Severance Pay Plans

[Emily1991]

My question relates to 29 CFR 2510.3-2(b) Severance Pay Plans

The Regulations state "the total amount of such payments does not exceed the equivalent of twice the employee's annual compensation during the year immediately preceding the termination of his service." What does the phrase "the equivalent of" mean? Is the DOL referring to the time value of money?

Additionally, in referring to the annual compensation, how is that determined? Is the annual compensation the employees previous years salary or is it the salary it would have been if he had continued working? Essentially I'm asking if anyone knows what they mean by "usual rate of compensation".

Any thoughts? Thank you!

 

[jpod]

I don't know if there is an advisory opinion on point, but absent one I think it is safe to assume that if the individual worked the full year that year, you can use the W-2 Box 1 amount for that year, and if less than a full year you can annualize the W-2 Box 1 amount.  It doesn't say "regular salary," or even "cash compensation;" it says merely "annual compensation."  Besides, it's only a safe harbor, isn't it?  

[Luke Bailey]

The reg says to use comp for the year preceding the year of termination, so you should have a full year and not have to adjust for raises or bonuses in current year. As to what "equivalent" means, I've always interpreted it as "equal" with maybe a tiny fudge factor. I think the DOL purposely avoided saying "equal" because it didn't want to have to explain exactly what they meant mathematically or suggest that absolute mathematical precision was required and even $1 over by some calculation would throw you out of the exception. But that is just a guess.

[jpod]

The previous year could have been a partial year; e.g., executive hired in the middle of 2017, then fired without cause in 2018 and his/her employment agreement says severance is 2 years' compensation.  Stranger things than that have happened.

[Luke Bailey]

True. Do you think in such a case you'd be stuck with the prior year's W-2 or could annualize? I would think in that case you could probably annualize, and maybe the use of term "equivalent" instead of "equal" would help.

[Emily1991]

The way I'm reading it is if a person was working in the previous year and then was fired in 2018, they would receive 2 years of compensation at their 2017 salary. 29 C.F.R. § 2510.3-2(B)(ii) provides “the total amount of such payments does not exceed the equivalent of twice the employee’s annual compensation during the year immediately preceding the termination of his service.” So in this case the year immediately preceding his termination would be 2017. Would that make sense?

[Luke Bailey]

I think we all agree that is correct. I think the issue raised by jpod was that if the individual had been hired in 2017, so only had partial year comp, would you be able to annualize or would you be stuck with 2x actual 2017 W-2. Could make a big difference if individual had been hired late in 2017.

[Emily1991]

Thanks for the clarification Luke! I'm leaning towards annualized. The regs give a definition of annual compensation and part of it states "or which would have been so paid at the employee's usual rate of compensation if the employee had worked a full year".

[Luke Bailey]

Well, that's the benefit of reading the whole thing, Emily1991, vs. just reading the snippets in these posts. :)

 

[Emily1991]

Thanks for your help guys! :D