FICA (the Federal Insurance Contributions Act) is a federal law passed in 1935, intended to create a fund to pay for Social Security benefits. ERISA (the Employee Retirement Income Security Act of 1974), on the other hand, is a law that regulates the administration of employee benefit plans and protects workers’ retirement benefits. Both FICA and ERISA are related to Social Security because they both provide different forms of financial protection for individuals who contribute their portion into the system.
The purpose of FICA is to finance Social Security benefits through payroll taxes, known as “FICA taxes.” The tax is split between employers and employees; each must pay 6.2 percent of covered wages up to an annual maximum amount ($137,700 as of 2020). Employers are also required under FICA law to report employee earnings and contributions so that the government can properly credit these funds towards an individual’s future Social Security benefit payments when they retire.
ERISA’s role in relation to Social Security involves protecting those saving for retirement by mandating certain standards be met by employers or plan administrators offering 401(k)s or other similar defined contribution plans, such as 403(b)s or 457 plans. These rules essentially ensure that participants have access to information about their investments, receive timely deposits/distributions from employer-sponsored pension funds, and generally receive proper communication regarding their accounts.
What is the relationship between FICA, ERISA, and Social Security? Include an example of fiduciary responsibility under ERISA.
Additionally, ERISA prohibits fraudulence with respect to how retirement money is managed and requires companies offering pensions or benefits programs through which employees will draw income upon retirement must be responsibly funded by employers (Mittal & Sturm 2015).
While ERISA does not specifically require employers set aside money specifically for Social security purposes – it does place responsibility directly on corporate leaders: fiduciary responsibility. Under this clause in ERISA regulations – fiduciaries are legally responsible for managing plan assets prudently; being impartial when making decisions about participant interests; following instructions laid out in plan documents; avoiding conflicts of interest; accurately documenting transactions involving plans assets; interpreting plan documents correctly; keeping accurate records relating to any actions taken while acting within this role (US Department Labor 2018). An example might include if an employer invests part of their contributions into stocks instead of bonds with higher returns – yet receives kickbacks from stock brokers unrelated – then this would constitute breach in fiduciary duty outlined under ERISA regulations since it could potentially increase risk proportional reward ratio associated with investment options available to participants without any tangible gain which should result from taking extra risks– thus resulting potential liabilities if found guilty by court (Mittal & Sturm 2015).