Most people with a workplace retirement plan, like a 401k, may not realize it’s governed by a law called ERISA — the Employee Retirement Income Security Act of 1974. This law sets the rules that keep plans fair, transparent, and properly funded.
For employers, it means meeting specific standards when offering retirement benefits. For employees, it means added protection for the savings they work hard to build.
This guide breaks down what ERISA-qualified retirement plans are, outlines the main requirements, and highlights compliance responsibilities that come with offering one.
📌 Also read: The Complete History of the Solo 401k Plan
What Is an ERISA Qualified Retirement Plan?
An ERISA-qualified retirement plan follows both the Internal Revenue Code (mainly section 401a) and the Employee Retirement Income Security Act of 1974 (ERISA). Meeting these standards ensures the plan is structured fairly and operated under strict rules designed to protect participants.
Definition and Types of Covered Plans
To be considered “qualified,” a retirement plan must satisfy rules on eligibility, vesting, benefit accrual, funding, fiduciary duties, and participant disclosures. Compliance is not just about having the right language in the plan document—it also means applying these rules in day-to-day operations.
Common examples of ERISA-qualified plans include:
- Defined benefit pension plans – provide a set monthly benefit at retirement, often based on salary and years of service.
- Defined contribution plans – such as 401ks, profit-sharing plans, or money purchase pension plans, where benefits depend on contributions and investment performance.
- 403b tax-sheltered annuities – retirement plans for public school employees and certain nonprofit workers; plans from private 501(c)(3) nonprofits may be covered by ERISA, while public school plans are generally considered governmental and not subject to ERISA.
✏️ Hypothetical Example:
A mid-sized company that sponsors a 401k plan must ensure employees can participate after meeting service requirements, apply nondiscrimination testing to include rank-and-file employees, and file Form 5500 each year to report plan details.
📝 Note: Defined benefit plans also carry insurance protection from the Pension Benefit Guaranty Corporation (PBGC), which provides a safety net if a plan is terminated and cannot meet its obligations.
ERISA vs. Non-Qualified Retirement Plans
Not all retirement arrangements meet ERISA standards. Non-qualified plans are often used to provide supplemental benefits, particularly for executives. These plans do not receive the same tax treatment or legal safeguards.
How non-qualified plans differ from ERISA-qualified plans:
- Bypass ERISA protections – no rules on participation, vesting, fiduciary duties, or PBGC insurance.
- Limited tax benefits – employer contributions are only deductible when participants recognize income.
- Flexible design – can be tailored to favor key employees or executives since nondiscrimination rules do not apply.
✏️ Hypothetical Example:
A company may set up a deferred compensation agreement for senior executives that delays income taxes until payout. Unlike an ERISA-qualified plan, this arrangement does not guarantee funding security if the company faces financial difficulties.
📝 Note: Because non-qualified plans lack ERISA’s protections, participants in these plans generally have fewer rights around funding, benefit guarantees, and appeals.
📌 Also read: 401k Nondiscrimination Testing Explained
Key Requirements and Benefits of ERISA Plans
ERISA shapes how employees qualify for participation, how employer contributions vest, how plans are funded, and how fiduciaries are expected to act. It also creates important tax advantages for both employers and employees.
Participation, Vesting, and Funding Rules
ERISA ensures employees gain fair access to retirement benefits:
✅ Participation – Most employees must be allowed to join a plan after one year of service and once they reach age 21. Employers may set more generous rules, but not more restrictive ones.
✅ Vesting – This determines when employer contributions become permanent. In defined contribution plans, employee elective deferrals vest immediately, while employer contributions must vest under at least a 3-year cliff or a 2-to-6-year graded schedule. Employer contributions typically follow a schedule similar to defined benefit plans.
✅ Funding – Employers must fund their plans responsibly. Defined benefit plans, in particular, require actuarially determined minimum contributions (under under IRC sections 412 and 430) to make sure promised benefits are covered and plans remain solvent.
📝 Note: These standards are designed to prevent unfair exclusions, lost benefits, or underfunded obligations.
Fiduciary Responsibilities and Employee Rights
Anyone managing plan assets or providing investment advice has fiduciary duties under ERISA. These responsibilities include:
✅ Acting solely in the best interest of plan participants and beneficiaries
✅ Avoiding conflicts of interest
✅ Diversifying investments to reduce risk
✅ Following plan documents in line with ERISA rules
Participants also gain specific rights, such as:
- Receiving clear plan information (summary plan descriptions, annual funding notices)
- Access to an appeals process if benefit claims are denied
- Legal recourse for breaches of fiduciary duty or unpaid benefits
If a defined benefit plan fails, the Pension Benefit Guaranty Corporation (PBGC) steps in to pay guaranteed benefits up to statutory limits.
Tax Benefits of ERISA Retirement Plans
ERISA-qualified plans also provide tax advantages:
✅ For employers – Contributions are deductible, within IRS limits, in the year they are made.
✅ For employees – Contributions and earnings grow tax-deferred until withdrawal, often when participants are in a lower tax bracket.
✅ Roth options – Some plans include Roth features, allowing after-tax contributions that grow tax-free, adding flexibility for retirement income planning.
These tax rules create strong incentives for both employers to offer plans and employees to participate consistently.
Setting Up and Staying Compliant
Creating and maintaining an ERISA-qualified plan goes beyond putting documents in place. Employers need to follow certain steps to establish the plan, meet ongoing compliance rules, and minimize the risk of penalties. Here’s an overview of the process and responsibilities involved.
How to Establish a Plan and Obtain IRS Approval
The first step is adopting a written plan document that meets both the Internal Revenue Code section 401(a) and ERISA standards. This document spells out who can participate, how benefits vest, and the formulas used to calculate benefits.
Some sponsors go a step further by applying for an IRS determination letter:
✅ Forms to use – Form 5300, 5310, or 5307, depending on the type of request
✅ Why it matters – A favorable letter confirms that the plan meets qualification rules and protects the sponsor against retroactive disqualification during an audit
✅ What’s required – Plan documents (plus amendments), a user fee (Form 8717), and the relevant application submitted through Pay.gov.
📝 Note: The determination letter is voluntary but gives sponsors added assurance and access to IRS correction programs under EPCRS.
Form 5500 Filing and Disclosure Rules
Once the plan is in place, ongoing reporting becomes critical. Every ERISA-qualified plan must file an annual return through the EFAST2 system:
✅ Form 5500 – Standard filing for most plans
✅ Form 5500-EZ or 5500-SF – Simplified options for small plans
The filing is due by the last day of the seventh month after the plan year ends, though extensions are available.
Plans also have disclosure duties:
- Summary Plan Description (SPD): Must be provided to participants within 90 days of enrollment.
- Summary Annual Report (SAR): Sent within two months after the Form 5500 deadline.
📝 Note: Failing to provide these documents can trigger civil penalties under ERISA section 502(c).
Compliance Mistakes to Watch Out For
Even careful sponsors sometimes run into problems. Common compliance errors include:
❌ Late or inaccurate Form 5500 filings, leading to penalties or audits
❌ Missing or outdated SPDs/SARs, leaving participants uninformed
❌ Not updating plan documents for law changes before amendment deadlines
❌ Skipping nondiscrimination or minimum funding tests, risking disqualification under section 401(a)
❌ Operational mistakes, such as misapplying vesting schedules or loan provisions
To avoid these issues, sponsors should regularly consult resources like:
- IRS “Guide to Common Qualified Plan Requirements”
- DOL “Reporting and Disclosure Guide”
Key Takeaways for Employers and Employees
ERISA-qualified retirement plans are designed to protect employees and guide employers by setting clear rules around eligibility, vesting, funding, fiduciary duties, taxes, and disclosures. These standards help ensure retirement benefits are managed fairly and consistently.
For employers, maintaining compliance usually means having a written plan document, considering an IRS determination letter, and staying on top of annual requirements such as Form 5500 filings and participant notices.
If you’re looking at next steps, you might start by reviewing your plan documents against ERISA rules, checking the DOL’s Reporting and Disclosure Guide, or exploring IRS correction programs if adjustments are needed. For employees, it can help to read your Summary Plan Description closely and ask questions about vesting schedules or investment options so you fully understand your benefits.
📌 You can also explore our related articles to learn more about retirement strategies:
Disclaimer:
The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.
The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.