Question: I was recently laid off from my employer.

My severance pay is being paid from our company retirement plan. This means if I don’t roll it over into an IRA I will incur a 10% penalty as though I am taking out an early withdrawal from a retirement account. Of course, if I roll it into an IRA, I will not have the money to live on.

Is this legal?

Sue 
Gilbert, Arizona

Answer: Dear Sue:   

The answer to your question, in a nutshell, is “Yes.”

a. Severance is almost always discretionary. As a general rule, severance payments are discretionary, that is, an employer does not have to pay severance. The two major exceptions to that general rule are (a) if an employer promised to pay severance in an employment contract or (b) obligated to pay severance as part of a formalized benefit plan.

b. What is in a severance package is also discretionary. The same goes for what kind of “goodies” may be in a severance package: (a) cash payments; (b) continued health care or other benefits; (c) career education monies; (d) outplacement services; (e) retirement assistance, or any combination of these. In my book, “Fired, Downsized, or Laid Off,” [available by instant download by chapters or as a whole book] Chapter 18 contains a list of 101 different things I have helped clients obtain as part of their severance packages.

c. So, severance can consist only of retirement benefits. It is for this reason that an employer – like yours – can provide severance assistance to their employees in any form they wish, including enhanced retirement benefits. The most common place I have seen employees receive enhanced retirement benefits has been in layoffs of union employees, especially public employees, and most especially, teachers.

In these situations, the source of these enhanced retirement benefits is often the general retirement fund, itself.

d. I suggest trying to see “the glass 90% full.” From one view, it is unfortunate that you don’t have these severance monies to pay your daily bills, which can be very upsetting if things get financially difficult. But viewed in a positive light, you can get these monies now – and use them now -  if you pay the 10% penalty attributable to “withdrawn retirement monies.” It’s perhaps seeing the glass “90% full,” rather than “10% empty.” Don’t forget – many people get no severance at all.

Hope this helps. If so, please consider recommending us to a few of your friends on Facebook, Twitter, LinkIn and other social media.

Best to you,
Al Sklover

© 2011 Alan L. Sklover, All Rights Reserved.