Before employers roll out a new severance program, they should ask one additional question: Are we unintentionally creating an ERISA plan?
The more administratively complex a severance program is, the more likely it is to fall under the Employee Retirement Income Security Act (ERISA). In general, ERISA applies when an employee benefit or program requires the employer to maintain an “ongoing administrative scheme” to operate it.
Does ERISA Apply?
If a severance arrangement is covered by ERISA, it will be treated as either a welfare benefit plan or a pension plan—employers generally prefer to avoid the additional requirements applicable to either type of plan.
Courts look at several factors when deciding whether ERISA applies, including:
- How severance payments are made (one-time lump sum vs. installments)
- The employer’s discretion in determining eligibility and benefits
- The expected duration of the program (single event vs. ongoing)
- Whether additional benefits such as employer-subsidized COBRA are included
- The overall administrative complexity of the arrangement
If ERISA Applies, What Are The Risks of Noncompliance?
Employers must comply with ERISA’s formal plan requirements, including:
- Adopting a written plan document with claims procedures
- Filing an annual Form 5500 if 100 or more employees are covered
- Providing a Summary Plan Description and other plan materials upon request
Noncompliance Can Be Costly
For 2025, failing to file a Form 5500 carried a $2,739 per day penalty, and failing to provide plan documents could cost $110 per day. A plan unintentionally subject to ERISA may also face U.S. Department of Labor (DOL) audits or participant claims.
Pros and Cons of ERISA Coverage
While ERISA imposes more administrative steps, it also provides certain advantages:
- ERISA preempts most state-law claims, offering employers protection from additional liability that may arise under state laws
- ERISA plan administrators’ decisions often receive judicial deference
- ERISA claims do not involve jury trials, reducing risks of protracted and expensive litigation
- A long-term ERISA plan can create predictability and security for employees
Avoiding Application of ERISA
Employers seeking to avoid ERISA coverage of a severance program can simplify their programs in a number of ways, including:
- Tie the arrangement to a one-time event rather than an ongoing program
- Make benefit eligibility and amounts automatic and formula-based, with minimal employer discretion
- Pay benefits in a single lump sum
- Exclude employer-subsidized COBRA benefits
The Bottom Line
Employers should carefully review their severance programs to avoid costly ERISA missteps. If you need advice and support in designing a compliant severance program, the Miller Nash employee benefits team is eager to assist you.
The legal issues impacting this topic are and will continue to be ever-changing (Employment Law in Motion!), and since publication of this blog post, new or additional information not referenced in this blog post may be available.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
