Frequently Asked Questions
Severance Solution helps organizations manage the costs associated with reductions in force and can be implemented within a two- to three-month timeframe in a co-sourced or fully outsourced environment.
How can Severance Solution save our company money?
Isn't this just a way to reduce benefits to severed employees?
If we still wish to reflect tenure in some meaningful way, how can we do this?
Why haven't companies been doing this all along?
How does Severance Solution work?
How do we know if a displaced employee has found new employment?
How long does it take to implement Severance Solution?
What does it cost to implement?
How can I get more information about Severance Solution?
How can Severance Solution save our company money?
Severance Solution offers three savings options that can be selected individually or in combination for optimal savings:
Option One
Eliminate FICA taxes for severance payments through a Supplemental Unemployment Benefit (SUB) Plan and Trust. This option increases after-tax benefits for workers and reduces tax liabilities for employers.
Potential Savings:
Estimated at 5 percent. Savings will depend on when during the calendar year displacements occur (for example, at the end of the calendar year some more highly compensated employees will have already reached the OASDI wage base, making additional savings limited for the employee and the employer).
Option Two
Coordinate severance payments with state unemployment benefits, maintaining 100 percent income replacement for former employees. This option offers the additional advantage of creating a more equitable benefit across the entire workforce, since different states provide different levels of benefits to unemployed workers.
Potential Savings:
Estimated at 25 percent. The degree of savings will depend on the distribution of states in which the displaced employees reside.
Option Three
Implement a new employment feature whereby severance payments stop when a displaced worker finds new employment.
Potential Savings:
Estimated at 10 to 20 percent, based on national averages. Local conditions may vary. Switching from lump-sum to installment payments should save employers an additional 1 to 3 percent because of the time value of money.
Isn't this just a way to reduce benefits to severed employees?
Not really. The first savings option, elimination of FICA taxes, benefits both the employee and the employer. The other two options allow companies to offer a more equitable benefit, across the board, to all employees.
Option 2, the unemployment insurance offset, is designed to do away with the wide benefits disparity that results from differences in the unemployment tax code in individual states. For example, a worker in the state of Georgia would receive no unemployment benefits during the period he or she is receiving severance payments, while a worker living in Florida would receive 28 percent of his or her salary in addition to severance payments. The graph below, which is based on an average salary of $52,000, presents the inequity of this situation across various states.
Option 3, the new employment feature, is consistent with other severance programs, such as outplacement and COBRA, and state unemployment benefits, which are offered only for the period during which the individual remains unemployed. Continuing payments after reemployment provides a "windfall" to individuals who find work quickly.
Companies that coordinate state unemployment benefits to make employees "whole" (i.e., receive 100 percent of their salary in combined severance and state unemployment insurance benefits) will indeed pay out less money, overall, directly to employees. But a portion of these savings can be redirected toward extending the number of weeks of severance payment offered to all employees. Likewise, terminating severance benefits upon reemployment (Option 3) allows companies to continue offering benefits to those who have been less fortunate in obtaining new work.
In short, this approach shifts the focus of severance from providing an entitlement to providing a bridge to new employment.
If we still wish to reflect tenure in some meaningful way, how can we do this?
Tenure continues to be reflected in the maximum duration of severance benefits (as long as the person is unemployed). It can also be acknowledged in other ways. For example, you can pay an initial (partial) lump sum that is based on tenure or increase the company subsidy for COBRA coverage based on tenure.
Why haven't companies been doing this all along?
There are several reasons why companies have chosen not to implement these savings options on their own:
- While SUB Plans have been in existence for more than 50 years in the collectively bargained arena–where temporary and permanent layoffs are a way of life–they are complex to administer. Setting them up requires an employer to be well versed in the unemployment rules for each state in which they have employees. For most employers, this process would require a tremendous amount of up-front tax and legal work. But with Severance Solution, all of the legwork is done.
- Most employers do not have the technology in place to monitor displaced workers' employment status. Buck's fully automated Severance Services System features state-of-the-art Web-based technology and a fully integrated Interactive Voice Response (IVR) module. The system monitors the eligibility of former employees for SUB payments and transfers information to the employer's payroll system quickly and simply. The system also incorporates a customized set of unemployment calculations that are updated regularly.
- Finally, many employers do not wish to handle ongoing payments to workers after they have been severed, preferring to make a "clean break" by providing a lump-sum payment. To address this issue Buck's turnkey solution lets us assume the payroll function for severance benefit payments. We handle all facets of the severance experience, including personalized benefit statements and unemployment assistance for terminated employees.
How does Severence Solution work?
Implementation begins with reviewing the existing plan and setting up a SUB Plan and Trust, if necessary, so that payments qualify as supplemental unemployment insurance benefits. Subsequent steps include:
- Revising current severance plan to meet integration and duration objectives
- Preparing SUB plan documents
- Crafting employee communication and management training materials
- Outlining administration procedures and responsibilities for payment processing
- Running tests using payroll data
- Training the customer service team
- Rolling out the severance program
How do we know if a displaced employee has found new employment?
To receive their supplemental unemployment checks, former employees are required to call the IVR system or log on to the Web site and respond to a few simple questions regarding their employment status. While the system relies on self-reporting and has no way of telling if people are providing truthful responses, individuals are reminded that falsifying employment status constitutes fraud against the federal government. As an additional service, if the employer so desires, Buck can conduct regular audits of state unemployment records to ascertain whether employees have reported their status correctly.
How long does it take to implement Severance Solution?
It can take as little as 60 days to set up the SUB Plan and launch the IVR system and Web site.
What does it cost to implement?
Fees are charged as a percentage of realized savings based on services rendered and the expected amount of severance activity during the term of the contract. Buck provides a detailed savings and fee proposal upon receipt of a company's basic employee demographic information (i.e., state distribution) and highlights from its current severance program.
How can I get more information about Severance Solution?
If you would like more in-depth information about Severance Solution, contact Ed Palko at 440.845.7473 or edward.palko@buckconsultants.com.
