Your voluntary separation incentive plan may involve even more paperwork and expenses than you think. According to a new federal government opinion, severance programs that aren’t directly linked to retirement can still be considered pension plans covered by detailed ERISA compliance requirements.
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Employer Offered Plan To Older Workers
The issue came up when the U.S. Department of Labor, which enforces ERISA, was asked whether a Suffolk University severance plan was exempt from ERISA rules. The university agreed to pay a full year’s salary to workers who chose to participate in its voluntary separation program. The plan was limited to employees who were at least 60 years old with 20 or more years of continuous university service.
Plan Must Pass 3-Part Test
The government pointed out that a severance plan is covered by ERISA unless it meets all of the following requirements:
- The payments are not contingent, directly or indirectly, on the employee’s “retiring”;
- The total payments do not exceed the equivalent of twice the employee’s annual compensation; and
- All payments to the employee will be completed within 24 months of termination.ERISA’s compliance rules will be triggered if any of these criteria are not met.
Indirectly Linked To Retirement
Although the university didn’t call its severance program a retirement plan, the Labor Department concluded that the service and age restrictions effectively made it one. Consequently, the institution should have complied with ERISA’s notice and recordkeeping requirements.
Trap For Unwary
Failing to comply with ERISA can result in government penalties and lawsuits by disgruntled employees. Consequently, it’s important to carefully analyze your severance plans, particularly if they are linked to years of service or, more importantly, age. If you’re unsure whether your plan is covered by ERISA, contact the Labor Department’s Pension and Welfare Benefits Administration in San Francisco at (415) 975-4600 or Los Angeles at (626) 583-7862.