Second Circuit Finds Disney Could Deny Severance Plan Benefits to Employee Terminated Due to Disability

In Soto v. Disney Severance Pay Plan, No. 20-4081, __F.4th__, 2022 WL 468126 (2d Cir. Feb. 16, 2022), after Plaintiff-Appellant Nancy J. Soto suffered a stroke and became unable to work, her former employer, The Walt Disney Company (“Disney”), terminated her employment. The company paid her short-term and long-term disability benefits, but it denied her severance benefits under the Disney Severance Pay Plan (the “Plan”). The Committee responsible for deciding the severance pay claims determined that Soto was not eligible for benefits because she did not experience a qualifying “Layoff” as defined in the Plan. Soto sued Disney, the severance plan, and its administrator under ERISA Section 502(a)(1)(B) & (a)(3), alleging that it improperly denied her severance by interpreting “Layoff” as excluding a termination based on disability. To qualify for severance benefits, an employee must have been an “Eligible Employee,” notified in writing that they are a Plan “Participant,” and have experienced a “Layoff.” The district court ruled in favor of Disney on the basis that Plaintiff admitted that she did not receive notice of her eligibility under the Plan, and this was grounds enough to dismiss her claim. In a 2-1 decision, the Second Circuit affirmed the district court’s judgment, but for a different reason than relied on by the district court. The Second Circuit held that Soto did not plausibly plead that Disney’s interpretation of “Layoff” and the resulting denial of severance benefits was arbitrary and capricious.

As explained by the court, the Plan defines “Layoff” as “[t]he involuntary termination of employment … except for reasons of poor performance or misconduct as determined by the Company [Disney] in its sole and absolute discretion,” subject to a substantive limitation: that, “[n]otwithstanding the foregoing” general definition, the phrase “involuntary termination of employment” may in no event “be considered a Layoff if such involuntary termination does not qualify as a ‘separation of service’ within the meaning of Section 409A of the Code and Treasury Regulation 1.409A-1(h).” The court found the phrase “involuntary termination of employment” in the Plan to be ambiguous as to whether it includes a termination based on disability. Considering “involuntary termination” in the context of the Plan further reinforces the ambiguity because one section of the Plan supports a narrow reading to exclude terminations based on disability, but another section of the Plan contemplates offsets for disability benefits.

Because “Layoff” is ambiguous and the Plan Administrator has discretion in construing this term, the court determined that Plaintiff’s complaint pleads reasonable bases for the Plan Administrator’s interpretation such that Soto does not have a viable claim. The court explained that Section 409A of the Internal Revenue Code defines “involuntary” “termination of employment” as occurring when an employee who was willing and able to continue performing services is terminated by the employer’s unilateral authority. Soto was not able to continue performing services because of disability. The severance plan requires compliance with Section 409A so the Plan Administrator acted reasonably in selecting an interpretation of “Layoff” consistent with this section. The Plan makes it clear that the Plan Administrator must interpret “involuntary” termination of employment consistently with Section 409A to ensure that Plan benefits receive the intended tax treatment under the Plan. Further, because Soto has not plausibly alleged that she is a plan “participant,” she is not entitled to bring a claim for equitable relief under ERISA Section 502(a)(3). Judge Sullivan dissented on the basis that the Plan’s definition of “Layoff” is clear and unambiguous and includes terminations due to disability.