Unfunded welfare (severance pay) plan - do I have to file 5500?

[Medusa]

Company A has an unfunded severance pay plan which takes effect January 1, 2000. In order to be covered by the severance pay plan, an individual must a) be terminated on or after the effective date as the result of a just-completed corporate merger, b) sign certain agreements including a nondisclosure/limited noncompete, and c) not have a separate employment agreement.

The severance pay plan offers a choice between two types of severance pay, installment and lump sum.

The first individuals who could have been eligible for the plan were those terminated on January 1, 2000. Technically they worked on January 1. First question: are the members of this group eligible participants at the beginning of the plan year?

Over the course of the year, hundreds of people were terminated and became covered by the plan. However, all but a handful elected the lump sum option, so their participation ceased as of the date they received their lump sum payment. Only about 15 people took the installment method. Consequently, at the end of the year, only these 15 people were participants.

My boss is having trouble with the fact that, because we potentially have a beginning count of 0 and an ending count of 15, but processed hundreds (if not thousands) of people inbetween, we might be exempt from filing a 5500. That just does not seem right to him, even though it's fine by me (since I'm the one who has to prepare it!).

Does anyone have experience with the finer points of participant counting and welfare plan exemptions?

[BeckyMiller]

I have to suggest that you contact qualified ERISA counsel on this. You have a bunch of issues.

1. Where the payments go beyond 2 years, the plan may be considered a pension plan, rather than a welfare plan.

2. Because of the installment payments, the arrangement may be considered to include an administrative arrangement. This is one indication of an ERISA plan.

3. On the other hand, because payments are triggered by a single event, some would argue that it is not an ERISA plan.

I would start with the following case and discussion surrounding it - Donovan v. Dillingham (3 EBC 2122, 3 EBC 1073, 5 EBC 2092, 688 F2d 1367 (1983)

BUT, realize that the differences between being an ERISA plan and not go way beyond the duty to file a Form 5500 series. It impacts stuff like which court system has jurisdiction over disputes, etc.

So - back to my first advice. You should contact counsel.

[KJohnson]

I am not sure that you are defining "participants" in the right fashion. Under. 2510.3-3 of the DOL regs an individual becomes a partipant in a welfare plan on "the date which the individual becomes eligible under the plan for a benefit subject only to occurrence of the contingency for which the benefit is provided..."

I am not completely clear on your factual situation, but it appears that all of your employees may be participants because they are capable of receiving benefits subject only to the contingency of being terminated.