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We would like to offer severance benefits


Question: We are in the process of downsizing and would like to offer severance benefits to our long-term employees. Are there regulations we should be aware of when offering these packages?

Answer: With the exception of the one-time lump-sum payment or special negotiated severance arrangements, almost all severance plans fall under the Employee Retirement Income and Security Act of 1974 (ERISA). In the event than an employee sues your company over your severance plan, ERISA rules apply. You should have your legal counsel advise you on whether your plan is covered by ERISA.

If a company maintains a severance plan that is covered by ERISA, the plan must be in writing, a written summary Plan Description must be distributed to all plan participants; and the company must file an annual report with the Internal Revenue Service for an unfunded severance for each year that it had, as of the beginning of the year, at least 100 employees potentially eligible to receive benefits.

If you require an employee to sign a waiver on future rights claims, the following pre-signing and post-signing waiting periods are mandated:

• At least 21 days for an individual to consider the waiver agreement; or
• 45 days if a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees; and
• At least 7 days following the date the waiver is signed by the employee during which the individual may revoke the agreement.

Never pay the severance allowance before the mandated waiting periods have expired.


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