Severance Programs and ERISA: What Employers Need to Know
Before employers roll out a new severance program, they should ask one additional question: Are we unintentionally creating an ERISA plan? The more administratively complex a severance program is, the more likely it is to fall under the Employee Retirement Income Security Act (ERISA). In general, ERISA applies when an employee benefit or program requires the employer to maintain an “ongoing administrative scheme” to operate it. Does ERISA Apply? If a severance arrangement is covered by ERISA, it will be treated as either a welfare benefit plan or a pension plan —employers generally prefer to avoid the additional requirements applicable to either type of plan. Courts look at several factors when deciding whether ERISA applies , including: How severance payments are made (one-time lump sum vs. installments) The employer’s discretion in determining eligibility and benefits The expected duration of the program (single event vs. ongoing) Whether additiona...