ERISA Liability for Massachusetts Employers: What You Need to Know About Employee Benefit Plans

By a Massachusetts Business Attorney  · Business Law

If you run a Massachusetts business that sponsors a 401(k) plan, a health insurance plan, or some other employee benefit plan, you probably don’t think of yourself as a fiduciary. But if your business established the plan, you control how it operates, or you make decisions about its administration, the busienss is a fiduciary under the Employee Retirement Income Security Act (ERISA), and that comes with liability.

I’ve been asked this a lot, and here’s what concerns me: many small business owners are unwitting fiduciaries with exposure they don’t even know exists. A late deposit of employee 401(k) contributions, a plan loan that doesn’t follow plan rules, a trustee who benefits personally from plan assets, or simply failing to communicate plan terms properly to participants can trigger serious liability.

Let me walk you through ERISA, fiduciary responsibilities, and the risks you need to manage.

What ERISA Is and Why You Are Likely a Fiduciary

ERISA (29 U.S.C. § 1001 et seq.) is a comprehensive federal law regulating private employee benefit plans. It governs retirement plans (401(k)s, profit-sharing plans, pensions), health insurance plans, disability plans, and welfare benefit plans.

ERISA is not optional. If you sponsor a plan for employees, ERISA applies to you. And here’s the critical part: ERISA creates personal liability for fiduciaries. You cannot hide behind corporate form. Directors, officers, and employees who exercise control over a plan can be held personally liable for violations.

Who is an ERISA fiduciary? Anyone who:

1. Exercises discretionary authority or control over the plan’s management or assets.

2. Renders advice regarding plan investments.

3. Exercises authority in administering the plan or interpreting its terms.

4. Has discretionary authority or control over plan disposition or management.

So if you’re a business owner who approved the plan, selected the provider, or manages plan operations, you’re a fiduciary. Even if you didn’t intend to be.

Fiduciary Duties and the Prudent Person Standard

Under ERISA, fiduciaries must discharge their duties “solely in the interest of the participants and beneficiaries” and act with “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in managing an enterprise of a like character and purpose.”

This is the “prudent person standard,” and it’s rigorous. You cannot favor the company over the participants. You cannot invest plan assets in a way that benefits the employer. You cannot take the easy path. You have to act prudently.

What does this mean in practice?

1. Investment decisions: You must diversify plan investments to minimize risk of large losses. You must review investment options periodically and ensure they are appropriate.

2. Fee monitoring: You must ensure plan fees are reasonable and not excessive. Fiduciaries cannot pay inflated fees to providers.

3. Benefit administration: You must follow plan documents precisely. You cannot deviate from stated terms.

4. Communication: You must provide required disclosures to participants (Summary Plan Descriptions, annual statements, etc.).

5. Conflicts of interest: You must disclose conflicts and avoid self-dealing.

Common ERISA Violations

Late or Improper Contribution Deposits

Employees contribute to 401(k) plans through payroll deduction. This money is withheld from employee paychecks and must be deposited into the plan promptly. ERISA requires deposits “as soon as possible,” typically within a few business days.

Employers sometimes use employee contributions as working capital, depositing them late. This is a serious violation. Employees can sue for damages, the Department of Labor can investigate, and penalties can mount quickly.

Misuse of Plan Assets

You cannot use plan assets for company purposes. You cannot take a loan from the plan at favorable rates not available to other participants. You cannot invest plan assets in company stock (beyond statutory limits). You cannot pay yourself inflated compensation for plan administration.

Failing to Follow Plan Document Terms

Plan documents control how the plan operates. If the plan says benefits vest over five years, you cannot vest them faster or slower without amending the document. If the plan specifies a claims procedure, you must follow it. Participants can sue if you deviate.

Inadequate Participant Disclosures

You must provide participants with:

1. A Summary Plan Description (clear, written explanation of plan terms).

2. Annual benefit statements.

3. Investment prospectuses or fact sheets.

4. Notice of plan amendments.

5. Claims procedures.

Failing to provide required disclosures violates ERISA and can result in participant lawsuits.

Improper Plan Termination

If you terminate a retirement plan, you must follow specific procedures. Plan assets must be distributed according to plan terms. If the plan is underfunded, you cannot simply walk away. The Pension Benefit Guaranty Corporation (for defined benefit plans) or proper distribution procedures must be followed.

Personal Liability

Here’s what keeps employers up at night: fiduciary liability is personal. The company is not your shield.

If you, as an officer or director, authorize a prohibited transaction, you can be sued personally. Your personal assets are at risk. The Department of Labor can pursue you for penalties and relief to the plan. Participants can sue you directly for breach of fiduciary duty.

Damages can include:

1. Restoration of plan assets (the amount lost due to the breach).

2. Prejudgment interest.

3. Attorney fees and costs.

4. Punitive damages in egregious cases.

This is serious. One bad decision about plan administration can result in six-figure liability.

How to Reduce Risk

Use a Third-Party Administrator

Don’t administer the plan yourself. Hire a qualified third-party administrator (TPA) to handle day-to-day operations. This delegates operational fiduciary responsibility and reduces your personal exposure.

Document Your Decisions

If you make investment selections, hire advisors, or modify plan terms, document your reasoning. Show that you acted prudently based on information available to you. Documentation is your evidence of prudence.

Get Professional Advice

Consult with a benefits attorney or ERISA specialist before making significant plan decisions. Before terminating a plan, before changing investment options, before interpreting ambiguous plan language. This shows prudent reliance on expert advice.

Review Investment Options Annually

At least once per year, review whether the plan’s investment options remain appropriate. Are fees still reasonable? Are returns competitive? Is diversification adequate? Document this review.

Provide Required Disclosures

Stay current on participant communication requirements. Provide all mandated disclosures timely. If the law changes, amend your documents and communications accordingly.

Consider Fiduciary Liability Insurance

ERISA fiduciary liability insurance covers breach of fiduciary duty claims. It’s not a substitute for prudent administration, but it can provide coverage for unintended mistakes.

The Bottom Line

If you sponsor an employee benefit plan, you’re a fiduciary. This is not a title you can disclaim. It comes with serious duties and personal liability. Your fiduciary responsibility is to the participants, not the company, and that matters.

I see employers make ERISA mistakes because they don’t understand the rules or assume the plan provider is handling everything. Wrong. You remain personally liable even if you delegate administration.

If you sponsor a benefit plan, or if you’re considering establishing one, call my office at 978-273-8337 or visit gaudetlawoffice.com to schedule a consultation. I’ll help you understand your fiduciary duties, review your current plan administration, and implement safeguards to protect your business and personal assets.

For more information about ERISA requirements, visit the U.S. Department of Labor Employee Benefits Security Administration (opens in new tab).

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ABOUT THIS ARTICLE

This article was prepared by a Massachusetts attorney and is provided solely for general informational and educational purposes directed to members of the general public. It does not constitute legal advice and does not create an attorney-client relationship. The law applicable to any particular situation depends on the specific facts and circumstances of that matter. Readers are encouraged to seek the advice of a licensed Massachusetts attorney before taking any action.