in their contracts disclaiming fiduciary status. However, as noted above, the test is a functional one, not a contractual one.There are a couple of things that TPAs often do that might cause them to be fiduciaries.

As always, details are important. However, it’s as important to the employer as it is to the TPA to know whether the latter is a functional fiduciary as that status will inform the relationship and transactions between parties.

Named Fiduciary

ERISA requires every plan to have a named fiduciary who is named in the plan document. The named fiduciary has authority to control and manage the operation and administration of the plan and is responsible for participant and beneficiary appeals of adverse claim determinations, unless that authority has been delegated. In the case of a health plan, the named fiduciary is typically the employer. In the case of a MEWA, it may be the sponsoring association or trustees. Please note that the named fiduciary is personally liable for all plan management and administration. TooltipUnless responsibility for a specific function has been delegated under a permissible procedure to another fiduciary

Named fiduciaries are typically not the only fiduciaries of a plan. Other persons or entities will also have fiduciary status based on the functions they perform relative to the plan.

Plan Administrator

Every plan must have a “plan administrator” who is responsible for various specified duties as well as the general governance and operation of the plan. This is also a fiduciary function.

ERISA provides that if the plan does not specifically name a Plan Administrator, then the Plan Sponsor (e.g., the employer) assumes this role by default. Even though as a practical matter the plan’s insurer or Third Party Administrator (“TPA”) may be performing most of the plan administration duties, they are not legally considered to be the Plan Administrator unless specifically identified as such in the plan document. In practice, most employers who sponsor ERISA plans are Plan Administrators.

Other Fiduciaries

If a plan has a trust for plan assets, there must be at least one trustee. Trustees of plan assets are fiduciaries.

Finally, a plan may have various “functional fiduciaries”; i.e., persons or entities that have discretionary authority in the management and administration of a plan or persons that exercise any authority or control over the management or disposition of plan assets. In addition, any person that provides paid investment advice with respect to plan assets will be a fiduciary.

Fiduciary Duties

In the case of a health plan, a fiduciary is subject to a “prudent expert” standard of care1. This means that a fiduciary must discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and:

Duty of Loyalty. To be clear, a fiduciary’s obligation to act “solely in the interest of the participants and beneficiaries” (often characterized as duty of “loyalty”) is intended quite literally. A fiduciary (for example, an employer) cannot take its own interests into account in the discharge of its duties.

This can present challenges for employers who reserve the right to resolve eligibility disputes or make benefits decisions on appeal. In the case of a self-insured plan, an employer-fiduciary faces an inherent conflict of interest since a decision in favor of the appealing employee will almost certainly cost the employer money in terms of additional benefit costs.

Mitigating the Risk of Conflicts of Interest on Appeal

Unfortunately, there is no magical formula to inoculate an employer from conflicts of interest. However, if an employer does want to decide benefit and eligibility appeals, there are steps that an employer can take which may help mitigate it. For example, an employer can:

Another area where this is important is that of employer communications to employees regarding the plan. For example, the Supreme Court has held employers cannot mislead employees when communicating about plan benefits. In an obvious extension of this holding, lower courts have ruled that employers cannot mislead employees when responding to their plan-related questions. In addition, employers may have an affirmative duty to inform employees of relevant information if silence on a matter would, in itself, be harmful.

Courts have also found that an employer has a duty to truthfully respond to employee questions about plan changes if a change is under “serious consideration” or whether there is a substantial likelihood that a reasonable employee would have considered the information that an employer had misrepresented important information in making a decision affecting benefits.3

Exclusive Purpose. We have previously touched on the exclusive purpose element of fiduciary responsibility as it relates to the types of expenses that may be paid by the plan. That responsibility also includes the criterion that the expenses must be reasonable. While this is essentially a facts and circumstances analysis, from a procedural perspective the DOL has indicated that a fiduciary cannot make the determination unless it actually has all the facts and circumstances. This includes amounts of compensation that a service provider receives, directly and indirectly (for example, from third parties), for its plan-related services.

It is tempting to think that these duties have little relevance to a plan that does not use a trust. As a practical matter, the diversification rule has no application to unfunded plans. It is also unlikely to affect plans whose only assets are employee contributions – this is on the assumption that employee contributions are spent on insurance premiums or plan benefits as quickly as they are received. In either case, however, an employer that fails to timely pay premiums or benefits has probably violated the “sole interest”, “exclusive purpose” and “plan documents” requirements.

Prudent Person. The “prudent person” rule is often discussed in connection with the diversification requirement but it also has application in the arena of how employers select plan service providers. For example, the DOL has expressed its view that:

the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. … What constitutes an appropriate method of selecting a …(service) provider, however, will depend upon the particular facts and circumstances. Soliciting bids among service providers at the outset is a means by which the fiduciary can obtain the necessary information relevant to the decision-making process. …

(B)ecause numerous factors necessarily will be considered by a fiduciary when selecting service providers, the fiduciary need not select the lowest bidder when soliciting bids, although the fiduciary must ensure that the compensation paid to a service provider is reasonable in light of the services provided to the plan. It also should be noted that, because “quality of services” is a factor relevant to selection of a service provider, … a plan fiduciary’s failure to take quality of services into account in the selection process would constitute a breach of the fiduciary’s duty under ERISA when the selection involves the disposition of plan assets.”4

It is worth noting that the prudent man rule does not require the presence of plan assets. For example, if an employer fails to properly vet a plan’s TPA and the latter does a poor job of determining or paying benefits, the employer has likely violated the prudent man rule.

Prohibited Transactions

Potential Prohibited Transactions with TPAs

Certain practices commonly used by TPAs can lead to prohibited transaction issues if not properly managed. For example:

A fiduciary may not cause a plan to engage in what ERISA calls a “prohibited transaction” with a “party in interest.”

A party in interest includes the following5:

  1. A plan fiduciary, plan counsel or plan employee.
  2. A person providing services to a plan.
  3. An employer whose employees are covered by a plan.
  4. A 50% owner of an employer whose employees are covered by the plan.
  5. A spouse, ancestor, lineal descendant, or spouse of a lineal descendant of any person described above.
  6. An officer, director, employee or 10% shareholder of a person described in 2, 3 or 4 above.

A transaction is prohibited if the fiduciary knows or should know that such transaction constitutes a direct or indirect:

(A) sale or exchange, or leasing, of any property between the plan and a party in interest;

(B) lending of money or other extension of credit between the plan and a party in interest;

(C) furnishing of goods, services, or facilities between the plan and a party in interest;

(D) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan.6

There is a further category of prohibited transaction involving arrangements that benefit a fiduciary (the “self-dealing” rules). A fiduciary may not:

On the face of things, it would seem that there is very little a fiduciary can do or cause a plan to do that isn’t a prohibited transaction. Fortunately, there is another section of ERISA that creates certain statutory exemptions from the prohibited transaction rules. The list of exemptions is extensive. Consistent with our practice in this section, we focus on the items most relevant to self-insured health plans without a trust. These include exemptions for:

Note that these statutory exemptions do not apply to the transactions that we have called the “self-dealing” rules. A fiduciary may not use the authority, control, or responsibility which makes the person a fiduciary to cause a plan to pay a fee to that fiduciary (or to a person in which that fiduciary has an interest which may affect the exercise of the fiduciary’s best judgment as a fiduciary) to provide a service. For example, a fiduciary of a plan may be in violation of the self-dealing rules if he or she hires a relative to provide services to the plan, particularly if the hiring decision was made without proper consideration under the prudent man rule.

Liability for Breach of Fiduciary Duty

A fiduciary who breaches his or her fiduciary duty can be:

The first two bullet points only provide relief to the plan itself, not to individual plan participants. And until recently, it was widely held that the third bullet point likewise applied only to harm suffered by a plan. This effectively limited the exposure of employers with unfunded plans. However, in 2011, the Supreme Court in the Amara case determined that individuals injured by a fiduciary breach may have a remedy under the third bullet point.

Of course, that remedy is, by its terms, limited to “equitable relief”. This, as it turns out, is a fairly nuanced and esoteric concept (notwithstanding – or perhaps because of – the fact that it has been part of the judicial arsenal for hundreds of years.) No attempt to parse it will be made here. However, the Amara court specifically included the following as remedies potentially available to an injured participant:

These remedies are less likely to be awarded in matters involving garden variety denials of claims for benefits. They are more likely to come into play when a person makes an election or decision regarding a benefit plan based on a fiduciary breach independent of any claim denial. For example, a person who elects to undergo a surgical procedure based on a fiduciary’s misrepresentation that it would be covered by a health plan may have an action against the fiduciary for equitable relief for monetary compensation in the amount the plan would have paid had it covered the procedure as represented by the fiduciary. That said, this is an area of the law that is actively evolving.


ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded in order to protect employee benefit plans from risk of loss due to fraud or dishonesty. The amount of the bond must be at least 10% of the funds handled, subject to a minimum of $1,000 and maximum of $500,000.

However, the bonding requirement does not apply to unfunded plans or funded plans whose only assets are employee contributions retained in the employer’s general assets and that are exempt from ERISA’s trust and reporting requirements pursuant to TR 92-01 (see above).

Reporting & Disclosure

The following is a list of some of the general reporting and disclosure notice requirements of ERISA. In addition, there may be other non-ERISA disclosures that are required. Employers should consult legal counsel for a determination of all (ERISA and non-ERISA) reporting and disclosure requirements that apply to their plans.

All Plans
Summary Plan Description (“SPD”)
Summary of Material Modifications (“SMM”)
Written Request by Participants for Plan Documents
Claim Procedures Notice

Additional disclosures required for Group Health Plans
Form 55007
Summary Annual Report7
Claims Procedure Notice
Qualified Medical Child Support Order (“QMCSO”) Receipt and Determination Letters
HIPAA Special Enrollment Notice
Women’s Health and Cancer Act Notice8
COBRA General Notice and COBRA Election Notice9
Conversion Notice*
W-2 Reporting of the aggregate cost of a group health plan (subject to exemptions)

7Applies to employers with 100 or more plan participants at the beginning of the plan year, and all “funded” plans (i.e. benefits are paid from plan assets rather than from insurance or the employer’s general assets)
8Applies to plans with mastectomy benefits
9Generally applies to employers with 20 or more employees (full-time and part-time) on more than 50% of its typical business days in the previous calendar year
*Required for certain COBRA qualified beneficiaries where the plan provides a conversion option

Employer Roles

Employers may take on different roles under ERISA, each with its own set of obligations. The sub-headings under “Employer Roles” describe a distinct role, how to determine if the employer has assumed that role, and the associated responsibilities.

Please note that this section deals only with single employers. While most Multiemployer plans or Multiple Employer Welfare Arrangements (MEWAs) are covered by ERISA, the rules may apply differently. Please see Multiemployer or MEWA specific compliance topics for more information about these types of plans.

Plan Sponsor

ERISA does not require employers to provide benefits, but once they do, they become the “Plan Sponsor.”

Among other things, the Plan Sponsor is responsible for establishing, maintaining, amending and terminating health and welfare plans.

They also typically provide a portion of the funding required to operate the plan and pay benefits.

Plan Administrator

The ERISA Plan Administrator assumes the primary role for administering the health and welfare plan, and assumes the liability for failing to properly perform these duties.

ERISA provides that if the plan does not specifically name a Plan Administrator, then the Plan Sponsor (employer) assumes this role by default. Even though as a practical matter the plan’s insurer or Third Party Administrator (TPA) may be performing most of the plan administration duties, they are not legally considered to be the Plan Administrator unless specifically identified as such in the plan document. Therefore, most employers who sponsor ERISA plan are Plan Administrators.

The employer may designate an individual, specific position (such as “HR Manager”), or a committee as the Plan Administrator. They may also name a person or committee to act on behalf of the Plan Administrator. However, due the associated liability of this designation, legal counsel should be sought when determining the designated Plan Administrator.

The Plan Administrator takes on Welfare Plan Administration Duties in relation to:


1These standards also apply to pension plans along with some additional requirements unique to pension plans and not discussed here.

2Varity Corp. v. Howe, 516 U.S. 489, (1996).

3The actual fiduciary standard and framework for analysis of employer duties with respect to plan changes varies among the federal circuit courts. What’s frowned on in one area of the country might be OK in another. Always talk to your attorney.

4DOL Information Letter to Diana Orantes Ceresi, dated February 19, 1998.

5This is a not a complete listing, but it does try to highlight the parties in interest most likely to encounter a self-funded health plan.

6This is not a complete listing of all possible prohibited transactions.