Earlier this month (and late last month), I warned against companies allowing their incentive compensation plans to become subject to ERISA (Follow-Up on Incentive Plans and ERISA). Today I write to suggest that you may want to make your severance plan subject to ERISA. Part of the reason for this juxtaposition is that incentive plans generally would become subject to ERISA as an employee pension benefit plan, while severance plans generally would be subject to ERISA as employee welfare benefit plans.

If fact, ERISA contains numerous advantages for the employer/plan sponsor, including the following:

  1. ERISA preempts state laws, which are usually the most troublesome for employers. Federal law sharply limits the claims that may be advanced and the damages that can be awarded.
  2. Only federal judges (and not juries) generally decide ERISA disputes.
  3. A participant or beneficiary first must present any disputes or claims to the plan administrator for review under ERISA “claims procedures.” After following ERISA claims procedures, the federal courts will uphold a plan administrator’s decision on review unless the court finds the decision to be arbitrary and capricious.
  4. The plan sponsor/plan document generally can dictate a reasonable statute of limitations for filing a lawsuit challenging the plan administrator’s denial of a claim.
  5. The plan sponsor/plan document generally can specify which state’s law governs the interpretation of the plan’s non-compete provision and the record evidence presented to a reviewing court is limited to the evidence presented to the plan administrator.
  6. The plan sponsor/plan document generally can specify the forum in which litigation may be brought, e.g., “The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan will be exclusively in the courts in the State of Illinois, County of Cook, including the Federal Courts located therein (should Federal jurisdiction exist).”
  7. The plan sponsor/plan document could provide that all claims or dispute are subject to arbitration (after exhausting the claim procedures).

If a company’s severance plan is subject to ERISA, only a few additional steps/actions are required to comply with ERISA.