The federal Employee Retirement Income Security Act of 1974, or ERISA, protects the savings in employer-sponsored, defined benefit and defined contribution plans. Accountability and disclosure requirements make sure plan fiduciaries, including the plan's administrator and trustee, adhere to principles of conduct and keep participants informed about things like features and funding. As the only types of employer-sponsored IRAs, SIMPLE and SEP IRAs are the only ERISA qualified plans.
Savings Incentive Match Plan for Employees
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is an employer-sponsored, defined contribution plan designed for very small businesses. Only businesses employing up to 100 workers who earned at least $5,000 during the preceding calendar year can offer SIMPLE IRAs.
The financial institution serving as the plan's trustee handles Internal Revenue Service reporting requirements. There are no ERISA required federal financial reporting requirements for SIMPLE IRAs
However, there are mandatory ERISA annual disclosure requirements. These consist of a summary description and an election notice. The summary description tells participants how the plan operates and outlines changes to the plan's structure or operation for the coming year. The election notice outlines an employee's right to make or change salary contributions and specifies whether mandatory employer contributions will be matching or nonelective in the coming year.
Simplified Employer Pension IRA
A Simplified Employer Pension (SEP) IRA is another employer-sponsored, defined contribution IRA. As such, it also is ERISA qualified. Because SEP IRAs have fewer ERISA reporting and disclosure requirements than most other defined contribution plans, including a 401(k), small business sole proprietors, partnerships and corporations looking for less complex and costly retirement plan options often choose this option.
ERISA requirements for SEP IRA plans are similar to SIMPLE IRAs. The plan's trustee handles IRS reporting requirements and there are no ERISA required federal financial reporting requirements. SEP plans also have the same ERISA annual disclosure requirements as a SIMPLE IRA.