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Your Severance Package May Be Covered Under ERISA

August 1, 1995
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Related Topics: Termination, Featured Article
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You could be in violation of ERISA without even knowing it. Your severance plan may qualify as an employee benefit plan—and as such would be subject to the Employee Retirement Income Security Act of 1974 (ERISA). Yet many employers don't know whether their plan qualifies or not, simply due to a lack of understanding on the subject. "Most employers know their pension plans are subject to ERISA. They know their health and welfare plans are subject to ERISA," says Neal Schelberg, a partner at New York City-based Proskauer Rose Goetz & Mendelsohn LLP who specializes in employee benefits law. "But they're surprised to learn that their severance plans are."

Companies with severance plans covered by ERISA generally must meet all of the act's provisions, including providing the Department of Labor with an annual report, summary plan descriptions and all other reporting forms traditionally associated with employee-benefit plans. Yet a large number of companies aren't doing so. "What's happened in the employee benefits world is that severance-pay plans have tended to be overlooked as far as reporting and disclosure because they weren't traditionally considered employee-benefit plans in the full sense," explains Mitchell Langbert, a frequent author on benefits issues. "So, many benefits departments let them fall through the cracks, and as a result there is pretty widespread non-compliance."

How do you know if your severance plan is subject to ERISA? The U.S. Supreme Court has provided some guidelines on the subject. If you have a program that requires ongoing administration, where payments are made upon the employee's termination and there are certain eligibility criteria to be met, then that is likely an ERISA-covered plan, because of the ongoing involvement of the employer in its administration.

On the other hand, if you have a plan in which a company is going out of business, for instance, so that payments will be made at one time, but there will be no continuing employer involvement in administration, that likely does not rise to the level of an employee-benefit plan under ERISA.

Make sure you know which kind of plan yours is, cautions Langbert. "Severance plans are one of the biggest areas of litigation under ERISA, even though most companies slough it off as minor in comparison with the medical or pension plan. It's important for employers to know about."

Personnel Journal, August 1995, Vol. 74, No. 8, p. 34.

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