Severance Benefits May be Subject to ERISA

Question:  When are an employer’s severance benefits subject to ERISA?

Short Answer: Severance benefits that are part of an ongoing administrative program with clear eligibility standards or benefit provisions are subject to ERISA.

 

General Rule

ERISA §3(1) includes severance plans as a welfare plan subject to ERISA because they provide benefits in the event of unemployment.  However, as described below, many employer severance payments do not rise to the level of an ERISA plan.

A severance benefit arrangement must generally include the following two components to be an ERISA plan:

1. An ongoing administrative program; and
2. Clear eligibility standards or benefit provisions.

The Two Components for ERISA to Apply

1. The Fort Halifax Test: Ongoing Administrative Program?

The U.S. Supreme Court addressed the question of when an employer severance payment is an ERISA plan in the 1987 case Fort Halifax Packing Company v. Coyne.

In that case, the court reviewed an employer’s one-time severance payment upon a plant closure.  The court stated that an employer’s severance benefits will give rise to an ERISA severance plan only if it “requires an ongoing administrative program to meet the employer’s obligation.”

The court found (in a narrow 5-4 decision) that the employer’s approach in that case was not subject to ERISA because it simply required a one-time obligation of the employer, with no need for an ongoing administrative program for processing claims and paying benefits.  The court’s majority opinion made clear that “[s]ome severance benefit obligations by their nature necessitate an ongoing administrative scheme, but others do not.  Those that do not, such as the obligation imposed in this case, simply [are not subject to ERISA.]”

Court Case Examples Finding No “Ongoing Administrative Program”

  • A short-term voluntary separation program with a window for employees to elect to be considered for termination and severance, with payments made based on a simple formula and paid in lump sum;
  • An executive employment contract requiring severance benefits on termination of employment without cause, where the severance provision was a straightforward calculation of a one-time obligation;
  • Employer’s practice of offering payments in exchange for release of claims with no evidence of ongoing commitment to make payments;
  • One-time severance payment dispersed in “mechanized fashion”;
  • Termination letter provided to one employee establishing a predetermined schedule of severance payments;
  • Employment contract providing for a single lump-sum severance payment; and
  • Writing quarterly checks for post-employment payments where amount was determined using one-time calculation.

Court Case Examples Finding an “Ongoing Administrative Program”

  • Severance plan treating a voluntary termination for “good reason” as a termination that may give rise to severance benefits, where the plan administrator must determine whether good reason exists in each case;
  • Severance plan that includes a somewhat complex benefit calculation formula with various offsets and deductions, and continued monitoring required to check whether the individual returned to work in a certain period;
  • Employer exercised discretion in determining employee’s seniority status and whether position was comparable to prior position;
  • Employer discretion involved identifying eligible employees and need for management of corporate assets;
  • Separation agreement where employer’s exercise of discretion required in calculating employee age and service, plus ongoing demand on employer’s assets;
  • Benefits entitlement on account of job restructuring required analysis of particularized facts of termination in light of plan’s criteria; and
  • Case-by-case review required for cause of each employee’s termination, multiple triggering events, and certain extended benefits and career-transition services offered.

2. Clear Eligibility Standards or Benefit Provisions?

An ERISA plan must also generally have sufficient detail to enable individuals to determine the available benefits.

In other words, a severance program that has an ongoing administrative program may nonetheless still not be an ERISA plan if it is not clear who is eligible and for what benefit amount.

Court Case Examples Finding Insufficient Detail for Eligibility and Benefits

  • Occasional voluntary separation agreements with an internal document outlining basic approach but no eligibility or benefits provisions, and nothing addressing how years of service might factor into the calculation of an individual’s benefit;
  • Employer had complete discretion to determine eligibility for severance payments without any explicit eligibility standards or distribution mechanisms; and
  • Informal practice of providing severance benefits at the discretion of the employer “if the Company determines that there should be a reduction in the workforce for business reasons.”

Summary

The dividing line between a non-ERISA severance arrangement and a severance plan subject to ERISA is nuanced and will generally depend on all of the facts and circumstances in each situation.

Whenever the factors listed in the summary above call into question whether a severance arrangement is subject to ERISA, we recommend that employers work with in-house or outside ERISA counsel to receive a legal opinion on the plan’s ERISA status.  ERISA severance plans will need to comply with the standard ERISA requirements (plan document, SPD, claims and appeals procedures, fiduciary duties, Form 5500, etc.).

Regulations

ERISA §3(1):

(1) The terms “employee welfare benefit plan” and “welfare plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 [29 USC §186(c)] (other than pensions on retirement or death, and insurance to provide such pensions).

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987):

The purposes of ERISA’s pre-emption provision make clear that the Maine statute in no way raises the types of concerns that prompted pre-emption. Congress intended pre-emption to afford employers the advantages of a uniform set of administrative procedures governed by a single set of regulations. This concern only arises, however, with respect to benefits whose provision by nature requires an ongoing administrative program to meet the employer’s obligation. It is for this reason that Congress pre-empted state laws relating to plans, rather than simply to benefits. Only a plan embodies a set of administrative practices vulnerable to the burden that would be imposed by a patchwork scheme of regulation.

The courts’ conclusion that they should be so regarded took into account ERISA’s central focus on administrative integrity: if an employer has an administrative scheme for paying benefits, it should not be able to evade the requirements of the statute merely by paying those benefits out of general assets. Some severance benefit obligations by their nature necessitate an ongoing administrative scheme, but others do not. Those that do not, such as the obligation imposed in this case, simply do not involve a state law that “relate[s] to” an employee benefit “plan.”

Oliviera v. Rare Hospitality International, Inc., 150 F. Supp. 2d 346 (D.R.I. 2001):

The First Circuit has ruled that ERISA is not implicated where the administrator of a plan “was authorized in his discretion to exclude all employees who had been terminated ‘for any reason or no reason at all,” because no careful assessment of “cause” would be required. Rodowicz, 192 F.3d at 171. Furthermore, with respect to the plant managers who authorized “mutual agreement,” the Gilmore court stated: the discretion involved in defendant’s severance “policy” was in deciding whether to offer severance benefits at all, rather than in deciding which employees would be eligible for the severance benefits. Once [the plant manager] decided it was in the company’s best interest to encourage the resignation of a particular employee, the payment of severance was mechanical, and no ongoing administrative scheme was implemented. Gilmore, 917 F.Supp. at 689. Therefore, the discretion exercised by RHI management in offering severance benefits to certain employees over others does not in itself create an ERISA plan.

In sum, this Court concludes that the new plan does not amount to an ERISA plan. The lack of any explicit eligibility standards or distribution mechanisms result in an administration too unsophisticated to pass the Fort Halifax threshold. Furthermore, the plan does not promise to maintain earmarked assets of the type which are subject to the potential abuses ERISA was intended to foreclose. Therefore, the ERISA regulations are inapplicable to the new RHI plan.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).

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