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Firing of FBI's McCabe Spotlights Benefits-Vesting Issues

Terminations before a vesting milestone can trigger litigation

Senior man talking on the phone while carrying a box in the office.

When Attorney General Jeff Sessions fired FBI Deputy Director Andrew McCabe on March 16, just two days before his 50th birthday, it kept McCabe from qualifying for early payout of his pension and other retiree benefits. The firing also raised issues about what is legal and fair regarding benefit vesting when an employee is discharged.

McCabe was set to retire and receive an annual pension payout calculated at a special enhanced rate and available at the early age of 50, CNN reported. Formulas published by the U.S. Office of Personnel Management show that his payout would have been around $60,000 annually if he had retired after his birthday.

Now, McCabe may not be able to draw an annuity until sometime between age 57 and age 62, resulting in a loss of hundreds of thousands of dollars, and he could also lose out on retiree health care benefits because he was fired before he turned 50.

Sessions said in a statement he fired McCabe because he "had made an unauthorized disclosure to the news media and lacked candor—including under oath—on multiple occasions." McCabe said he was authorized to share information with reporters.

According to reports, McCabe is expected to appeal the loss of his early pension payout and other benefits, charging he was subjected to excessive punishment. He could also file a federal lawsuit, the ABA Journal reported.

Employers' ERISA Liability

While government employment rules differ from the private sector, McCabe's termination suggests issues that all employers should consider.

For instance, private-sector employers that plan to fire employees close to key benefit vesting dates should consult with both their regular employment and Employee Retirement Income Security Act (ERISA) counsel "to ensure that they are not violating ERISA—or any other federal or state law—and that they are properly documenting the reasons for their actions," said Peter Marathas, general counsel at Alera Group, a network of insurance and financial services firms.

Unless employment is governed by an individual or collectively bargained contract, employees are typically at-will and can be fired for any reason that doesn't violate a specific law, Marathas noted.

ERISA Section 510, however, protects employees from being discharged if the reason is to deprive them of the right to a benefit under an ERISA-governed retirement or welfare plan, Marathas said.

An employer that fires an employee shortly before she or he vests in a pension or retiree health benefit "may find that they will need to show how their actions were not for the purpose of interfering with the attainment of a benefit right," Marathas explained.

Lawsuits under ERISA Section 510 "can be brought straight to federal court and can leave the employer on the hook for money damages to the employee as well as payment of the employee's attorney's fees," said Arlington, Va.-based Tom Spiggle, founder of The Spiggle Law Firm, which represents employees. "To win such a lawsuit, the employee need only show that the firing or discriminatory action was motivated in part by an effort on the part of the employer to avoid paying a benefit."

[SHRM members-only toolkit: Involuntary Termination of Employment in the United States]

Age-Discrimination Liability

Spiggle offered another consideration: Many employees fired before a pension plan or other benefit vests will be over 40 years old and are thus protected by the Age Discrimination in Employment Act (ADEA). "An employee could argue that the employer's decision was also motivated by age discrimination, a claim that can also be brought in federal court," he warned.

The upshot is that firing an employees before the vesting of a benefit "can result in a double-barrel ERISA and ADEA discrimination lawsuit in federal court. Employers considering such a move should consult with experienced management-side attorneys before pulling the trigger," Spiggle said.

A Safe Timeline?

There is no legal "bright line" for employee lawsuits involving benefits vesting. However, a good rule of thumb—provided by Spiggle—is that:

  • Any action that would deprive an employee of high-value benefits within 90 days of those benefits vesting is asking to get sued.
  • Anything in the 90- to 180-day range is the yellow zone; you might still get sued, but a court might not presume that the firing was for the purpose of denying benefits.
  • Anything 180 days or before is much safer territory.

A court will also look to other evidence that the firing was unlawful, Spiggle added. For example, "if you fire an employee seven months before her benefits vests, and there is an e-mail among C-suite executives around the time of her firing saying that 'benefit costs are out of control,' then she probably has a claim for an ERISA violation even though the firing took place more than 180 days before vesting."

A prudent employer will carefully evaluate and document all of the reasons for the firing, Marathas recommended. "It might, in the proper circumstances, even be advisable that the employer delay the action to avoid a Section 510 claim," he said.

ERISA, however, does not apply to government plans, so "McCabe would not have a cause of action under ERISA"—although if the matter isn't otherwise resolved, he could bring a claim under federal employment guidelines, Marathas observed.

Consider Benefits After Termination

Firings are "an unpleasant experience for all concerned," especially when precipitated by a quarrel between manager and employee, said Bobbi Kloss, director of HR management services at Benefit Advisors Network, a consortium of health and welfare benefit brokers. If a dispute becomes personal, "even the most seasoned supervisors can let their emotions obscure the implications that a termination may have on an employee's rights for benefits," she noted.

When an employee is discharged under these circumstances, "HR should educate managers on the possibility of extending benefit coverage" for the time being to alleviate liability issues and avoid penalties under applicable federal and state laws.

"It's just one reason why HR should be relied on as a neutral third party to all termination decisions," Kloss said.

Addendum: Benefits Vesting Milestones

  • 401(k) vesting. Many employers have a vesting schedule for matching contributions in 401(k) or other defined contribution plans, such as a six-year graded (or graduated) vesting method, which increases the employee's vested percentage for each year of service with the employer until six years of employment, or a three-year cliff vesting approach, where participants are not vested until completing three years of service, at which time they become 100 percent vested in accrued matching contributions.
  • Pension vesting. Defined benefit pension plans often combine graded and cliff vesting, such as by requiring three-to-five years of service to vest in a minimum payout at normal retirement age, and then increasing the payout per years of service up to a maximum number, such as 15 years tenure.
    A year of service is defined by the plan, generally 1,000 hours worked over 12 months. This puts the trigger around early July for many full-time workers.
    Often, the size of a lump-sum distribution or annual annuity will significantly balloon just before an employee reaches the maximum years of service used to calculate pension payouts.
  • Retiree health care. Some employers offer long-tenured employees, often if they are employed until their normal retirement age, supplemental health care benefits that can cover the gaps in government-provided Medicare.

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