It May Be Time To Check Your Employee Severance Policy

It was an unusually stressful spring and summer for employers managing their workplaces during the COVID-19 outbreak. Unfortunately, many employers were forced to reduce staffing, and in doing so, implement their severance policies, if they had one, or introduce one for the first time. As employers and their employees try to return to a “new normal” workplace, we think it is an appropriate time to review your employee handbooks, benefit plans, and specifically, your severance policy or arrangement – even if unwritten – for compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”).

Can our severance policy really be subject to ERISA?

It could be – please check and consult us.  Generally, employer severance payment policies or arrangements are covered by ERISA (technically as health and welfare or pension plans) if they are a “plan, fund, or program . . . established or maintained by an employer” to provide severance benefits to employees. Even if an ERISA plan is not intended, an employer could accidentally create one by having a regular practice of paying severance, particularly where such payments are subject to internal policies or procedures designed for consistency or to limit employer personnel discretion.  Back in 1987, the United States Supreme Court established the standard for determining whether the payment of severance pay is pursuant to a "plan” holding that a one-time, lump sum severance payment triggered by a plant closing did not create an ERISA plan because it did not create the need for an "ongoing administrative scheme." Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1 (1987). Today, courts generally find that severance policies or arrangements requiring sufficient discretion, such as in determining when severance benefits are payable or eligibility, are plans that must comply with ERISA.

Therefore, employers should check to see if their severance arrangement: (1) is more than just a one-time, lump sum payment to employees triggered by a single event not anticipated to reoccur; or (2) requires an ongoing administrative scheme. If the answer to either is "yes," that severance policy may be a plan that must comply with ERISA. The further away an employer gets from a one-time, lump sum payment, the more likely a court or the U.S. Department of Labor (“DOL”) will find that an ERISA severance plan exists.  

How do we comply with ERISA?

First, employers should make sure their severance policy is an ERISA welfare plan, subject to significantly fewer ERISA requirements - not a pension plan (unless a pension plan is intended of course). Generally, for a severance plan to be an ERISA welfare plan, the following requirements must be met: (1) the severance plan payment may not be contingent upon the employee retiring; (2) the total amount of the payments to be made may not exceed two times the employee’s annual compensation during the last full year of employment; and (3) all payments must be made within 24 months following the employee’s termination. If you think your severance policy violates any of the above, you may be administering an ERISA pension plan and you should seek further guidance from counsel.  

Second, employers must draft and administer their severance policy to comply with ERISA’s reporting and disclosure requirements (among other requirements), including but not limited to:

What are the risks of not complying with ERISA?

If an employer’s severance policy is determined to be subject to ERISA and ERISA’s requirements have not been followed, the employer, as well as the individuals who act as fiduciaries with respect to the policy, could be subject to various penalties and potential claim exposure. For example:

What are the benefits of an ERISA severance plan?  

Like any ERISA employee benefit plan, maintaining and administering an ERISA-compliant severance plan has costs and burdens, but hold on, there are benefits. For example:

Employers paying severance to departing employees on a recurring basis, particularly those doing so in accordance with internal policies or practices (even if unwritten), should evaluate the benefits of implementing a formal ERISA severance plan against those risks identified with maintaining a non-compliant severance policy or arrangement. Please contact us with any questions or assistance in reviewing and/or preparing ERISA-compliant severance plans or any employee benefit need.

 

Clifton Budd & DeMaria remains fully functioning during the current state of emergency. If you should have any questions, please contact the author of this article or your CB&D attorney.

About the Author
David P. Ofenloch
Partner
David P. Ofenloch joined Clifton Budd & DeMaria as a Partner in 2018. David's practice primarily concentrates on employee benefits...
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