Compensation paid after separation of Service

[Guest getaxa]

I keep reading about severance pay being paid over several years after separation of service. I thought that taxes are due when earned not when recieved however many schools are paying teachers via a W2 after seperation of service and then taking taxes at that time. The Arizona Republic wrote:

"Employees who worked for the district for 10 or more years were eligible. In exchange for leaving July 1, employees will get one year's salary, up to $60,000, spread out over the next eight years. Employees older than age 60 will get their money in fewer years."

http://www.azcentral.com/news/education/07...erretire06.html

Now in that example aren't taxes due on the $60,000 at separation of service?

I know that this isn't quite 403(b) material but you all seem to know so much I thought I give it a try. Thanks for any info.

[E as in ERISA]

Income taxes are usually taken out when the compensation is paid. For deferred compensation plans, FICA is taken out when earned, not when paid. However, there is an exception for severance plans -- so some of them would not be subject to that rule and would be taxed when paid.

[Guest getaxa]

Thanks for your reply, do you know what exceptions apply? I still don't get how someone can earn money for not working. If the employee (teacher in this example) is receiving W2 income, a salary, why can't they electivly deferred that into thier 403(b)?

[Harwood]

If a severance package is such that the employee has the option of getting all their money now, then there is constructive receipt of the $60,000 and it is all taxable now.

If, as is probably the case, the severance policy is always to pay the money out over extended periods of time, then the money is taxable when actually received.