Severance Plans

houspinner

Other than being in writing, when is a severance plan considered an ERISA plan and therefore subject to filing reports, etc. with the government (DOL)?

Thank you.

System

You ask a very good question. In order to answer you, I may be giving you more information than you asked for, but I hope a full explanation will be helpful. As always, check with your attorney to see if your specific severance plan qualifies. These are just general guidelines.
Generally, unless a severance benefit is individualized and offered on a truly ad hoc basis, it risks being covered by ERISA. Severance benefits will be covered by ERISA if the benefit is a “plan” or “program.” The U.S. Supreme Court has ruled the payment of a one-time lump sum as severance pay was not a “plan” or “program” because the payments required no ongoing administrative scheme. Consequently, ERISA did not apply. But a plan or program will be found to exist if, from the surrounding facts and circumstances, a reasonable person could ascertain the existence of intended benefits, intended beneficiaries, a source of financing, and an ongoing administrative scheme.

Most severance plans are "welfare plans", however, if the severance benefits are directly or indirectly conditioned on the employee’s retirement, the plan will most likely be considered a "pension plan" and be required to follow the additional rules that ERISA imposes on pension plans.


Severance plans that are covered by ERISA are required to meet the following standards:
• They should be in writing.
• They should be described in a summary plan description that is provided to employees.
• They must be administered by plan fiduciaries (persons that act in the plan participants’ best interests).
• Depending on the number of employees eligible for the severance program, the employer might have to file annual returns or a copy of the summary plan description with the U.S. Department of Labor.

A severance program will be considered an ERISA pension plan — subjecting it to more requirements than if it is considered a welfare plan — if it has any of the following characteristics:
• The severance benefit amount is more than two times the employee’s annual pay for the year preceding the reduction in force.
• The period of time over which severance payments are made is longer than 24 months.
• The severance package is conditioned, directly or indirectly, on an employee’s retirement.
The added requirements imposed on severance plans that are considered pension plans under ERISA include minimum participation and vesting standards, funding standards, and rules concerning joint and survivor annuities.

I hope this helps, and isn't information overload!

houspinner

This is exactly the information I needed. Thank you very much