Be Wary of a Non-Formal Severance Program

Most employers realize that their retirement and welfare (e.g. health) plans are subject to ERISA and must comply with a variety of Department of Labor requirements. But unknown to many employers is that severance benefits can also be an ERISA covered plan, usually as a welfare plan, but sometimes as a pension plan. Because the determination of whether a severance package is an ERISA covered plan has significance to both employers and employees, the issue has been heavily litigated.

Severance programs come in many sizes, from a one-time agreement with an executive to more structured plans with ongoing administrative schemes. The determination of whether a severance program is covered by ERISA is a question of fact. The four elements of an ERISA employee welfare benefit plan are that (i) there is a plan, fund, or program; (ii) that is established or maintained by an employer; (iii) for the purpose of providing benefits; (iv) to participants and their beneficiaries. Litigation has largely been centered on determining if a severance program meets the first requirement of being a plan.

A severance program that requires little to no ongoing administration will likely not be interpreted to be an ERISA covered plan. Ongoing administration increases with the amount of discretion employers have in the amount, timing, and form of severance payments. A severance package that requires only a straight forward calculation for a one-time obligation will most likely not be determined to be an ERISA covered plan. The intended benefits, beneficiaries, source of funding, and procedures of an ERISA plan must also be ascertainable, and a program where the decision to offer benefits is at the full discretion of the employer does not create an expectation of benefits.

Courts look to the actions of the employer, not the intent, to determine if an ERISA plan exists. An ERISA covered severance plan can be created inadvertently without a written plan or the express intent of the employer to create one. A court can interpret that the past performance of an employer offering severance packages creates an expectation of benefits, and will determine that the program is an ERISA benefit plan.

Employers without a formal severance program should consider the costs and benefits of adopting a plan. Like other ERISA covered plans, a formal ERISA covered severance plan would require more compliance, but can be beneficial if a dispute arises. Even more critically, if an employer that does not have a formal plan is determined to have maintained an ERISA covered plan, failure to fulfill the compliance requirement of ERISA will result in a large cost to employers. If you would like to discuss your severance program, please reach out to a Graydon attorney.

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