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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
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CCH® PENSION — 09/07/10

Denial of severance benefits was abuse of discretion: employee was constructively terminated

The U.S. Court of Appeals in San Francisco (CA-9) in Sluimer v. Verity, Inc. has affirmed without comment a district court's ruling that a plan administrator abused his discretion by denying severance benefits to an employee who experienced a "constructive termination" under the terms of the plan.

Heightened abuse of discretion standard

The district court first determined it was appropriate to review the plan administrator's benefits denial under a heightened abuse of discretion standard. The plan administrator responsible for determining eligibility under the plan also served as a high-level executive of the entity that provided the funding of any potential benefits under the plan. This is the type of conflict of interest the heightened abuse of discretion standard of review is intended to address.

Constructive termination

The plan defined "constructive termination" as the offer of a different position that would result in a substantial reduction in the employee's duties or responsibilities. In the new job offered to the employee, he would supervise 15 employees and be responsible for $5 million in annual revenues, while in his old position he supervised over 100 employees and was responsible for over $100 million in revenue. Given these facts, the court explained, the administrator's denial of benefits was unreasonable and contrary to the uncontroverted evidence.

Waiver of claims

The court also rejected the administrator's contention that the employee was required to waive all claims against the company and sign a confidentiality agreement before he could even be considered for severance benefits. Again, that's a misreading of the plan, the district court explained. Signing the waiver of claims and confidentiality agreement are conditions precedent only to the receipt of benefits, not eligibility for benefits.

Effect of foreign litigation

The court noted that the employee's Dutch lawsuit regarding the amount of the cash severance payment he was entitled to under Dutch labor laws did not preclude him from signing the required waiver. The parties had understood from the beginning that the employee's only claims under the severance plan were to stock options and continued health insurance, and not to any cash award.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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