Definitely maybe. Severance benefits are subject to ERISA if they comprise a “plan, fund or program.” The Supreme Court held that there is a plan, fund or program for severance benefits if (1) payment requires an “ongoing administrative scheme,” or (2) benefits are more than a one-time, lump-sum payment triggered by a single contingency that may never happen.
On what is an ongoing administrative scheme, courts have been notoriously inconsistent about both the minimum required benefit (or combination of benefits) and the extent of a plan administrator’s discretion. Although case law is unclear, many are comfortable that there is no ongoing administrative scheme for severance benefits payable in a lump sum to any employee who terminates employment for any reason. The answer becomes less clear when eligibility is restricted, specifically by subjective criteria. Additional facts that suggest an ongoing administrative scheme include whether cash payment is accompanied by other benefits like continued participation in a group health plan, outplacement assistance, etc.
If severance benefits comprise an ERISA plan, several requirements apply. A severance plan must be in writing, must have a claims and appeals process, must furnish specifically required disclosures, and must file a Form 5500 if there are at least 100 participants in one year. Failure to comply with ERISA might result in penalties and other potential liabilities. Currently, the penalty for failing to file a Form 5500 is $250 a day (up to a maximum of $150,000) from the IRS, and $2,233 a day (no maximum) from the Department of Labor (DOL). These penalties are cumulative (the IRS’s penalty does not offset the DOL’s) and are imposed after the IRS or DOL notifies the employer. In addition to penalties, ERISA allows aggrieved participants or the DOL to seek other equitable remedies that are broad in scope.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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