How To Determine An ERISA Plan

In order to determine whether any agreement, severance or otherwise, falls under the Employee Retirement Income Security Act (ERISA), the executive must determine whether the agreement is an ERISA plan.

If the executive determines the severance agreement constitutes an ERISA plan, he or she must evaluate whether the company will assert an ERISA defense and bring the legal claim under ERISA for more beneficial treatment, instead of a basic breach of contract action. Under ERISA, an employer can attain valuable legal protection, so long as the agreement provides for "discretion by management to interpret the plan and the payment of benefits." Such discretion would allow the company to obtain the more deferential arbitrary and capricious standard of review. If no discretionary language is found, a de novo review is mandated under ERISA, wherein the court will examine all the facts and circumtances without deference to the company. Under ERISA, there are no punitive damages and attorneys' fee awards are discretionary [in contrast to a breach of contract action]. If the executive files a state court action, the employer may have the case removed to federal court because ERISA provides subject matter jurisdiction. Depending on the facts and provisions contained in the severance agreement, the executive must carefully analyze whether to seek a state court action for breach of contract or an ERISA action. Even though an employer may force an ERISA action, a court may find that the employer's actions were unwarranted and provide relief for the executive.

ERISA Section 502(a)(1)(B) states that "a civil action may be brought (1) by a participant or beneficiary (B)to recover benefits due to him under the terms of his plan [or] to enforce his rights under the terms of the plan. . ." 29 U.S.C. Section 1132(a)(1)(B). Section 3(3), in turn, states that "plan means any employee welfare benefit plan or an employee pension benefit plan or a plan which is both. . ." 29 U.S.C. Section 1002(3). An "employee welfare benefit plan" is "any plan, fund, or program . . . established or maintained by an employer. . . for the purpose of providing. . . medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment." 29 U.S.C. Section 1002(1). An "employee pension plan" is "any plan, fund, or program. . . established or maintained by an employer. . .that. . . provides retirement income to employees, or . . . results in a deferral of income." 29 U.S.C. Section 1002(2)(A).

"In the determination of whether an ERISA plan exists, arrangements that involve a single employee quite understandably have been met with a particularly careful scrutiny. In such situations, it is often more difficult to discern the sort of ongoing administrative management that Congress intended to subject to the regulation of ERISA. . .Certainly, the plain language of ERISA in no excludes from coverage those situations in which only one employee is extended benefits." Cvelbar v. CBI Illinois Inc., 106 F.3d 1368, 1376 (7th Cir.1997). The U.S. Department of Labor has stated that a contract between one employee and an employer can be an employee benefit plan. See Biggers v. Wittek Industries, 4 F.3d 291, 298 (4th Cir.1993). So long as the benefit program "meets the other requirements of an ERISA plan, namely, an ongoing administrative scheme and reasonably ascertainable terms, the program does not fall outside the ambit of ERISA merely because it covers only a single employee." Cvelbar, 106 F.3d at 1376.

a. An Ongoing Administrative Scheme
In order to bring a severance agreement into ERISA and thus gain the protections of benefits provided for in such an agreement, there must be an ongoing administrative scheme. Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987). "The pivotal inquiry is whether the plan requires the establishment of a separate, ongoing administrative scheme to administer the plan's benefits. Simple or mechanical determinations do not necessarily require the establishment of such an administrative scheme; rather, an employer's need to create an administrative system may arise where the employer, to determine the employee's eligibility for and level of benefits, must analyze each employee's particular circumstances in light of the appropriate criteria." Kulinski v. Medtronic Bio-Medicus, Inc., 21 F.3d 254, 257 (8th Cir.1994).

An example of an ongoing administrative scheme in a case involving a severance agreement, the following factors may be decisive. The benefits provided do not require a one time lump sum payment, and the company reasonably can assume responsibility to pay benefits on a regular basis and to further expect a periodic demand on its assets to create a need for financial control and coordination. It is important to examine the length of time the payments are to be made, where even a three period and a seven month period could establish an onging process. If the company is required to reexamine the payment of benefits over a period time, this also adds the establishment of an ongoing administrative scheme. Such as in the case where the company must determine over a vesting cycle what benefits are due. However, the company must do more than right a simple check. Fort Halifax, 482 U.S. at 12.

b. Requirement of Managerial Discretion
In support of an ongoing administrative scheme, the next issue is to determine whether the employer's undertaking or obligation requires managerial discretion in its administration. Bogue v. Ampex Corp., 976 F.2d 1319, 1323 (9th Cir.1992). Such a requirement can be met by the mere terms of the agreement. For example, if a severance/change in control agreement conditions payment upon a determination of whether a change in control occur, this would meet the requirement of managerial discretion. If the same agreement provided for a non-competition for one or two years, the company would have to monitor the ex-employee to determine if he or she complied with the covenant not to compete, thus also implies managerial discretion. If severance agreement afforded for medical benefits, there will be managerial discretion in determining these benefits. If the severance benefits were in any way calculated with using deferred compensation, this would require management discretion. Furthermore, if the severance payment constitutes a parachute payment pursuant to 280g of the IRS code, then the company would have to individually evaluate whether such payment exceeded three times his base salary and compensation.

Mark Carey
ExecuCite (c) 2004