Benefits and Compensation

Early Retirement Plans: Win-Win IF You Follow Rules

ERIPs are a win-win, the attorneys say, because:

  • Employers benefit from reducing wages and other costs associated with senior workers, and avoid the negativity associated with a RIF
  • Employees benefit because a portion of that cost savings is passed to retiring workers who can retire earlier than they otherwise might.

Anderson, a member of Miller & Martin PLLC in Nashville, Tennessee, and Maxwell, who is an associate at the firm, offered their tips at a recent webinar sponsored by BLR.

What is an ERIP?

An ERIP is a plan developed by an employer that provides incentives for employees to retire early voluntarily. The employer typically provides severance benefits in exchange for a release of claims.

Primarily, employers want to save money by reducing the ranks of higher-paid employees, but they may also just prefer the ERIP to layoffs or RIFs as a nicer way to deal with the need to reduce staff.

ERIPs are particularly important these days because of several factors, according to Anderson and Maxwell.

  • Aging Workforce. First, there’s the aging workforce—the number of workers between the ages 65 and 74 will grow dramatically in the coming years
  • Intent to work longer. Many Americans are choosing to work longer
    • 57% of Americans over age of 45 who lost money in investments since 2008 will delay retirement.
    • Many workers are delaying retirement not only to ensure financial security, but to stay productive and socially engaged.
  • Changing economy. Employers need to be nimble and efficient.
    • Cut costs by reducing payroll
    • Looking for more value in the workforce
  • Age claims on the rise. In part because of the factors above, age discrimination claims are on the rise.

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What Types of Inducements May Employers Offer?

The ADEA does provide some guidance with regard to what kind of benefits may be provided to employees as inducements to retire early:

  • Flat dollar amounts (lump sum payment)
  • Service-based benefit
  • Percentage of salary benefit
  • Flat dollar increase in pension benefit
  • Percentage increase in pension benefit
  • Plan that imputes years of service or age

ERIPs Must Comply with ADEA

Anderson notes that ERIPs must comply with Age Discrimination in Employment Act (ADEA).

The ADEA protects workers age 40 and older from age-based discrimination. Employers may not discriminate based on age when making employment decisions about hiring, firing, promotions, layoffs, compensation, benefits, job assignments, and training. Thus, age cannot be the sole factor in making ERIP decisions, says Anderson.

Voluntary Is the Key

Voluntariness is the biggest difference between layoffs, RIFs (Reductions in Force) and ERIPs. RIFs are involuntary terminations based on nondiscriminatory criteria.

An ERIP cannot be forced upon an employee. The employer must ask him or herself before administering an ERIP: Would a reasonable person conclude that there was no choice but to accept the offer? Is the employee subjected to negative consequences if they reject offer? That’s not voluntary.

Employers should obviously avoid threatening employees with termination. However, says Anderson, employers can notify workforce that layoffs will be necessary if an insufficient number of employees accept the ERIP.

Furthermore, he says, it is not illegal for your offer to be “too good to refuse.”

A second consideration to determine whether or not the plan is voluntary is whether the employee was given accurate and complete information about the plan.

The last consideration in determining whether a plan is voluntary is: Did employees receive advice of counsel while making that decision? Thus, when structuring a release, the employer should insert provision in release encouraging employee to consult with attorney and acknowledging that employee had opportunity to consult with attorney.


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How Can We Restrict the ERIP?

If the plan is “voluntary,” the employer may:

  1. Set a minimum age or length of service at which employees are eligible to participate.
  2. Offer the ERIP for a set period of time.
  3. Offer ERIP to only a subset of employees such as managers or a department or employees at a specific facility. However, if this is carried through, employers should have an objective justification of why the ERIP offer applies only to a specific group.

In tomorrow’s Advisor, the ins and outs of releases, plus an introduction to the all-in-one HR site, HR.BLR.com.