Financial Accounting II

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ERISA

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Financial Accounting II

Definition

ERISA, or the Employee Retirement Income Security Act, is a federal law enacted in 1974 that sets standards for pension and health plans in private industry to protect individuals in these plans. It ensures that employee benefit plans are managed fairly and that participants receive their promised benefits. By regulating defined benefit and defined contribution plans, ERISA plays a critical role in shaping how these retirement plans are funded and administered.

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5 Must Know Facts For Your Next Test

  1. ERISA does not require employers to establish pension plans but sets minimum standards for those that do exist.
  2. The law mandates reporting and disclosure requirements for pension plans to ensure transparency for participants.
  3. ERISA provides fiduciary responsibilities, meaning that those managing plan assets must act in the best interest of the participants.
  4. Under ERISA, participants are granted rights to sue for benefits and breaches of fiduciary duty if their benefits are denied or mismanaged.
  5. The PBGC was created under ERISA to insure defined benefit plans and provide financial assistance to underfunded plans, protecting retirees' benefits.

Review Questions

  • How does ERISA influence the management of defined benefit and defined contribution plans?
    • ERISA influences the management of defined benefit and defined contribution plans by imposing strict standards for reporting, transparency, and fiduciary duties. These requirements ensure that employers manage retirement assets responsibly and protect participants' rights. For instance, employers must provide regular statements to plan participants about their benefits and any changes, which helps maintain trust and accountability in how these plans are handled.
  • What protections does ERISA provide to employees regarding their retirement benefits?
    • ERISA provides several important protections to employees regarding their retirement benefits. It requires plans to follow specific guidelines for reporting and disclosure, allowing employees to understand their benefits clearly. Additionally, ERISA gives employees the right to sue for denied benefits or breaches of fiduciary duties, ensuring they can seek justice if their rights are violated. This legal framework helps safeguard employeesโ€™ financial security in retirement.
  • Evaluate the impact of ERISA on the overall landscape of employee retirement benefits in the United States.
    • The impact of ERISA on the overall landscape of employee retirement benefits in the United States has been profound. By setting minimum standards for pension and health plans, it has increased accountability and transparency in how these plans are managed. As a result, employees have more confidence in their retirement savings, knowing there are protections against mismanagement. Furthermore, the establishment of the PBGC under ERISA has provided a safety net for employees relying on defined benefit plans, enhancing stability within the retirement system.
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