ML BeneBits


With the economy humming along and unemployment at historic lows, it seems a strange time for a blog post about severance plans. This is the ideal time, however, to start planning for the next phase of the business cycle and the inevitable reductions in workforce that will follow. In connection with this planning, we wanted to remind our readers of the numerous advantages of adopting an ERISA-compliant severance plan. While many employers think they do not have an ERISA-covered plan—because it is not written or is not distributed to employees—they may in fact have a de facto plan if they have a routine policy for providing severance benefits that requires ongoing administrative discretion. Don’t panic: ERISA coverage is generally a good thing.

Specifically, ERISA-covered severance plans may provide an employer with the following protections:

  • Federal court jurisdiction – plan disputes should be resolved in federal court
  • No jury trials – ERISA disputes generally are heard in bench trials
  • Deferential standard of review – if a plan contains appropriate language, the decisions made by the plan administrator should only be overturned by a court if they are arbitrary and capricious
  • Preemption of state law – ERISA-covered plans broadly preempt state law that relates to the plan; accordingly, certain types of state wage payment law and other damage claims may be preempted by use of an ERISA-covered plan, as well as state laws that may affect plan design (such as “reverse age discrimination” laws)
  • No special damages – ERISA generally does not provide for special, punitive, consequential and other types of damages beyond the benefits due
  • EEO relief – bona fide employee benefits plans under ERISA are afforded certain limited relief from the federal equal employment laws related to the benefits provided thereunder

All these advantages can be gained by adopting a well-drafted severance plan that allows the employer significant flexibility to determine eligibility and benefits, including adopting different schedules of benefits for different reductions in force or even for individual terminations, and that can also serve as the plan’s ”SPD.” Many employers conclude that these advantages far outweigh the limited added administration required to run an ERISA-governed severance plan. We would be happy to discuss these issues with you and to assist with the drafting and adoption of an ERISA-compliant severance plan.