What Does ERISA Require in a Severance Package?

  1. Severance Agreement
  2. What Does ERISA Require in a Severance Package?
Signing paper

The Employee Retirement Income Security Act (ERISA), also colloquially known as the Employee Benefits Security Act, is a federal law that helps regulate employee-provided pension plans. While ERISA does not require employers to provide pension plans, ERISA regulates pension plans that employers establish for the benefit of their employees. Many people are unaware that severance packages often qualify as welfare plans under ERISA. As a result, certain severance packages may be regulated.

Which Severance Packages Might ERISA Apply to?

ERISA does not apply to all forms of severance pay and severance benefits. Rather, ERISA regulations apply to comprehensive severance plans that involve ongoing administration. In other words, if an employer fires you and offers you a one-time payment of a years’ salary as severance, that does NOT count as a severance plan. This is because all that occurs is the employer provides one payment all at once and then sends you on your way. Instead, if your severance plan involves a more in-depth arrangement of benefits, then your severance plan may be subject to ERISA regulations that may offer you additional protections.

How to Tell if Your Severance Package is Covered

In many cases, it can be difficult to determine if your severance package is covered. Often, employers will intentionally create ERISA-regulated severance plans, which could be useful to help an employer administer large-scale severance plans. In those cases, employers will likely inform all affected employees that ERISA applies to their plans and explain what that means. In other cases, however, employers may accidentally create a severance package that is subject to ERISA as a severance plan without realizing it.

In determining whether a severance package is a “severance plan” that can be regulated by ERISA, courts will review several different factors. Specifically, the amount and form of payments, the level of discretion in payment retained by the employer, the length of the plan, and the total amount of administrative effort could all help determine whether it applies.

ERISA Severance Plan Protections

For severance plans that qualify for regulation under ERISA, the beneficiaries of those severance plans receive several additional benefits. First, the terms plan must be given to the terminated employee entirely in writing and provide extremely detailed descriptions on how the employee can access money from the severance plan. Second, all employees must additionally receive a summary plan description. Third, if the employer’s severance plan is administered on a large scale involving multiple employees (this is most common where large layoffs occur), then the employer must provide an annual report to the beneficiaries about the plan’s status. All of these benefits provide the covered employees with additional transparency and help explain what exactly their benefits are under the plan. As a result, covered employees can better plan their next moves forward, whether they are heading into retirement or are searching for a new job.

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