Severance program that did not require ongoing administrative scheme was not an ERISA plan
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Wednesday, August 1, 2018

Severance program that did not require ongoing administrative scheme was not an ERISA plan

By Pension and Benefits Editorial Staff

A severance program that did not require the maintenance of a new and ongoing administrative scheme was not an employee welfare benefit plan subject to ERISA, according to the U.S Court of Appeals in Philadelphia (CA-3). The program was designed only to provide lump-sum payments over a defined and brief period and did not reflect an intention by the employer to offer benefits on a regular and long-term basis.

Voluntary Separation Program

Following a spin-off, a company, in September 2015, announced a voluntary reduction in force (Voluntary Separation Program (VSP)) that would provide eligible employees with a lump-sum severance benefit equal to one week of base pay for each full year of service (up to a maximum benefit of six months of base pay). The company had sole authority and discretion to determine the employees eligible to participate in the program. Once approved, employees were generally required to end their employment on a date between December 1, 2015 and March 31, 2016, as determined by the employer. However, the company retained the discretion to select employees to continue working part time for up to six months after April 1, 2016.

As a condition of participation in the VSP, employees were required to complete an “appropriate knowledge transfer.” In addition, employees needed to execute a release agreement, which contained a non-disparagement provision, and a restricted covenant which prohibited the employee from working from a competitor for one year.

VSP participants were ineligible to return to work within 12 months. However, the company retained the option to rehire employees for “specialty consulting projects.”

Employees brought ERISA claims related to the VSP against the employer. The employer moved to dismiss the complaint, arguing that the VSP was not an ERISA plan. A federal trial court granted the motion to dismiss and the employees appealed.

ERISA plan requires separate and ongoing administrative scheme

On appeal, the Third Circuit initially noted that severance plans do not implicate ERISA unless they require the establishment and maintenance of a separate and ongoing administrative scheme. The crucial factor in determining whether a program constitutes an ERISA plan, requiring ongoing administration, is whether the employer has expressed the intention to provide benefits on a long-term basis. Thus, as the United States Supreme Court has explained, a program that provides a one-time, lump-sum payment triggered by a single event that does not require an ongoing administrative system for processing claims and paying benefits is not subject to ERISA (Fort Halifax Packaging v. Coyne, U.S. Sup. Ct. (1987), 482 U.S. 1).

Applying Fort Halifax, the Third Circuit noted that the company, in creating the VSP, did not express an intention to provide regular and long-term benefits. The VSP was designed merely to provide lump-sum payments to a class of employees over a defined and relatively brief period. Moreover, the determination of the amount of lump-sum payments involved only the mechanical application of a simple formula, and did not require a new administrative body or the exercise of discretion.

Ancillary rights and obligations did not require ongoing administration

The court further ruled that the ancillary rights granted (including the possibility of rehire) and obligations imposed on the VSP participants did not subject the plan to ERISA. The knowledge transfer requirement was time-limited and did not implicate ongoing administration. Similarly, the non-compete and nondisparagement provisions were untethered from any ongoing payment or adjudication of benefits, and did not require a new and ongoing administrative scheme. Finally, the possibility of rehiring did not require a new administrative process and would not impact a participant's entitlement to a benefit, which would have already been paid.

Source: Girardot v. The Chemours Company (CA-3).

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