Managing Change/Reductions in Force Tip of the Month
When is a severance pay arrangement considered an ERISA plan?
What requirements do employers need to satisfy to comply with ERISA?
- If a severance pay arrangement is governed by ERISA, a formal plan document must be drafted.
- ERISA contains certain reporting and disclosure requirements. Participants must receive summary plan descriptions and summaries of material modifications.
- ERISA-covered arrangements with more than 100 participants must also file annual reports (Form 5500) with the U.S. Department of Labor.
- Plan fiduciaries must act prudently and in the best interests of plan participants when administering the plan. This burden is significantly mitigated by the fact that plan design, modification and termination are typically considered a non-fiduciary (or “settler”) functions that are not subject to these rules. Thus, for example, a properly designed ERISA plan could still require a release of all claims against the employer.
- The plan fiduciaries must follow the terms of the plan, which means that there is somewhat less flexibility to determine eligibility for, and the amount of, benefits.
- ERISA contains explicit procedures for addressing participant claims and appeals (although these requirements often work in the employer’s favor).
How can an employer take advantage of some of the benefits of ERISA?
- Due to ERISA’s preemption provisions, a plan that is subject to ERISA is generally not subject to state law, which can often be more onerous than ERISA. Thus, a former employee that wishes to bring a claim for severance benefits would be forced to do so under federal law and, typically, in federal court, where the environment may be significantly more favorable to an employer. In contrast to many state law claims that might otherwise apply, under ERISA, punitive damages are unavailable and attorney fees and court costs are only imposed at the discretion of the court. In addition, there are no jury trials in ERISA suits, resulting in more reasoned and predictable outcomes. To avail themselves of these benefits, employers may wish to take steps to maximize the likelihood that ERISA will apply.
- Fiduciaries of ERISA-covered plans can generally reserve very broad discretion with respect to determinations regarding benefits or plan interpretation. A reviewing court will not second-guess these determinations as long as the fiduciary was not acting in an arbitrary and capricious manner. (In contrast, decisions under a non-ERISA arrangement would typically be reviewed de novo, with a court attempting to determine whether the employer’s decision was substantively correct.) In order to avail itself of these benefits, however, employers must ensure that they have specific plan language reserving the appropriate discretion.
- Some of the “burdens” of ERISA actually represent opportunities for employers. For example, the requirement that an ERISA plan be written encourages employers to reduce to writing eligibility criteria, exclusions and benefit formulas. Employers that do so clearly are significantly less likely to face claims related to oral promises, patterns of past behavior and so forth.
- As noted above, ERISA-covered plans must have specific procedures for deciding claims and appeals by employees. A properly drafted plan will prevent an employee from bringing a lawsuit until these procedures are exhausted. This layer of pre-litigation burdens can serve to reduce the number of lawsuits an employer may face.
Conclusion
If you have any questions, please feel free to contact the Chairpersons of Proskauer’s Managing Change/Reductions in Force Practice Group, who are listed below.