IT Employment

Severance pay and unemployment compensation

Can you collect unemployment benefits if you receive a severance package? It depends on the state you live in and whether your severance is a lump payment.

Can you collect unemployment benefits if you receive a severance package? It depends on the state you live in and whether your severance is a lump payment.

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Many companies offer serverance packages to employees who have been laid off. But did you know that receiving a severance package could have big tax consequences, as well as interfere with your unemployment benefits? According to NewYorkLife.com:

Severance options may also have big tax consequences, depending on whether you chose a lump sum payment (you may want to consider investing it in an annuity or IRA), or salary continuation payments. Depending on your investment vehicle, the money may be taxed as income, or the earnings may be tax-deferred. To lower the immediate tax bite, you may be better off taking salary continuation, which would lower the income taxes due, as the amount is spread over a period of time.

Severance payments may also disqualify you from unemployment benefits. Typically, if you are receiving severance payments in the form of salary continuation and those payments equal or exceed your previous weekly wages, it qualifies as income. But eligibility requirements vary by state, so check with your local office (look in the phone book under unemployment, or under Bureau of Employment Services).

Taking the lump sum option may not be a shortcut to your first unemployment check, either. Typically, the government will determine how many weeks of wages your lump sum amount is worth. You won?t be eligible for unemployment until afterwards.

If you do qualify, unemployment payments are generally 50 percent of your recent income, and depending on years of service, the payments can extend up to six months. Unemployment benefits are regulated at the state level, so check with your state's Department of Labor for details specific to your state. Most states have a waiting period of one week after you are terminated.

About

Toni Bowers is Managing Editor of TechRepublic and is the award-winning blogger of the Career Management blog. She has edited newsletters, books, and web sites pertaining to software, IT career, and IT management issues.

10 comments
CharlieSpencer
CharlieSpencer

Especially one from 'azamgarh, Alabama' with less-than-impressive language skills?

Kelley@HollywoodSteel.com
Kelley@HollywoodSteel.com

I understand the point that you are making regarding taxes, etc. However, lets not forget that you are getting money. A lot of displaced workers need severance pay and would really appreciate it. This could mean the difference between making their mortgage or not or allow them to afford a prescription they need. I personally have been layed off twice and got severance both times. The first time was in 1989 and I was given the option of a lump sum, which I did not accept. In 2007 when it happened again, salary continuation was the only option that was offered. I appreciate the tax implications and the impact on unemployment, but I think that a larger issue is being missed.

ckulins
ckulins

Well - I chose to take my severance as salary continuation mainly because it would spread the income and therefore taxes out over the end of 08 and the start of 09. I started collecting un-employment as soon as my termination date was reached. BUT then the company went bankrupt in the 2nd week of January severing the remaining 3 months of severance. So for a little more in tax last year I could have had the entire amount. Consider that now more than ever before with companies going Chapt 11 left and right. Also consider taking lump sum payment of any company funded pension. Seems they under funded the pension and now it is questionable if we will see any of it at all.

patrick
patrick

I was laid off from the world's largest liquid foods packager company in Switzerland in 2006. I was promised a 6 months severance pay to be paid in one lump sum with my last paycheck (October). I asked HR if they could postpone the severance pay until the next year, so I could declare that income in another fiscal year. The answer was 'no' because if I were on their books after the end of Oct 2006, I was officially still employed, which wasn't the case as I got my notice. So they had to pay it all in one go. This resulted in a much larger income for 2006: Jan-Oct + 6m = 16 months income to be declared for 2006. That should have resulted in 33% more taxes to pay. I did not look for a new job right after this, and decided to take my severance pay and go travel for a year. I came back 1 year minus 1 day. (364 days) and registered with unemployment. I had dome my homework: the rule for being eligible for unemployment is that you have to have worked 1 year in the past 2 years. Which I did. I also started looking for jobs 4-5 months before returning home (internet job posts), which I knew I would be asked for upon enrollment. No big questions were raised when I talked with the people looking over my case: I was clearly within the requirements, and having received a severance pay did not even come in the discussion. Obviously I had to spend my personal money (severance pay + savings) during 1 year, and only asking for public money 1 year later. In Switzerland, you are eligible for 1.5 year of unemployment benefits, at 70% of your last salary, capped at 10'500 CHF/month. ($9340/month). On top of that, they pay for relevant training: I took classes and passed certifications: ITIL, RUP, PMP, IPMA, and a few others. I then found a job 8 months after coming back home from my year-long trip (around the world) and rejoined the IT workforce with better knowledge than before I left it. It clearly was a risky move, but if you do your homework right, and have no dependents (I left with my wife...we have no kids) and can rent out the apartment for just 1 year, you can experience in just 1 year the amount of vacation one normally gets in 15 years or so (in Europe, not in the US! In the US it would be more like 25 years!). So with these difficult and interesting times we live in now, it's time to make decisions for yourself. Do you take that next job, or you enjoy life a bit?...

Jaqui
Jaqui

the reason for the dismissal, at least here. For some grounds they deny any EI benefits. For others, you can get them. Severance packages just delay the start date of benefits, they don't stop the benefits completely..

reisen55
reisen55

In December, 2005 Aon Group fired 140 technicians to save an outsourcing contract. The outsourcing firm, CSC, honored the severance agreements and we we received one weeks pay for every year worked, in my case 7 years. Ok, good there. And we unemployment was possible too. But We were then all interviewed by BancTec, which was picking up the desktop and server support, and we were guaranteed that 80% of would be rehired. Oh, really. Out of 140, they made offers to just 40. And the offers were such a joke that only 10 accepted the offers. But why 40? WARN act provision. By making offers to 40, they slipped in under the WARN act which says that if you fire more than 100 people, then you have to pay 60 days severance. By making offers to 40, that expense was eliminated. Totally cute. My daughter had it worse. Foxtons simply fired 330 people in 2007 with a single day's notice and that clearly violated WARN provisions and the lawsuit is settled with payments forthcoming. KNOW YOUR LAW!!!!!!!!!!!!!!!!!!!!

blair.howze
blair.howze

Until I saw your location I thought MPC\Gateway. Those people really got hosed.

cmk7471
cmk7471

Wow, you have great unemployment benefits in Switzerland! My husband has been laid off from his job as a commercial carpenter since before Christmas. In Wisconsin the max payment was just INCREASED to $382/week, which is less than 30% of his normal pay. How can you survive on that!

mdhealy
mdhealy

A friend of mine got a retroactive ruling that entitled her to 26 weeks of unemployment benefits, so naturally she expected to get one check for the full amount. But this was the State of Connecticut so logic appears to have little relevance: over about a week she got TWENTY SIX ENVELOPES in the mail, each containing the check for one week of unemployment benefits. Don't get me started on what our Motor Vehicles Department is like...

GNX
GNX

I was laid off in May 2008. Because parent company closed my division, this fell under the WARN act as a plant closing. I was paid 1 week for every year of service, 13 in all, at the time of the layoff. I got my severance in one lump sum, with 40% taken out as a donation to the government. I live in Taxachusetts after all. I was eligble in Massachusetts to start collecting unemployment after waitng one week. Currently I am still looking for a full time job doing Desktop Support or Help Desk. All of the jobs I apply for are getting 100 to 200 resumes. So if you have the pleasure of being laid off, budget everything and cut your spending.