6.5 ERISA & Employer-Sponsored Plans

ERISA: Employee Retirement Income Security Act of 1974

The Employee Retirement Income Security Act of 1974 (ERISA) is the federal statute that sets minimum standards for most voluntarily established employee benefit plans, including health plans. ERISA's central feature for health insurance is federal preemption of state law for employer-sponsored benefit plans — a feature that reshapes how state insurance mandates apply depending on whether the plan is self-funded or fully insured.

Federal Preemption of State Law

ERISA §514(a) supersedes (preempts) any state law that "relates to" an employee benefit plan. The Supreme Court's Pilot Life (1987) and Travelers (1995) decisions shaped this: state insurance mandates are saved from preemption under the saving clause (§514(b)(2)(A)) for laws that "regulate insurance" — but state tort claims and certain direct mandates against plan sponsors remain preempted.

The practical result:

• Fully insured plans (the employer buys an insurance policy): state insurance mandates DO apply because of the saving clause — the insurer is regulated.
• Self-funded plans (the employer bears the risk directly, often through a third-party administrator): state insurance mandates generally do NOT apply — ERISA preempts them, and the saving clause does not save them because the plan is not "insured."

This creates the "self-funding escape" from state mandates — large employers can self-fund to avoid state-imposed benefit mandates (e.g., fertility preservation, autism coverage, specific provider mandates) while still being subject to federal requirements (ACA, HIPAA, Mental Health Parity).

Fiduciary Duties

ERISA imposes fiduciary duties on plan officials (named fiduciaries, plan administrators, trustees) under §404:

• Duty of loyalty — act solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable plan expenses.
• Duty of prudence — act with the care, skill, prudence, and diligence that a prudent person would use in a similar situation.
• Duty to follow plan documents — act consistently with the governing plan documents (unless inconsistent with ERISA itself).
• Diversification — for investment-related plan assets, minimize risk through diversification (less directly applicable to health plans but relevant for self-funded trust assets).

Fiduciaries who breach these duties are personally liable for losses and may be required to restore plan assets. The Department of Labor (DOL) enforces ERISA's fiduciary and reporting provisions.

Reporting and Disclosure

ERISA requires several disclosures:

• Summary Plan Description (SPD) — the plan's "user manual," must be provided to participants within 90 days of enrollment and updated every 5 years (or when materially amended). Explains benefits, claims procedures, and participant rights.
• Summary of Benefits and Coverage (SBC) — required under ACA §2715; a concise, uniform summary of benefits and coverage using standard definitions, provided at enrollment and renewal.
• Form 5500 — annual report filed with the DOL; plans with 100+ participants (and some smaller plans) must file. Used for compliance monitoring.
• Plan document — the underlying legal instrument establishing the plan; not distributed to participants but available for review.

Self-Funded vs Fully Insured Plans

Many mid-size employers use self-funded arrangements with stop-loss coverage to cap risk, gaining ERISA preemption benefits while managing catastrophic exposure. Stop-loss insurance itself is regulated as a property/casualty-like product and is not subject to the same state health insurance mandates as the underlying medical coverage.

DOL Jurisdiction vs State Insurance Department

• Self-funded plans: regulated primarily by the U.S. Department of Labor (DOL) under ERISA; state insurance departments generally lack jurisdiction over the plan terms (though stop-loss insurers remain state-regulated).
• Fully insured plans: regulated by both — DOL for plan-level ERISA matters, state insurance department for the underlying insurance contract and mandates.

This dual jurisdiction is why the "fully insured vs self-funded" distinction is exam-critical: it determines who enforces consumer complaints, who sets benefit mandates, and who collects premium tax.

Plan Years and Compliance Timelines

ERISA plans operate on a plan year — a 12-month period (which may or may not align with the calendar year) defined in the plan document. Key compliance dates are tied to the plan year:

• Form 5500: due 7 months after the end of the plan year (with extension).
• Annual notices (e.g., SPD if material modification, SBC at renewal): due per plan-year schedule.
• COBRA notices: triggered by qualifying events, not the plan year.

ERISA and Other Laws

ERISA does not operate in isolation:

• ACA layered federal mandates on top of ERISA — group plans must comply with both.
• HIPAA portability, privacy, and security rules apply to ERISA group health plans.
• Mental Health Parity and Addiction Equity Act (MHPAEA) requires parity between mental health/substance use disorder and medical/surgical benefits — applies to both ERISA and insured plans.
• COBRA applies to ERISA-covered group health plans of employers with 20+ employees.
• Newborns' and Mothers' Health Protection Act, Women's Health and Cancer Rights Act — federal mandates that apply regardless of self-funding status.