Constructive receipt

[Guest Sieve]

Not sure this question belongs in this topic, but I don't know where else it might go.

Company offers voluntary buy-out to a number of employees, & gives each a choice of 2 benefit options: (i) lump sum, or (ii) smaller lump sum plus a set number of health care continuation payments. If the buy-out offer is turned down, the employee gets nothing, and then prays that he/she still has a job when the dust setttles and involuntary terminations are announced following an evaluation of the success of the buy-out program.

I assume there is no constructive receipt here, since the employee is not entitled to (i.e., has not earned the right to) any payment whatsoever, so that the higher valued benefit option will not be included in the employee's income if he/she accepts the buy-out but selects the lesser valued benefit option. Thoughts?

[J Simmons]

If the severance pay (lump sum or lesser lump sum+med payments) would not be taxable if there was only one severance package rather than two to choose from, then having the choice and picking between two non-taxable benefits should not of itself trigger constructive receipt of taxable income.

If the lump sum severance pay would be taxable, then the choice between a taxable lump sum and a taxable lesser lump sum+tax-free med payments would make the choice--which boils down to the lump sum delta or med payments--constructive receipt of the lump sum delta even for those that choose the med payments instead.

These are thoughts off the top of my head, not suggesting whether the severance pay would or would not be taxable absent the choice of the two packages.

[GBurns]

Your option (ii) includes a lump sum, albeit "smaller lump sum" so there is entitlement to a payment under both options.

[Guest Sieve]

The severance package has not been "earned", as a bonus payment might be earned. No one is entitled to the buy-out package unless he/she agrees to the buy-out--if the individual does nothing, then he/she gets nothing whatsoever. Doesn't that make it different from the normal constructive receipt scenario (where an individual has earned the right to payment before making the choice)?

Isn't this really a choice between 2 future forms of compensation, much like the negotiation as to salary/benefits which individuals enter into BEFORE there is any right to payment, or negotiations surrounding an employee resignation? Isn't it therefore not a constructive receipt issue?

[J Simmons]

The severance package has not been "earned", as a bonus payment might be earned. No one is entitled to the buy-out package unless he/she agrees to the buy-out--if the individual does nothing, then he/she gets nothing whatsoever. Doesn't that make it different from the normal constructive receipt scenario (where an individual has earned the right to payment before making the choice)?

Isn't this really a choice between 2 future forms of compensation, much like the negotiation as to salary/benefits which individuals enter into BEFORE there is any right to payment, or negotiations surrounding an employee resignation? Isn't it therefore not a constructive receipt issue?

I'm not so sure it hasn't been earned. You, Larry, and I are not being offered these packages just for making the choice, even if we're willing to agree not to work for the ER. It is the existing EEs of the ER. If they were not employed, i.e. had no past service, they would not be given this choice.

The ER is giving EEs that take the severance pay a choice between a taxable benefit, the lump sum delta between the two packages, and a non-taxable one, medical payments.

You might be able to structure the lump sum delta v medical payments choice in some sort of 125 context, but I think there would be many hurdles if not roadblocks to doing that.

[Guest Mr. Kite]

The employee doesn't have a right to the payment until he or she accepts the buyout offer, and therefore there is not an income event if he or she doesn't take the buyout.

[GBurns]

But what happens " if he/she accepts the buy-out but selects the lesser valued benefit option. Thoughts? " ?

[J Simmons]

I think the constructive receipt lies in the choice, for those taking the severance buyout, between the lump sum delta or medical payments, between taxable income and a benefit that an employer may provide tax-free. For those that choose the medical payments, they have taxable income because they could have chosen the lump sum delta (taxable income)--unless that choice fits into the 125 context.