Contemplating a Severance Plan? Consider ERISA

A severance plan may be subject to the requirements of ERISA as an employee welfare benefit plan. The determination of whether a severance plan is subject to ERISA depends in large part on whether the plan is part of an “ongoing administrative scheme.”

Severance plans subject to ERISA have certain requirements, such as the obligation to file annual Forms 5500, to follow ERISA’s formal claims procedure, and to provide a summary plan description (“SPD”), a summary annual report (“SAR”), and any required summaries of material modification (“SMM”) to participants.

For a severance plan subject to ERISA, failure to comply with these requirements can carry a hefty fee – up to $110 per day for failure to provide required documents to participants on request and up to $1,100 per day for failure to file a Form 5500. Note that these penalties may be softened by using delinquent filer voluntary correction programs.

However, there may be certain advantages to maintaining an ERISA severance plan. ERISA’s preemption provisions may ensure that all state law claims related to severance pay are preempted.  Further, claims against an ERISA severance plan must be tried in federal court rather than state court.  A plaintiff cannot recover punitive damages, and jury trials are not available.  Finally, if the plan document provides for it, claim determinations by the plan administrator may be reviewed under a more favorable judicial standard.

While there are certain legal and administrative procedures employers must follow when operating an ERISA severance plan, having an ERISA plan in place may provide clarity, uniformity, and some peace of mind when providing severance benefits.