Every day seems to bring news about more layoffs in corporate America. What’s more, most Americans are worried about layoffs (75%), and nearly 40% are concerned about losing their own job. With this in mind, let’s look at what’s typically included in a severance package.
What is a severance package?
A severance package is the pay and benefits an employee receives from an employer when their employment contract has unexpectedly ended due to a layoff or job elimination. “Severance is a very formal version of ‘Don't go away mad, just go away,’” Fordham economics professor Giacomo Santangelo told CBS MoneyWatch. “Companies are considering how much they have to give you so that you go quietly, because when a person is laid off, this has an adverse effect on them. They try to soften that blow a little.”
While 64% of employers surveyed by talent mobility company Randstad RiseSmart in 2021 provided a severance package to employees who were let go (up from 44% in 2019), the Fair Labor Standards Act does not require employers to pay severance.
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While every severance package is different, five common elements may be included:
Severance pay. Depending on your situation, this may or may not be the most critical element in your severance agreement. Severance pay is usually based on the number of years you’ve worked at your employer. Generally, you’ll get one week to four weeks of pay per year of service, but it is common for employers to pay out two weeks of pay for each year at the company. Of course, every company differs in calculating total severance pay.
In addition, while no federal law requires companies to pay out an employee’s unused paid time off (PTO), such as vacation and sick days, many states have some sort of rule regarding PTO pay. For example, California requires that it be paid out upon separation, while Texas requires it to be paid only if paying it upon termination is part of your original employment contract.
Health insurance. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1995, employers must provide health insurance coverage to laid-off employees under their existing plan for 18 months. They are not required to contribute to the premiums, though, so the cost to you will be much higher.
According to Zippia.com, a platform for job seekers, the average annual cost of health insurance premiums through an employer is $7,739 for single coverage. The typical employer pays 78% of those costs, so your health insurance costs under COBRA would increase by nearly fourfold.
Negotiating with your employer about covering your COBRA premiums for an agreed amount of time is worthwhile.
Retirement plans and company stock. Even though you’re no longer with the company, you can choose to keep your 401(k) in your former employer’s plan. Your holdings will grow tax-deferred until you must start taking required minimum distributions (at age 73 this year and going up to age 75 in 2033).
A second option is to roll your 401(k) into another company’s 401(k) plan or a traditional IRA or Roth IRA.
If your company has an employee stock option plan and you have unvested options, they will often accelerate the vesting period at the termination date. That will allow the employee to exercise the unvested shares or sell them back to the company. If you have a financial adviser, you’ll want to consult with them about how to handle this.
Career transition support. Companies often provide terminated employees with outplacement services such as résumé evaluation and career counseling to help them find a new job as quickly as possible.
If you feel you won’t need this kind of help, you could ask for compensation equal to the amount that would have been spent on these services.
References. Don’t forget to ask your immediate supervisor and other colleagues for professional references. They will help in cementing that next position.
What to know about non-compete and non-disclosure clauses
Companies will often ask employees to sign non-compete and non-disclosure documents. Non-compete agreements usually prevent a former employee from working for a competitor in the same industry or starting a rival company. Non-disclosure agreements ensure an employee won’t disparage the company after they no longer work there or share sensitive information about the company.
Consider consulting with a lawyer about your negotiation rights regarding non-compete and non-disclosure agreements. Some companies may not be flexible about the terms, but others could be more open to working out a compromise, including paying out more separation pay in exchange for signing these documents.
If you receive a severance package, it’s important not to sign any documents before thoroughly reading and understanding their contents. A severance agreement is a legal contract between you and the company. If you’re over 40, the Older Workers Benefit Protection Act (OWBPA) gives you 21 days to look it over (45 days if you’re part of a larger reduction-in-force) and seven days to revoke a signed agreement.
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FAQs
Key Takeaways. A severance package can include payment, continuation of insurance coverage, assistance finding another job, and other benefits. Most employers offer a severance agreement that defines the financial terms for an employee when their employment is terminated.
What is the rule of 70 for severance? ›
Extension of Benefits Under Rule of 70
To be eligible to retire, you must be at least age 55 with 10 years of service or age 65. Years of service for the “Rule of 70” eligibility purposes, means total years of employment from date of hire to date of termination. Medicare.
How do I know if my severance package is good enough? ›
Evaluating whether the severance pay amount provided is good depends on many different factors, including the size of your company, the industry in which the company works, the stage of your company (if it is a startup), the length of your employment, your position, and the reasons for your departure, and the terms the ...
What is the formula for the severance package? ›
Below, you can find the severance pay formula to use: [Employee's weekly salary] x [Number of weeks](Number of years) = Total severance allowance Therefore, if an employee has been part of your organization for five years on a weekly salary of $300 and you'd like to give them four weeks' pay for every year, the ...
What is the most common severance package? ›
Typical severance packages offer one to two weeks of paid salary per year worked. Continuation of insurance benefits, assistance finding another job, and other perks can be negotiated. You usually have 21 days to accept a severance agreement, and once it's signed–seven days to change your mind.
How much severance should I ask for? ›
Severance pay: While most employers offer employees one to two weeks of pay for every year they worked for their company, consider asking for up to four weeks of pay for each year worked if you can prove being laid off may cause you significant economic hardship.
What is the rule of thumb for severance pay? ›
Basic severance allowance equals
One week's pay (use most recent rate) for each year of service up to and including 10 years, plus two weeks pay (use most recent rate) for each full year of service over 10.
What is prohibited in severance? ›
In addition, any employer is not permitted and does not have the authority to include anything in a severance agreement that prevents an employee from discussing or disclosing fact-based information regarding cases or claims of retaliation, harassment, bias, and retaliation.
How to negotiate severance package? ›
Assess the Terms of the Initial Offer
Carefully review the initial severance offer provided by your employer. Pay attention to details such as the amount of severance pay, continuation of benefits, and any non-compete or non-disclosure clauses. Understanding the baseline allows you to identify areas for negotiation.
What is a decent severance? ›
Severance pay is usually based on the number of years you've worked at your employer. Generally, you'll get one week to four weeks of pay per year of service, but it is common for employers to pay out two weeks of pay for each year at the company. Of course, every company differs in calculating total severance pay.
An executive severance package usually consists of a severance of one and a half to two times the executive's salary, plus target bonuses and health benefits for up to two years (“Executive”).
Can you ask for a bigger severance package? ›
If you ask for more severance, most employers will say no because they want to maintain consistency. Then will not, however, typically reduce the severance offered. They want your signature. Therefore, you have little to lose is asking for more.
Is 6 months severance good? ›
In the USA, typically severance packages offer 1-2 weeks of paid salary per year of service. You can also discuss whether there will be a continuation of health insurance and other benefits. All in, a few months is pretty standard, more than 6 months is considered a great result in the USA.
Does severance pay get taxed? ›
Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes. See Publication 525, Taxable and Nontaxable Income, for additional information.
What is the C level severance package? ›
Presidents, COOs, CFOs, and other C-level executives typically receive one to two times the base salary, plus bonus, benefits, stock options, and pensions. Some CEOs negotiated golden parachutes that allowed stock options to vest immediately, and thereafter payouts skyrocketed, according to one compensation expert.
Is 3 months severance good? ›
In the USA, typically severance packages offer 1-2 weeks of paid salary per year of service. You can also discuss whether there will be a continuation of health insurance and other benefits. All in, a few months is pretty standard, more than 6 months is considered a great result in the USA.
Who usually gets a severance package? ›
The pay is typically reserved for employees who have worked at a business for a long period of time. The pay is in addition to your regular pay, and the specific amount of a severance payment will vary. The money is usually given in a lump sum payment.
Do you get severance if you get fired? ›
If you're fired, you could still be offered severance pay. Under those circ*mstances, the employer still wants assurances the employee that's leaving won't come back with a lawsuit, Clark says. However, if you're fired for another, more serious reason, “the offer of severance is unlikely,” Clark says.
Why is severance taxed so high? ›
According to the IRS, severance pay is considered supplemental wages subject to federal income tax. Employers typically withhold federal income tax at a flat rate of 22%. However, if your severance pay is combined with your regular wages, your employer might withhold taxes at your normal withholding rate.
