December 11, 2018

December 10, 2018

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Court Rules that One-Time Voluntary Separation Program is Not an ERISA Plan

Whether a one-time voluntary separation program should be treated as an ERISA-covered severance plan depends on whether the program requires an “ongoing administrative scheme” – a requirement first established by the Supreme Court in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987).

In Fort Halifax, the Supreme Court held that ERISA does not apply to a one-time severance payment —such as one dictated by a state plant-closing law ― that is triggered by an external event and requires no administration or administrative interpretation to make payments.  The subsequent court decisions understandably have not established a hard and fast rule regarding how much administration is required to trigger ERISA plan status.  As a result, the rulings have been unpredictable in determining whether an employer has established an “administrative scheme” to provide benefits in situations that fall between one-time corporate events and ongoing benefit payments.

Recently, in Girardot v. The Chemours Company, 2018 WL 2017914 (04/30/2018), the Third Circuit held that a one-time voluntary separation program required no ongoing administrative scheme and dismissed the ERISA complaint of former employees who had separated under the program.  The terms of the program were common to many current programs:

  • Eligible employees could elect to be considered for the program during a short window period;

  • The company had the discretion to determine whether an employee could separate and receive the program severance benefits;

  • The company had the discretion to determine a participating employee’s separation date;

  • Participants had to sign a general release and a restrictive covenant agreement;

  • Participants could receive a lump sum severance payment based on years of service plus a lump sum payment equal to the cost of 3 months of COBRA medical coverage, and a pro-rated bonus for the year of separation; and

  • Participants were ineligible to be rehired within 12 months following separation.

The Third Circuit stated that the crucial factor in determining whether a program constitutes an ERISA plan is whether the employer expresses the intention to provide benefits on a regular and long-term basis.  But here, the Court found that the company merely had entered into an obligation to provide lump-sum payments to a class of employees over a defined and relatively brief period.  According to the Court, determining these lump sum payments required no new administrative body or exercising discretion – rather, it involved the mechanical application of a simple formula based on time of employment with the company.  The Court found that this was generally akin to a Fort Halifax plan and held that the voluntary separation program was not subject to ERISA.

COMMENT:  The Second Circuit has applied similar factors in determining whether a severance benefits plan requires an administrative scheme that is sufficient to trigger ERISA plan status.  See Okun v. Montefiore Medical Center, 793 F.3d 277 (2015).  Based on these factors, one-shot involuntary reductions in force and voluntary separation programs usually will not be subject to ERISA.  Nevertheless, even if ERISA does not apply, clear drafting and communications to affected employees resolve many issues under these types of programs.

Jackson Lewis P.C. © 2018

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About this Author

Bruce H. Schwartz, Employee Benefits Attorney, Jackson Lewis Law firm
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Bruce Schwartz is a Principal in the White Plains, New York, office of Jackson Lewis P.C. He has more than 30 years of experience in all aspects of employee benefits and compensation counseling and is one the founders of the Firm’s Benefits Practice Group.

Mr. Schwartz’s practice encompasses virtually all areas of employee benefits law and federal tax law matters relating to benefits and compensation, including the following:

  • design, implementation and operation of tax-qualified retirement plans including 401(k), profit-sharing, stock...
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