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What Do I Need to Know About Severance Packages?

By law, organizations are not required to offer severance packages to downsized employees. If they do offer packages, most companies compute severance payments on a formula, based on years of service and other factors. Some pay for un–taken vacation time, others don't. In short, packages vary. You may even be able to negotiate a better severance package, but make sure to consult a lawyer.

Whether you elect to take a lump sum severance payment, or opt for salary continuation payments, depends on many factors. These factors include:

  • Do you need immediate funds? If so, the lump sum option may be the better choice.
  • Do you need health insurance? Salary continuation may be the better choice here.
  • Do you have a certain amount of time before you qualify for pension or retirement benefits? Again, salary continuation might be the better option in this case.

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.

A word of advice
Start the paperwork immediately, even if you're not sure of your eligibility. The process can take a long time.

Unemployment payments are there to tide you over until you find a job. Most states require you to furnish proof of looking for a job as well, so keep notes. Remember, if you refuse a suitable job, you may endanger your unemployment eligibility.

In the end, whatever option you choose, think before you sign. Although you may be receiving much-needed cash, you may also be signing away your legal right to sue.

  • Helpful Hint...
    If you think you may be laid-off, and want to resign instead, talk to lawyer about your options. Resigning may disqualify you from unemployment benefits, unless it for a just cause.

  • Helpful Hint...
    Before you leave, secure a written referral, stating the reason for your termination. Sample referral letters can be found on the Internet.

  • Title VII of the Civil Rights Act of 1964 (Title VII), which prohibits employment discrimination based on race, color, religion, sex, or national origin;
  • The Equal Pay Act of 1963 (EPA), which protects men and women who perform substantially equal work in the same establishment from sex-based wage discrimination;
  • The Age Discrimination in Employment Act of 1967 (ADEA), which protects individuals who are 40 years of age or older;
  • Title I and Title V of the Americans with Disabilities Act of 1990 (ADA), which prohibit employment discrimination against qualified individuals with disabilities in the private sector, and in state and local governments;
  • Sections 501 and 505 of the Rehabilitation Act of 1973, which prohibit discrimination against qualified individuals with disabilities who work in the federal government; and
  • The Civil Rights Act of 1991, which, among other things, provides monetary damages in cases of intentional employment discrimination.

  • Did You Know...?
    Unemployment insurance was created by the 1935 Social Security Act. The program is largely run through the Federal Unemployment Tax Act (FUTA). Each state follows minimum federal guidelines, but each has its own program. Basically, qualifying companies pay unemployment tax to help displaced workers.

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What Do I Need to Know About Severance Packages?

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