One issue that is overlooked by some employers is whether a company severance plan is subject to ERISA.
Determination of whether a plan is subject to ERISA is necessary for avoiding costs of ERISA non-compliance and understanding whether challenges should be brought in federal or state court.
The standard used in determining whether a severance plan was subject to ERISA was established in Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1 (1987). Under Fort Halifax, the Supreme Court reasoned that whether ERISA applied depended on if there was an “on-going administrative scheme” required to administer the benefit. The Court ultimately held that ERISA did not apply to the one-time lump sum payment at the core of the dispute.
In Girardot v. The Chemours Company, 2018 WL 2017914 (3rd Cir. 2018), the employer was involved in a corporate spin-off and created a the Chemours Voluntary Separation Program (“VSP”) to facilitate a reduction in work-force. The VSP required that employees elect participation during an 18-day period. Participating employees were required to terminate employment during an estimated 4-month period in exchange for severance benefits and three months COBRA premiums, both to be paid in a one-time lump sum payment. The Employer retained control of who was eligible to participate, when the participants would be terminated within the estimated window, and even who would be required to continue working part-time for up to 6 months after the end of the termination window.
The employer failed to attract enough participation under this program and eventually replaced the VSP with an involuntary reduction program offering better benefits. The electing participants under the original VSP sued on the premise that they would not have elected to participate under the original VSP if they knew a program with greater benefits would have been implemented.
In Girardot, the Third Circuit Court of Appeals affirmed the district court’s finding that the employers severance plan was not an ERISA plan. The Court reasoned that there was no intention to provide regular long-term payments as the Employer only entered into an obligation to provide lump-sum payments to a group of employees over a brief period. The determination of the lump sum payments did not require any new administrative body or exercise of employer discretion as the formula for rendering these severance payments had been pre-established. The Court recognized that employer discretion was necessary to determine eligibility but found that this exercise did not involve any long-term or on-going administrative processes as eligibility once determined was not conditioned on future events.
Being subject to rules set out for ERISA welfare plans is not always a worse-case-scenario, but knowing whether your plan is not covered under ERISA, an ERISA welfare plan, or an ERISA pension plan is crucial to how you manage it.
This post was written by Anne Greene.