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Fourth Circuit Court of Appeal Finds That Company ERISA Severance Plan Was Not Properly Terminated, Leaving Potential for Employees to Collect Severance

Marcellino & Tyson
Marcellino & Tyson April 27th, 2023

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The Lesson: Read and Follow the Plan Documents

In Messer, et al. v. Bristol Compressors Int’l, LLC, et al., the Fourth Circuit Court of Appeals—the federal appeals court with jurisdiction over North Carolina—recently addressed whether an employer had validly terminated a severance plan prior to laying off employees, such that the employees would not be entitled to severance upon being laid off.  The severance plan at issue was subject to the Employee Retirement Income Security Act, or “ERISA,” the federal law that governs most benefits that employees receive from their employer.

The appeals court first observed that as a welfare benefit plan—unlike pension plans (such as 401k plans)—benefits under the severance plan were not vested and therefore could be forfeited, provided that the company properly terminated the plan.

Of critical importance were the terms of the plan governing how the plan had to be amended.  Specifically, the plan provided that the board of directors of the company was allowed to amend the plan, but the human resources department had to implement any amendments.  Although the board of directors had passed a resolution to terminate the plan, it was not properly implemented by the human resources department.  As a result, the termination was invalid and the plan still existed at the time the employees were laid off, paving the way for those employees to collect benefits under the severance plan.

The moral of the story for employers is that if you intend to terminate an ERISA-governed plan, be sure to follow the amendment procedure to ensure that the intended action is effective.  For employees, the lesson is to read ERISA plan documents to ensure that all terms are followed with respect to any benefits claims.