Are IRA Accounts ERISA Qualified?
The Employee Retirement Income Security Act was a federal law passed in 1974 that mandated minimum standards for pension and retirement plans held by individuals working for private employers. ERISA generally applies to both defined contribution plans, where employers and employees contribute to an employee's retirement account, and a defined benefit plan, where an employer guarantees a minimum level of retirement income for an employee.
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Non-ERISA-Qualified IRAs
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An Individual Retirement Account is a tax-advantaged account held in the name of an individual for the purpose of providing income to the individual during retirement. There are three types of IRAs that are not covered under ERISA: traditional, Roth and education.
The traditional IRA provides an immediate tax deduction for contributions, but is subject to taxes upon withdrawal. The Roth IRA provides no immediate tax benefit, but withdrawals following retirement are generally tax free. The education IRA was the former name for accounts more traditionally known as Education Savings Accounts. Education IRAs are not for retirement savings.
These types of IRAs are not covered under ERISA.
ERISA-Qualified IRAs
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Three types of IRA accounts are covered under ERISA: SIMPLE, SEP and rollover.
A SIMPLE IRA is created by an employer for the benefit of an employee. A SEP IRA is generally used by self-employed individuals of small businesses to set up retirement accounts for themselves and their employees. A rollover IRA is an IRA that is created to hold the funds transferred from another ERISA-qualified plan.
These accounts are covered under ERISA and are subject to the relevant minimum standards requirements as mandated under the act.
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Other Qualified Accounts
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The remainder of employer-provided, tax-advantaged retirement accounts are generally covered under ERISA and considered qualified. These include 401(k)s, pension plans and many 403(b) plans. Employers have discretion in the operation of 403(b) plans and may choose not to have the plans be ERISA-qualified by limiting their involvement in the plans.
Considerations
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ERISA qualification is meaningful for many reasons, but the most useful is protection from creditors. ERISA-qualified plans are generally protected from creditors and bankruptcy. Most non-ERISA-qualified plans are subject to creditors and bankruptcy for amounts greater than $1 million.
Warnings
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Employer retirement plans are complex and require the services of a third-party administrator. Before deciding to start a retirement plan for employees, employers are strongly advised to contact an attorney or plan administrator for detailed information. There are severe consequences for both the employer and employee for improper or illegal retirement plans.
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References
- US Department of Labor: Frequently Asked Questions about Pension Plans and ERISA
- Cornell University Law School: U.S. Code, Title 29, Chapter 18
- Pension Benefit Guaranty Corporation: General FAQs About PBGC
- IRS: IRC 403(b) Tax-Sheltered Annuity Plans - Questions and Answers
- IRS: Individual Retirement Arrangements (IRAs)
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