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Severance Arrangements and Code Section 409A

We recently posted an item that discussed when a severance policy would be subject to ERISA and the potential benefits of the policy being subject to ERISA (that post is available here). Another potential issue employers should consider is whether their severance arrangements are subject to Code Section 409A, which applies to certain deferred compensation arrangements. If a severance arrangement is subject to Code Section 409A, it must comply with Code Section 409A’s various documentary and operational requirements to avoid the additional 20% tax and underpayment penalty that may be assessed for any compliance failures. Severance arrangements can be drafted to be exempt from Code Section 409A, such as under its short-term deferral and separation pay exceptions. If the severance arrangement is subject to Code Section 409A, some of the potential issues employers should consider include, among others: Any changes to the time or form of payments must comply with… Continue Reading

Reminder: A Severance Policy Could be an ERISA Plan

As the coronavirus pandemic continues, many employers have been forced to reduce their workforce, oftentimes paying some form of severance to their employees. One area that continues to cause confusion among employers is whether their severance policy is an employee benefit plan subject to ERISA. Generally, informal arrangements that feature one-time payments in response to ad hoc situations and that do not have an ongoing administrative scheme will not be subject to ERISA. However, it is not always clear when such arrangements become “employee benefit plans” that are subject to ERISA. It is generally not to the employer’s advantage to have its severance strategy characterized as an informal arrangement not subject to ERISA. For example, the beneficiary of such an arrangement would be able to sue in state court for benefits, which could expose the employer to larger damage awards than are available under ERISA. Employers should ask their counsel… Continue Reading

Employee Benefits as Payroll Costs under the Paycheck Protection Program

Businesses that received a loan under the Paycheck Protection Program (“PPP”) are eligible for forgiveness of that loan if, among other things, the loan proceeds are used to cover “payroll costs” incurred over the eight-week period after the loan is made. Payroll costs, capped at $100,000 on an annualized basis for each employee (i.e., $15,384 over the eight-week period), are broadly defined to include, among other things: Salary, wages, commissions, or tips; Employee benefits costs, such as for vacation or paid family or medical leave (other than wages for which a credit is received under the Families First Coronavirus Response Act), group health care costs, retirement plan contributions, and severance benefits; and State and local taxes assessed on employee compensation. As of the date of this posting, no guidance has been issued by the IRS or the Department of Treasury to further clarify what specific items qualify as payroll costs.… Continue Reading

Texas Supreme Court Holds that Severance Arrangements Relating to an ERISA Plan are Preempted by ERISA

When Tyco Valves & Controls, L.P. closed one of its facilities, it offered certain employees severance benefits pursuant to either (i) a severance pay schedule for that facility or (ii) retention agreements. At that time, Tyco employees were covered by Tyco’s severance plan, which was undisputed to be governed by ERISA (the “ERISA Plan”). After Tyco sold one of the production units located in the facility, several former employees who had been denied severance filed a breach-of-contract claim under state law against Tyco. The trial court ruled in favor of the plaintiffs and awarded the severance pay. The court of appeals reversed, and the Texas Supreme Court agreed, holding that ERISA preempted the plaintiffs’ breach-of-contract claims. The plaintiffs involved were two separate groups. The first group was promised severance pay under a schedule that referenced the ERISA Plan, copied and used terms from the ERISA Plan, and purported to supersede… Continue Reading

Supreme Court Holds that Severance Payments are Subject to FICA

In rejecting the decision of the U.S. Court of Appeals for the Sixth Circuit, the U.S. Supreme Court recently ruled unanimously in favor of the IRS and held in United States v. Quality Stores, Inc. that severance payments for involuntary terminations of employment are generally subject to Federal Insurance Contributions Act (“FICA”) taxes (i.e., Social Security and Medicare taxes). In taking a broad view of the FICA statute, the Court concluded that severance payments are “remuneration for employment” within the meaning of the FICA statute and in consideration for employment. The Court also ruled that the payments made by Quality Stores, which were based on individuals’ positions with the company and their years of service, were specifically tied to their employment, and thus, wages for purposes of FICA.  United States v. Quality Stores, Inc., No. 12-1408 (U.S. Mar. 25, 2014).

Federal Court Lacks Jurisdiction to Consider Arbitration or ERISA Benefit Related Issues under Employment Agreement

The U.S. Court of Appeals for the Eighth Circuit recently held that it lacked jurisdiction to hear a motion to enjoin a request for arbitration to settle disputes under an employment agreement. Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”) entered into an employment agreement with its president and CEO (the “Defendant”) to encourage his retention following an anticipated change of control. With a merger imminent, DM&E terminated the Defendant without cause and triggered the employment agreement’s severance provisions; the Defendant filed a demand for arbitration. DM&E then filed an action in federal court to enjoin the arbitration. The Eighth Circuit agreed with the district court that the benefits sought in the Defendant’s arbitration demand were not claims for benefits due under an ERISA plan. The circuit court held that the benefits being demanded under the employment agreement (i.e., the continued provision of employee benefits or cash payments if such benefits… Continue Reading

6th Circuit Reverses Trial Court’s “Mechanical Application” of Statutory Pre-Judgment Interest Rate Applied to Pension Benefit Award

The U.S. Court of Appeals for the Sixth Circuit recently affirmed a trial court’s award of more than $3 million in unpaid pension benefits but reversed the trial court’s award of pre-judgment interest at the statutory rate. The Sixth Circuit agreed that a class of plaintiffs’ claims for unpaid pension benefits were not precluded by their execution of severance agreements, which included a release of claims, because the claims allegedly released (i.e., lump sum benefit calculations) had not yet accrued at the time the severance agreements were signed, since lump sums were not yet available for those who signed the releases, and because there was no mention in the releases of future pension or ERISA claims. The circuit court held that its ruling was consistent with the law that waivers of future ERISA violations are unenforceable. Nevertheless, the Sixth Circuit reversed the trial court’s application of the statutory pre-judgment interest… Continue Reading

Termination of Employment Following Rescission of an Involuntary Termination Notice is a Voluntary Termination

The U.S. Court of Appeals for the Seventh Circuit recently held that the decision by the plan administrator of an ERISA-covered severance pay plan was not arbitrary or capricious when it denied severance benefits to employees who terminated employment after the company sent involuntary termination notices, but later rescinded such notices. The court held that the employees’ termination was voluntary. In Reddinger v. SENA Severance Pay Plan, the employees received notices stating that the plant where they worked was closing, their employment would be terminated effective May 2, 2008, and severance pay would be provided if they timely executed and returned a release agreement. Following receipt of the termination notices, the employees sought alternative employment. Two weeks after the termination notices were sent, the company notified the employees that the plant was going to stay open until October 1, 2008, and that releases were no longer being accepted. A retention bonus and… Continue Reading

Failure to Offer Comparable Severance Package Could Be Discriminatory Under Title VII

The U.S. Court of Appeals for the Fourth Circuit reversed and remanded a district court’s dismissal of a claim by a former employee that she was not offered the same severance benefits as other similarly situated male counterparts when they were terminated from employment. In this case, the employee was offered three months of continued pay and health benefits when her employment as the county’s human resources director was terminated. The employee claimed that males in similar positions were customarily offered six months of pay and benefits, or were transferred to positions with less responsibility while continuing their pay and benefits. The district court dismissed her claim, finding that there was no factual basis for an “adverse employment action” because there was no contractual right to the severance package and she was a former employee at the time the severance package was offered. The Court of Appeals reversed the district… Continue Reading

Federal District Court Holds Puerto Rico Law 80 on Severance Plans Completely Pre-Empted by ERISA

A participant in a severance plan sued her employer for income tax withholding amounts in contravention of Puerto Rico’s Law 80. Law 80 prescribes the amount of severance that must be paid to employees in Puerto Rico and further provides that it is not subject to Puerto Rico income tax withholding. The U.S. Federal District Court held that her claim was completely pre-empted by ERISA because the severance plan in question was an ERISA plan. The court would have had to interpret the terms of the plan to determine whether the severance benefits it provided conflicted with Law 80. As such, Law 80 “related” to the plan and was thus pre-empted. Colon-Rodriguez v. Astra/Zeneca Pharmaceuticals, LP, No. 3:11-cv-01495-FAB (D.P.R. Dec. 13, 2011).

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