TAILIEUCHUNG - Lecture Employee benefits and retirement planning - Chapter 33: Severance pay plans
This chapter discusses severance pay plans. A key consideration is to avoid characterization as an ERISA pension plan. Assuming this is avoided, severance pay plans can maintain quite a bit of flexibility. Tax implications are covered, focusing on reasonableness, and highlighting funded and unfunded plans. ERISA implications are discussed, with special emphasis on being considered a pension plan. | An agreement between employer and employee to make payments after the employee’s termination of employment If avoid characterization as ERISA pension plan, severance arrangements can be flexible and arranged on an individual or group basis, as needed What is it? Copyright 2009, The National Underwriter Company severance payments are tax deductible to employer IF payments are compensation for services previously rendered to employer payment amounts are reasonable Tax Implications Copyright 2009, The National Underwriter Company Unfunded severance pay plan severance payments are taxable to recipient as compensation income in year actually or constructively received Funded severance pay plan value of benefit is taxable to employee in first year in which employee no longer has substantial risk of forfeiture Tax Implications Copyright 2009, The National Underwriter Company If severance pay is characterized as “parachute payment” the employer’s deduction may be limited the employee may be subject to penalty Tax consequences of severance pay plan generally are like those of nonqualified deferred compensation plan except for Social Security tax Tax Implications Copyright 2009, The National Underwriter Company IRC – severance pay in general is NOT SUBJECT to special timing rule for nonqualified deferred compensation that states any amount deferred shall be taken into account for FICA purposes the latter of when services performed when substantial risk of forfeiture no longer exists Tax Implications Copyright 2009, The National Underwriter Company Dept. of Labor – severance pay plan will not be considered a “pension plan” under ERISA IF payments are not contingent, directly or indirectly, on retirement total payments Copyright 2009, The National Underwriter Company Severance pay plans are not flexible. Failure to have a written severance pay plan can lead the IRS to conclude that the payment is a gift or a buyout. In an unfunded plan, severance payments are taxable to recipient only when actually received. True or False? Copyright 2009, The National Underwriter Company 1. False, see page 315. 2. True, see page 315. 3. False, in an unfunded plan, severance payments are taxable when received AND when constructively received, see page 315. Severance pay in a funded plan is taxed at the end of the first year that the plan was established. A severance pay plan that does not meet the ERISA ‘pension plan’ exemption is treated as if it was a defined contribution plan. True or False? Copyright 2009, The National Underwriter Company 4. False, severance pay in a funded plan is taxed the first year of constructive receipt, see page 316 5. False, the severance pay plan in this situation is treated as if it was a nonqualified deferred compensation plan for ERISA purposes, see page 316. Identify situations where a severance pay plan would be advantageous, first from the perspective of the employer and then from the perspective of the employee. What other ways, if any, might exist to accomplish the same end? Discussion Question Copyright 2009, The National Underwriter Company
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