Advisory Opinion 1999-01A

Dear Mr. Castellano:

This is in reply to your request for an advisory opinion regarding the applicability of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether the Suffolk University Voluntary Separation Program (the University Program) is an employee pension plan within the meaning of section 3(2) of ERISA. You also inquired about whether ERISA governs withholding for Social Security/Medicare and state income tax by Suffolk University from separation payments being made under the University Program.

The following summary of relevant provisions of the University Program is based on the plan document you enclosed with your letter. The plan document indicates that Suffolk University considers the University Program to be a employee welfare benefit plan covered under Title I of ERISA. The purpose of the University Program is to provide an enhanced benefits package to those eligible employees who request voluntary separation from employment with the university. The document indicates any "regular, titled, full-time faculty members of the University's Sawyer School of Management" who were on the university's active payroll on January 22, 1997, and who, as of June 30, 1997, had attained the age of sixty (60) years and had twenty (20) or more years of continuous service with the university were eligible to request participation. The plan document states the program was to be effective for the period January 22, 1997 through June 30, 1997, and provides that requests to participate had to be made on or before March 14, 1997. Suffolk University reserved the right to extend the effective dates of the program. Participants were required to voluntarily terminate their employment on June 30, 1997, or other agreed upon date, and must sign a agreement that they will not apply for unemployment benefits in connection with their voluntary termination of employment under the University Program. Participants are also required to sign a release of claims against Suffolk University.

The University Program includes the following benefits. The program provides for payment of a separation payment in a sum equal to the employee's base annual wage. Separation payments are to be made in a lump sum on June 30, 1997, or, so long as all payments are completed within two years of the employee's termination, pursuant to a schedule agreed upon between the participant and the university. If the participant dies prior to receiving the separation payment, it is payable to the participant's designated beneficiary, or, if no beneficiary is designated, to the participant's spouse, living children, and estate in that order. The plan document also provides that a participant has the right to continue medical coverage under the university's health plan for himself or herself and dependents until eligible for Medicare. A participant who chooses to continue coverage under the universitys health plan may continue to receive medical coverage after becoming eligible for Medicare under the university's supplemental Medicare plan. The benefits under the plan are to be paid out of the general assets of the university, except to the extent participant contributions are required for continuation of medical and/or dental insurance coverage.

The term "employee benefit plan" is defined in section 3(3) of ERISA as " . . . an employee welfare benefit plan or an employee pension benefit plan or a plan that is both an employee welfare benefit plan and an employee pension benefit plan.⁽¹⁾  ERISA section 3(2)(A) generally defines the term "employee pension benefit plan" to include: " . . . any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program -- (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan."

In regulation 29 C.F.R. § 2510.3-2, the Department of Labor identified certain programs that provide for payments upon severance from employment which would not be considered to constitute employee pension benefit plans within the meaning of ERISA section 3(2). Regulation § 2510.3-2(b) provides, in relevant part:

(1) For purposes of Title I of the Act and this chapter, an arrangement shall not be deemed to constitute an employee pension benefit plan or pension plan solely by reason of the payment of severance benefits on account of the termination of an employee's service, provided that:

(i) Such payments are not contingent, directly or indirectly, upon the employees' retiring;

(ii) The total amount of such payments does not exceed the equivalent of twice the employee's annual compensation during the year immediately preceding the termination of his service; and

(iii) All such payments to any employee are completed,

(A) In the case of an employee whose service is terminated in connection with a limited program of terminations, within the later of 24 months after the termination of the employee's service, or 24 months after the employee reaches normal retirement age; and

(B) In the case of all other employees, within 24 months after the termination of the employee's service. . . .

Although benefits under the University Program do not appear to be directly contingent on an employee's retiring, the program provides that to be eligible for the described benefits an employee must have completed 20 years of continuous service and attained age 60, or older. In view of the eligibility requirements, it is the Department's opinion that benefits under the Program are indirectly contingent upon retirement. Therefore, the University Program does not fall within the criteria of section § 2510.3-2(b). The preamble to the Federal Register notice adopting regulation 2510.3-2(b) recognizes that the regulation sets forth conditions under which a severance pay plan will not be deemed to be a pension plan, without excluding the possibility that, in appropriate circumstances, a severance pay plan not meeting the conditions might also be deemed not to be an employee pension benefit plan. However, it is the opinion of the Department that the University Program has been established as a means of providing retirement benefits to those eligible employees who chose to participate in the program of employment terminations and, therefore, is an employee pension benefit plan within the meaning of section 3(2)(A) of ERISA.⁽²⁾

Section 514(a) of Title I of ERISA generally preempts, with certain exceptions not relevant to the issue you presented, any state law which relates to an "employee benefit plan" covered under that title. Section 514(d) provides, also with certain exceptions not relevant in your situation, that: "Nothing in this title shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States . . . or any rule or regulation issued under any such law."  Accordingly, if the benefits you are receiving from the University Program are subject to required withholding under federal law governing Social Security and Medicare, section 514(a) would not affect such required withholding.

The Department has also stated that the definition of what constitutes income to an individual under state or local income tax laws would not be preempted under section 514(a). See Opinion 86-05A (January 21, 1986), and Letter to Honorable Don J. Pease (March 4, 1982) (copies enclosed). The Department has not previously addressed the issue of whether, or under what circumstances, a state or local law regarding withholding of state income taxes on retirement income would be preempted under section 514(a). We have insufficient information on the facts and state law involved for us to express a view on that issue in your case.⁽³⁾

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is subject to the provisions of the procedure, including section 10 thereof relating to the effect of advisory opinions. If you have any questions about this letter, please do not hesitate to contact John Keene of this Office at (202) 219-8521 (this is not a toll-free number).