ERISA & Severance Package: What Do I Need to Know?
Many employees understand that the Employee Retirement Income Security Act (ERISA) protects their rights and assets regarding employer-provided group health or retirement plans. However, many may not realize ERISA’s regulations can extend to severance agreements.
If you’ve been dismissed and are expecting separation pay or benefits, your employer may be required to follow specific rules and procedures when administering your severance agreement.
This blog post will give an overview of how ERISA can impact your severance agreement. We’ll explain what defines an ERISA severance plan, discuss what this means for employers, and explore the protections it offers to employees.
Which Severance Plans ERISA Covers
Some but not all employer severance arrangements fall under ERISA’s oversight. As a federal law, ERISA aims to regulate employer-sponsored group benefit plans, such as health insurance, disability, and pensions. However, certain severance packages can also fall under ERISA’s definition of an “employee benefit plan.”
Several factors determine whether a severance package qualifies as an employee benefit plan under ERISA:
- Timing. Benefit plans generally distribute funds gradually over an extended period, not in a lump sum. A one-time payment to an employee immediately after termination is less likely to be considered a structured benefit plan.
- Employer discretion. When a severance agreement is a regular benefit offered to all employees, ERISA is more likely to be involved. Employers who sporadically offer severance to select employees on special occasions could be seen as simply implementing a one-time payroll practice.
- Administrative oversight. Severance packages that require an “ongoing administrative scheme” are more likely to qualify as benefits plans. Calculating payments based on tenure, issuing non-monetary benefits, and designing eligibility policies are all practices that could suggest a company is administering a structured severance plan.
Overall, the greater the administrative effort and involvement required to distribute the severance benefits, the more likely ERISA considers it an employee benefit plan.
Importantly, even informal severance agreements can fall under ERISA’s regulations. For example, consider a company that regularly offers employees a week of pay for each year of service if they’re terminated involuntarily. Even though this is not a written policy, ERISA could treat it as a legitimate employee benefit plan if it meets the appropriate standards.
How ERISA Impacts Employer Severance Plans
If ERISA covers a severance policy, an employer must ensure it follows the rules and regulations around reporting and disclosure required of other group benefit plans. To stay compliant with federal law, companies with ERISA-eligible severance plans must do the following:
- Document it—all ERISA plans must be put in writing;
- Outline a claims process—employees must be able to raise grievances and concerns about their benefits;
- File a Form 5500—employers with at least 100 eligible employees must file this form annually with the Department of Labor and Internal Revenue Service (IRS); and
- Provide a summary plan description—terminated employees should receive a document that clearly outlines the rights and benefits granted by the severance plan.
ERISA also requires employers to follow general standards for responsible fiduciary behavior.
In some instances, additional requirements could also apply to employers whose severance policies qualify as pension benefit plans under ERISA. A severance plan could fall into ERISA’s pension plan category if it:
- Is directly or indirectly tied to an employee’s retirement,
- Pays more than two times the employee’s annual compensation during the last full year of work, and
- Continues payments beyond 24 months after the employee’s departure.
When this happens, an employer must also ensure they follow the regulations around funding and vesting that ERISA requires for retirement and pension plans.
ERISA Severance Plan Protections
Severance packages falling under ERISA regulations offer several advantages and protections for employee beneficiaries. These include the right to:
- Transparency. You should receive a comprehensive written document outlining all your severance benefits and their calculation. If your employer’s policies change, they must inform you in writing.
- Equal treatment. Companies can’t discriminate or engage in favoritism when administering severance plans and benefits.
- A claims process. ERISA gives beneficiaries a procedure for addressing issues with their severance benefits. If you’re not receiving the payment or benefits owed by your employer, the claim process can help you raise the issue with your former employer and enforce your rights.
- Retaliation protection. Employers are prohibited from retaliating against beneficiaries who exercise their rights to benefits under an ERISA severance plan. This retaliation includes altering benefits or severance pay due to a former employee’s ERISA claim.
Companies that violate these protections can face serious legal and financial penalties under federal law. Severance plan beneficiaries whose ERISA rights are infringed upon can sue their employer in federal court to recover owed benefits.
Experienced Legal Support for ERISA Claims
At the Peace Law Firm, we understand how challenging navigating the ins and outs of your rights under ERISA can be. If you have specific questions about your severance agreement and how ERISA affects it, it’s best to consult with a professional.
John Peace has spent the past two decades helping North and South Carolina residents understand and exercise their rights under this federal law.
He exclusively represents employees—not employers or insurance companies—and he’s prepared to help you. Contact our office today to schedule your free, no-obligation consultation.
Rate this Post
Loading...