Severance Plan That Doesn't Require Ongoing Administration Is Not an ERISA Plan

An employer's project completion bonus payable to employees is not an employee benefits plan under the Employee Retirement Income Security Act (ERISA) if the plan does not involve an ongoing administrative program, the 5th U.S. Circuit Court of Appeals ruled.

The employer created a project completion incentive plan that required the employer to pay a completion bonus to employees who were laid off in a reduction-in-force or transferred by the employer when the employee's role on the project ended. The plaintiffs, five former employees of the employer who were not entitled to the completion bonus because they quit before the project ended, argued that the plan violated state law. The district court disagreed, concluding that the plan was an ERISA plan as it required ongoing discretion and administration, and thus, federal law superseded the state law forming the basis of the plaintiffs' lawsuit.

In reversing the district court's ruling, the 5th Circuit held that the completion bonus was not an ERISA plan. The appeals court initially found that the incentive bonus was akin to a severance plan and then noted that determining whether a severance plan is governed by ERISA is a fact-intensive inquiry. In holding that the project completion incentive plan at issue was not an ERISA plan because it did not involve an ongoing administrative scheme, the 5th Circuit relied on four factors.

First, the plan only required a one-time payment, which does not usually require ongoing administration. Second, the bonus was easily calculated as it was simply based upon a percentage of the employee's earnings, and thus, it did not involve a complex determination typical of ERISA plans. Third, the plan conditioned an employee's eligibility to the bonus on the employee's completion of job duties on a discrete project, which distinguishes this plan from most ERISA plans.

Lastly, although the district court found that the plan required ongoing discretionary decisions made by the plan administrators, the appeals court disagreed because the only employees eligible for the bonus were employees who were laid off in a reduction-in-force or employees who were transferred by the employer after their role on the project was completed. The 5th Circuit reasoned that determining whether an employee was transferred does not involve a significant degree of discretion, and although the determination of whether a layoff occurred may involve some discretion, the discretion involved would be minimal.

Atkins v. CB&I LLC, 5th Cir., No. 20-30004 (March 22, 2021).

Professional Pointer: Although employers may commonly think of retirement and health plans when considering ERISA plans, some severance plans are within the purview of ERISA. Determining whether a severance plan is an ERISA plan is a fact-intensive inquiry, and employers should be mindful of this outcome to ensure that the severance plan complies with ERISA, if necessary.

Howie Waldman is an attorney with Allen, Norton & Blue PA, the Worklaw® Network member firm in Winter Park, Fla.