Severance Benefits

Does federal ERISA law apply to your severance benefits? An important first inquiry for an employee seeking to recover benefits under a severance plan or arrangement is whether the plan falls within the purview of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Section 3(1) of ERISA defines an employee welfare benefit plan in part as any plan, fund or program established by an employer to the extent that such plan, fund or program was established or is maintained for the purposes of providing for its participants or their beneficiaries any one of the benefits listed in ERISA section 186(c). Severance benefits are among those listed in that section.

What’s an ERISA plan, anyways? However, the Supreme Court has held that, in order to be considered a “plan” under ERISA, there must be some ongoing administrative scheme. While it is clear that a one time, lump sum payment would not constitute such a scheme, many other plans fall within a gray area and require further analysis. In making the determination, courts generally assess the particular facts and circumstances of the case, including: whether the employer’s obligation requires managerial discretion in its administration, whether a reasonable employee would perceive an ongoing commitment by the employer to provide benefits, and whether the employer was required to analyze the circumstances of each employee’s termination separately in light of certain criteria.

Who cares if ERISA applies? This threshold determination is important because, if the severance arrangement is not governed by ERISA, the expansive protections offered by Title I, including the fiduciary duty provisions, are not applicable. Considering the above analysis, however, ERISA will generally apply to severance arrangements that provide for multiple payments and particularized criteria for employee qualification coupled with employer discretion in making the qualification determination.

What happens if you are denied severance benefits under an ERISA governed plan? An important corollary of being governed by ERISA is that severance plans thus become subjected to ERISA’s broad preemptive scope. Section 514(a) of ERISA provides that ERISA preempts any and all state laws insofar as they relate to any employee benefit plan. This provision has been applied by courts broadly to bar state law-based contract claims seeking damages for alleged breaches of obligations. As a result, many employees seeking to recover benefits pursuant to the terms of a severance plan are forced to bring their case to federal court and argue exclusively under ERISA’s remedial provisions. This is important because, in order to challenge a denial of benefits under ERISA, a claimant must generally first exhaust any and all administrative remedies set out by the terms of the plan. This will generally mean following the terms of the severance plan and appealing the initial denial to the plan administrator or a committee set up under the terms of the plan.

In the event administrative remedies are exhausted, the employee seeking benefits denied to her under a severance plan can generally challenge the denial in federal court. However, such a challenge is often decided on terms favorable to the plan administrator. As noted by the court in Toohig v. National City Corp. Amended and Restated Mgmt. Severance Plan (No. 1:10 CV 657, N.D. Ohio, 6/15/2011), when an ERISA plan gives the plan administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan a court should not reverse a decision denying benefits unless the decision was arbitrary and capricious. In addition, the court pointed out that the arbitrary and capricious standard is extremely deferential to the administrator, in that decision will be upheld if it is the result of a deliberate principled reasoning process, if it is supported by substantial evidence, and if it is based upon a reasonable interpretation of the plan. Further, the court noted, when the terms of a plan are ambiguous, the court only requires that the administrator’s rationale be rational.

How familiar are you with the intricacies of your severance benefits? Therefore, it is important that employees remain familiar with the terms of their severance plan even before they could potentially become eligible under its terms. In addition, upon being separated from employment, it is crucial that the employee be able to assess whether the plan is governed by ERISA and, if it is, what steps need to be taken to protect and secure the employees’ rights. Such steps often include exhausting administrative remedies under the plan and, if necessary, seeking redress in federal court for an improper denial of benefits and/or a breach of another substantive ERISA provision, such as those relating to fiduciary duties.

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