Severance Pay versus Deferred Compensation


J

John

My employment agreement gave me money when I quit; which I
got. It did not catagorize it; it was just money I got when
I quit. It was paid like any other pay, with all deductions
taken, W2 issued, etc.

There is now some debate over whether it is Deferred
Compensation or Severance Pay.

Is there any reason I should care?
Are they taxed to me the same?
Are they treated any differently by the company paying them?
Will the IRS care what they are called?
 
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A

Arthur L. Rubin

John said:
My employment agreement gave me money when I quit; which I
got. It did not catagorize it; it was just money I got when
I quit. It was paid like any other pay, with all deductions
taken, W2 issued, etc.

There is now some debate over whether it is Deferred
Compensation or Severance Pay.

Is there any reason I should care?
State unemployment benefits? Your termination date
for COBRA purposes?

I can't think of any other differences.
 
J

John H. Fisher

My employment agreement gave me money when I quit; which I
got. It did not catagorize it; it was just money I got when
I quit. It was paid like any other pay, with all deductions
taken, W2 issued, etc.

There is now some debate over whether it is Deferred
Compensation or Severance Pay.

Is there any reason I should care?
Are they taxed to me the same?
Are they treated any differently by the company paying them?
Will the IRS care what they are called?
There could be a BIG difference. Deferred compensation may
be subject to both income tax + a penalty tax of 10%.

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
D

David Woods, EA, ChFC, CLU

John said:
My employment agreement gave me money when I quit; which I
got. It did not catagorize it; it was just money I got when
I quit. It was paid like any other pay, with all deductions
taken, W2 issued, etc.

There is now some debate over whether it is Deferred
Compensation or Severance Pay.

Is there any reason I should care?
Are they taxed to me the same?
Are they treated any differently by the company paying them?
Will the IRS care what they are called?
Your questions are all moot. You got the money. It is
severance pay.
 
A

A.G. Kalman

Your questions are all moot. You got the money. It is
severance pay.
Not necessarily moot. If the person had a deferred
compensation plan and the funds received were from that
plan, they could be subject to the early withdrawal penalty
depending upon the person's age.

An employee should generally know if one has a deferred
compensation plan.
 
M

MTW

John said:
Are they taxed to me the same?
You probably haven't provided enough information to say for
sure. However, while "severance pay" is generally subject to
FICA taxes when paid, "deferred compensation" might not be
IF the FICA tax was paid in earlier years when the deferred
compensation was "earned."

If you were over the FICA ceiling in those earlier years,
then only the Medicare portion of FICA would have been
payable on the compensation that was deferred. However, if
this was NOT done, and you are below the FICA ceiling in the
year that the deferred comp is actually paid, it would all
be subject to the full FICA tax. In the former case, both
the employer and employee would have/could have saved money.

However, if there is nothing specific in your employment
agreement (or other applicable company policies) about a
deferred compensation arrangement, then this likely isn't
applicable.

MTW
 
J

John

My employment agreement gave me money when I quit; which I
There could be a BIG difference. Deferred compensation may
be subject to both income tax + a penalty tax of 10%.
Can you please elaborate on that? When would deferred
compensation be subject to the 10% penalty tax?
 
D

David Woods, EA, ChFC, CLU

My employment agreement gave me money when I quit; which I
There could be a BIG difference. Deferred compensation may
be subject to both income tax + a penalty tax of 10%.
Since WHEN? Deferred comp that is received and taxable on a
W-2 is not subject to any penalty, EVER.
 
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D

David Woods, EA, ChFC, CLU

Not necessarily moot. If the person had a deferred
compensation plan and the funds received were from that
plan, they could be subject to the early withdrawal penalty
depending upon the person's age.

An employee should generally know if one has a deferred
compensation plan.
Employment agreements don't pay qualified deferred
compensation money. If it was DC money for a DC plan, he
didn't receive it subject to a W-2 as he stated and it went
into a qualified plan. If it was non-qual DC money, I have
NEVER seen it payable immediately upon termination, that
leaves severance pay.
 
A

Arthur Kamlet

Not necessarily moot. If the person had a deferred
compensation plan and the funds received were from that
plan, they could be subject to the early withdrawal penalty
depending upon the person's age.

An employee should generally know if one has a deferred
compensation plan.
Also if this is a Sec 457 deferred compensaion plan, and it
is rolled to an IRA, an early distrihution penalty could
then apply?

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
A

Alan

My employment agreement gave me money when I quit; which I
Since WHEN? Deferred comp that is received and taxable on a
W-2 is not subject to any penalty, EVER.
IRC Sec. 457(f)(1)(B)

(f) Tax treatment of participants where plan or arrangement of
employer is not eligible
(1) In general
In the case of a plan of an eligible employer providing for a
deferral of compensation, if such plan is not an eligible
deferred compensation plan, then¡X
(A) the compensation shall be included in the gross income of the
participant or beneficiary for the 1st taxable year in which
there is no substantial risk of forfeiture of the rights to such
compensation, and
(B) the tax treatment of any amount made available under the plan
to a participant or beneficiary shall be determined under section
72 (relating to annuities, etc.).
 
H

HW \Skip\ Weldon

Also if this is a Sec 457 deferred compensaion plan, and it
is rolled to an IRA, an early distrihution penalty could
then apply?
Our State has a public employee 457 Plan. My understanding
is that they cannot roll those dollars to an IRA. Of
course, if you are working with a Georgia fan (by
definition, clueless) who handles IRA rollovers, you might
try convincing him/her that the plan is a 401k. <grin>

-HW "Skip" Weldon
Columbia, SC
 
A

A.G. Kalman

Employment agreements don't pay qualified deferred
compensation money. If it was DC money for a DC plan, he
didn't receive it subject to a W-2 as he stated and it went
into a qualified plan. If it was non-qual DC money, I have
NEVER seen it payable immediately upon termination, that
leaves severance pay.
A nonqualified DC plan may pay out the funds upon
separation. I have no idea what this person meant when he
said "employment agreement" in the original post. He might
of meant the terms negotiated upon his separation or he
might of meant a written contract, or he might of meant
..........?

My only point is that distributions from nonqualified DC
plans may be subject to an early withdrawal penalty. As
stated previously, one would think that an employee would
know whether or not he ever deferred compensation and if he
did, whether or not funds distributed at termination came
from the DC plan.
 
A

Arthur Kamlet

HW \"Skip\" Weldon said:
(e-mail address removed) (Arthur Kamlet) wrote:
Our State has a public employee 457 Plan. My understanding
is that they cannot roll those dollars to an IRA. Of
course, if you are working with a Georgia fan (by
definition, clueless) who handles IRA rollovers, you might
try convincing him/her that the plan is a 401k. <grin>
I don't know the rules for this particular plan. See Pub 575
page 25 which explains 457s can be rolled into IRAs.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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H

HW \Skip\ Weldon

HW \"Skip\" Weldon said:
Our State has a public employee 457 Plan. My understanding
is that they cannot roll those dollars to an IRA. Of
course, if you are working with a Georgia fan (by
definition, clueless) who handles IRA rollovers, you might
try convincing him/her that the plan is a 401k. <grin>
My mistake. Providing separated from service, a public
employee deferred comp plan (457) CAN be rolled to an IRA.
Whether this is a good idea, and whether an IRA will accept,
is another subject.

-HW "Skip" Weldon
Columbia, SC
 

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