A Severance Promise Can Become A Federal Benefit Plan Without Anyone Intending It.
Employers often treat severance as a business decision. If the arrangement requires an ongoing administrative scheme, the Employee Retirement Income Security Act can treat it as an employee welfare benefit plan with a written document, a summary plan description and claims procedures.
When A Severance Arrangement Looks Like A Plan.
Plain overview only, not legal advice. Check the current rules before you rely on it.
An Ongoing Administrative Scheme
A one-time lump sum with no discretion usually is not a plan. An arrangement that needs case-by-case review of eligibility, formulas or terms can be.
Pension Rule Exclusion
Federal regulation excludes certain severance pay from the pension plan definition if it is not contingent on retirement, is capped at twice annual pay and is paid within 24 months. It can still be a welfare plan.
Plan Document And Claims Procedure
A covered plan needs a written instrument, a summary plan description and a reasonable claims and appeal process.
Spotting The Plan Before It Spots You.
The question turns on administration. A severance policy that applies a formula such as two weeks of pay per year of service, requires eligibility decisions and may be paid over time can look like a plan, especially when it is repeated for several layoffs. Promises in an email or handbook can be enough to create the program.
If the arrangement is a plan, ERISA expects a written plan document, a summary plan description given to participants, a claims procedure that meets federal standards and the correct fiduciary handling. Employers can often manage this with a short severance plan document and a standard release.
Health coverage promises need extra care. A pledge to pay part of the COBRA premium can be a self-insured benefit for tax purposes, and special rules can apply when highly compensated individuals receive more favorable terms. Check the arrangement with the carrier and advisors before announcing it.
Where this shows up in your plan.
Premium Subsidies Inside Severance
Paying the employee portion of continuation premiums is a plan feature that should be written down and tested against the carrier contract.
Nondiscrimination On Self-Insured Plans
Self-insured plans have tax rules that limit favoring highly compensated individuals, which can matter for executive severance.
SPD Content
A summary plan description should describe eligibility, benefit formula and how to file a claim, so it often fits the existing plan document set.
Setting it up.
Collect every severance policy, letter, handbook section and email promise made in the last few years.
Decide whether the arrangement is a one-time contract or an ongoing program.
If it is a program, adopt a written plan document and prepare a summary plan description.
Add a claims and appeal procedure and name who decides claims.
Review any premium subsidy or continued coverage promise with the carrier and plan documents.
Mistakes to avoid.
Promising severance by email without a plan document behind it.
Offering different terms for each layoff without a written formula.
Overlooking the claims procedure that ERISA requires for a covered plan.
Making coverage promises that conflict with the carrier eligibility rules.
Other rules employers work with.
Reduction-in-Force Guide: Severance and Plans
See the overview this severance topic sits under.
SPD or Benefits Guide: Which Is Which
Where the required plan terms must appear.
Offer Letters and Benefit Promises
Commitments to put in writing ahead of a start date.
Laws and Rules Referenced
ERISA definitions, 29 U.S.C. 1002 — Definition of an employee welfare benefit plan.
Plan establishment under ERISA, 29 U.S.C. 1102 — Written plan instrument and named fiduciaries.
Severance pay plans, 29 CFR 2510.3-2 — Limits on treating severance as a pension plan.
Self-insured medical reimbursement plans, 26 U.S.C. 105 — Tax rules for self-insured medical benefits.
Quick answers.
Short replies on when a severance arrangement becomes an ERISA plan.
Is every severance offer an ERISA plan?
No. A one-time payment under a simple agreement that needs no ongoing administrative scheme usually is not, but a repeated formula or discretionary program may be.
Does a plan need a written document?
Yes. A covered employee welfare benefit plan must be established and maintained under a written instrument.
Can we subsidize COBRA premiums as severance?
Yes, but the promise should be documented and checked against the carrier contract and the tax rules for self-insured benefits.
Does a release replace a plan document?
No. A release is a contract with one employee, while a plan document governs the program for all participants.
More guides in this series.
WARN Act Notice Requirements for Michigan Employers
A companion guide in the same series.
Older Workers Benefit Protection Act Releases for Group Layoffs
A companion guide in the same series.
Why Michigan Has No State WARN Law and What Applies Instead
A companion guide in the same series.
Stop-Loss and Claims Run-Out After a Reduction in Force
A companion guide in the same series.
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