Kimberly Couch. To embed, copy and paste the code into your website or blog:. Safe Harbor Rule for Severance Plans Under ERISA, a plan, fund, or program that i provides retirement income to employees or ii results in a deferral of income by employees for a period extending to or beyond the termination of employment generally is treated as a pension plan subject to complex rules for participation, benefits, vesting, and funding.
Code Section A Considerations In general, if an employee has a legally binding right in one year to receive payment of compensation in another year, there will be a deferral of compensation and the payment may be subject to Section A of the Code.
Safe Harbor Rule for Severance Plans Certain bona fide severance arrangements that provide separation pay upon an involuntary termination of employment or pursuant to a window program are excluded from Code Section A. Short-Term Deferral Exception If an employer wants to provide severance payments that exceed amounts permitted under the safe harbor rule for severance plans, the payments may still be exempt from Code Section A under the short-term deferral exception.
Other Considerations This post provides a high-level summary of ERISA and tax issues that should be addressed when an employer seeks to implement a temporary or permanent severance program. Send Print Report. Benefit Plan Reimbursements. Department of Labor DOL. Labor-Managment Relations Act. Retirement Plan.
Safe Harbors. Severance Agreements. Tax Code. Business Organization. These reimbursements include:. With the exception of taxable medical expenses, the expenses described above must be incurred or the benefits provided by the end of the second year following the year in which the separation from service occurs, and all reimbursements must be paid by the end of the third year.
For taxable medical expenses described above, this exemption applies to the extent that the reimbursement rights apply during the period of time the employee would be entitled to COBRA continuation coverage. For example, if the severance plan provides for outplacement services, those services must be provided to the employee by the end of the second year following the year in which the separation from service occurs and all reimbursements must be paid by the end of the third year.
These plans are either characterized as welfare plans or pension plans under ERISA, and different rules govern the two types of plans. Coyne, decided by the United States Supreme Court in At issue in Fort Halifax was whether a Maine statute that required employers to provide their employees with a one-time severance payment under certain circumstances established an ERISA plan. Relying on the Fort Halifax decision, courts have looked at the following factors in determining whether an arrangement providing severance payments is an ERISA plan:.
Most severance plans are found by courts to require sufficient discretion — in determining when severance benefits are payable or in identifying which employees are eligible — to be ERISA-covered plans. This can occur in plans where the employer has to calculate years of service as well as plans where employees are provided extended benefits rather than a one time payment. As stated above, a severance plan that is subject to ERISA will be classified as either a pension benefit plan or a welfare benefit plan.
As described in the next section, this could include among other things filing an annual return with the Department of Labor. This could include among other things requirements that a trust be maintained for the plan and that the plan not contain any forfeiture provisions. The requirements that apply to both welfare and pension plans include, but are not limited to, the following:. ERISA contains both civil and criminal penalties for failing to meet certain requirements, such as the following:.
While this may seem like a burden, there are corresponding advantages. Having a plan document allows the employer to add a provision that the plan can be amended or terminated at any time. Accordingly, a plan document that contains the right to terminate or amend the plan at any time is a protection against such claims. In addition, there are several other advantages to having an ERISA plan, including, but not limited to:. While an employer has a great deal of discretion in how it designs its severance plan, it must be aware of potential issues under the Code and ERISA.
Once aware of these issues, an employer should be able to draft a plan that meets its objectives and applicable legal requirements. This article is a summary of these issues. Trucker Huss hosted a webcast on September 1 that discusses these issues in greater detail.
Severance Compensation means the compensation set forth in i , ii , and iv above. Qualifying Employee means any employee of Managing Agent or Parent or any of their respective subsidiaries who is and has been an employee of Managing Agent or Parent or any of their respective subsidiaries for at least thirty-six 36 months.
Retirement Eligible means that the Participant has either attained age 60 and completed 10 years of Service as an Employee or attained age 65 and completed five years of Service as an Employee. Plan Participant means a person who is eligible to receive, and is receiving, a pension benefit from the Plan. Grandfathered Participant means an Inactive Participant who, on or before December 31, , entered into a written agreement with the Company to terminate service to the Company or gives written notice of intention to terminate service to the Company, regardless of the actual date of termination of service.
A Participant shall be deemed to have severed his or her employment with the City when, in accordance with the established practices of the City, the employment relationship is considered to be terminated. Participant means any Participant that if it were a Lender would qualify as a Non-U. Covered Employment means employment in a covered position.
Eligible Participants means persons who, at a particular time, are employees, officers, consultants, or directors of the Company or its subsidiaries;. Inactive Participant means any individual who was an Active Participant, but is no longer an Eligible Employee and who has an Account under the Plan.
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