Will My Severance Package Affect My Unemployment Benefits?

State law determines whether severance pay counts as wages earned -- and therefore, might reduce or eliminate unemployment benefits.

Some employers pay severance to employees who are laid off or fired. When these newly out-of-work employees file claims for unemployment, their state's law will determine how those severance payments are treated. In some states, severance pay may render an employee ineligible for benefits.

Severance Pay and Unemployment

A severance package can affect the employee's eligibility for benefits. State law determines how these amounts are treated:

  • Benefits denied. In some states, an employee won't be entitled to benefits in any week when the employee receives severance pay.
  • Benefits reduced. Some states subtract the amount of severance paid from the employee's weekly benefit amount, and pay the employee the difference.
  • Benefits allowed. Some states don't consider severance pay to be wages, but instead to be recognition for past performance. These states don't count severance pay against the employee, and allow employees to collect full unemployment benefits even if they are receiving severance pay.

When Is Severance Pay Received?

In states that reduce or deny benefits in weeks when the employee receives severance pay, it's important to know when the state considers the payment "received." If severance is paid out over time (for example, the employee continues to draw a paycheck for several months after being laid off), it's easy to determine how much pay the employee is receiving every week. But what about lump-sum payments?

Some states simply divide the payment into amounts equal to what the employee use to earn each week, then count that amount against the employee each week until the severance is used up. Some states use the employer's allocation to determine when benefits are paid.

To find out how your state treats severance payments, contact your state unemployment insurance agency. For links to each state's agency, see State Unemployment Agencies.

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