What is an ERISA Qualified Plan?

ERISA is an acronym frequently thrown around in the world of HR, but what does it mean? ERISA stands for the Employee Retirement Income Security Act. The law sets the standards for pension and Welfare plans to protect employees and their beneficiaries.

Many employees are unsure how an ERISA applies to them, as there are many complex rules associated with the Act, which make it hard to fully understand. Some pension and Welfare plans are ERISA qualified and some are not. Read on to find out if your program is an ERISA qualified plan.

What plans are subject to ERISA?

Employers who contribute to a health or retirement plan are subject to the rules of ERISA. Employer-sponsored plans that take salary deductions from the worker or contributions by the employer is an ERISA qualified plan.

One caveat, however, is that the ERISA doesn't usually cover group health plans established or maintained by government organizations or religious institutions. ERISA also only applies to plans maintained inside the United States.

Individual retirement plans aren't usually covered by ERISA, but there are a couple of exceptions if they are employer-sponsored.

What is considered a qualified plan?

An ERISA qualified plan must meet the criteria above. To qualify, a plan must be employer-sponsored. The IRS requires plan contributions to be tax deductible. Qualified plans must also abide by non-discriminatory rules so that each employee has access to the same benefits.

Non-ERISA qualified plans include tax-deferred compensation and bonus plans. They are typically held by employees of hospitals, public schools, churches, and nonprofits. Simply put, a non-qualified plan cannot receive employer contributions.

The plan sponsor should consult with an ERISA attorney before choosing a qualified or non-qualified plan. Incorrect classification or reporting errors could result in costly correction fines.

Is a 401k ERISA qualified?

A 401k is an ERISA qualified plan because it is a corporate defined-benefit plan and therefore employer-sponsored. The only time this isn't true is for employees who work for government agencies, religious institutions, or nonprofits. If your 401k is employer-sponsored, it's typically an ERISA plan.

Are IRA accounts ERISA qualified?

Individual retirement accounts, such as an IRA, are not ERISA qualified unless they are employer-sponsored. Starting to see a trend?

Traditional and Roth IRAs are not ERISA qualified because these plans are managed by the individual plan holder, not his or her employer.

SEP IRAs are usually offered to employees by small to mid-sized businesses. This retirement option requires less administrative work from the employer, which makes them popular for smaller organizations. Since the account is employer-sponsored, it is ERISA qualified.

A Savings Incentive Match Plan for Employees (SIMPLE) is another employer-sponsored IRA plan. This type of account allows employers to contribute to the IRA established for their employees. The Department of Labor classifies SIMPLE IRAs as ERISA qualified because employers are involved in the plan.

To find out if your IRA is ERISA qualified, start by identifying the type of IRA you contribute to and whether or not it’s employer-sponsored.

Lastly, you may be wondering how to maintain an ERISA plan if you're considering a rollover. According to Zacks, “to ensure that the rollover maintains the ERISA qualified status, the IRA account holder must ensure that he does not comingle the ERISA funds in the same account.”

Questions about ERISA? We can help.