As an organization, you may issue employees different kinds of pay at separation. One of the most common types is severance pay, also known as dismissal or separation pay.
Did you know that severance pay – and other types of disqualifying pay – can impact unemployment benefits?
It is important to understand these different types of remuneration, their impact on unemployment, and how they differ from monetary and non-monetary determinations to best support your employees and your organization.
Severance Pay 101
Simply put, severance pay is financial compensation provided to an employee when they leave their employment under certain conditions. This payment is most often offered in situations such as layoffs or mutual separations and is intended to help the departing employee transition to a new job or career.
Severance pay may impact an individual’s qualification for unemployment benefits.
States have very specific rules surrounding severance pay, with its impact on unemployment benefits varying widely between states. If an individual receives severance pay, they must report any payment(s) to the state workforce agency when filing for benefits. The state will review all relevant details to determine how the severance pay will impact an individual’s benefits. Most states assess severance in one of the following ways:
No Impact – In some states, severance pay is not considered wages and, therefore, does not reduce or disqualify an individual from benefits.- Lump Sum Payment Date – When severance pay is provided in a single, lump sum payment, some states will only disqualify an individual for the week in which the lump sum payment was received.
- Lump Sum Proration – Alternatively, some states will prorate the lump sum severance payment, distributing the pay across several weeks. The number of weeks may be based on the allocation period provided by the employer or, if none is provided, based on the claimant’s weekly wage prior to their separation.
- Weekly Allocation – If a state recognizes severance as disqualifying pay, and the payment is received spread out over a series of weeks, the severance pay will reduce/deny unemployment benefits for all weeks in which the severance is received.
Additional Disqualifying Income
In addition to severance pay, there are several additional types of pay that may be considered income, resulting in either disqualification from or reduction of unemployment benefits.
Social Security benefits are the clear exception to precedent associated with disqualifying pay. In almost every state, unemployment benefits are not reduced if a claimant is receiving Social Security benefits but is otherwise eligible.
Reporting Income
Although it is required for claimants to disclose all wages received to the state workforce agency during filing and at their regular certifications, as the employer, it is also important to report relevant payments when responding to unemployment claims.
This information will ensure the claimant accurately reported their wages, helps the state make the proper determination on eligibility for benefits, and potentially reduce your exposure to benefit charges.
Keep In Mind
Disqualifying income is NOT the same as a monetary and/or non-monetary disqualification.
It is important to remember that disqualifying pay does not mean an individual is disqualified from receiving unemployment benefits for the duration of their benefit year. Both monetary disqualifications, where an individual fails to earn enough wages to qualify for benefits, and non-monetary disqualifications, where an individual is disqualified due to their separation reason, result in a disqualification that runs until the claimant meets certain conditions, such as earning sufficient wages in the base period or finding new employment.
Alternatively, disqualifying income will only disqualify the individual for the time period in which the remuneration is received or allocated, as previously discussed.
Will you be paying for unemployment benefits and severance pay at the same time?
In states that do not recognize severance as disqualifying pay, individuals will be able to collect benefits beginning after their initial waiting week has passed and will be eligible for the duration of their benefit year regardless of the severance payments made to them. This means that your organization may be liable for benefits paid out to this individual even if you are providing pay after separation if you are also their base period employer.
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For more than 40 years, 501(c) Services has been a leader in offering solutions for unemployment costs, claims management, and HR support to nonprofit organizations. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy and are committed to providing our clients with customized plans that fit their needs.
Contact us today to see if your organization could benefit from our services.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources. Some information was provided by our friend, Darby Gibson, Client Marketing & Insights Specialist, at Thomas & Company.
(Images by Kiwistocks and Freepik)
