Severance Package
A severance package is compensation and benefits provided by an employer to a departing employee upon involuntary termination, typically including cash payments based on tenure and position, extended benefits coverage, and outplacement services in exchange for a release of legal claims.
Severance packages are not legally required under federal law for most private-sector employees in the United States. The Worker Adjustment and Retraining Notification (WARN) Act requires 60-day advance notice for large-scale layoffs affecting 50 or more employees, but even this requirement has exceptions and pertains to notice rather than cash severance. Severance practices are therefore driven by company policy, employment contracts, collective bargaining agreements, and competitive labor market norms rather than statutory mandate.
The standard severance formula in white-collar employment is typically one to two weeks of base salary per year of service, subject to a floor (often two weeks minimum) and a ceiling (often 26 or 52 weeks maximum). Senior executives frequently negotiate individualized severance terms in employment agreements or change-in-control agreements, sometimes receiving 1–3 years of total compensation plus accelerated vesting of equity awards. The negotiated executive severance packages associated with corporate transactions — sometimes called parachute payments — are subject to Section 280G excise tax rules when they exceed three times the executive's average five-year compensation.
In exchange for severance, employers typically require the departing employee to sign a separation agreement and general release, waiving all legal claims against the employer. Under the Older Workers Benefit Protection Act (OWBPA), employees age 40 and over must be given at least 21 days to consider a release agreement and 7 days to revoke after signing — protections that cannot be waived. Group layoff situations require a 45-day consideration period.
Beyond cash, severance packages commonly include continuation of health insurance (either employer-paid extension beyond COBRA or subsidy of COBRA premiums), outplacement services (career coaching and job search support), accelerated vesting of some equity, and agreement to pay out accrued but unused paid time off. Negotiating these components can materially affect the total value received.
Employees who receive severance should understand the tax treatment: cash severance is ordinary income taxable in the year received (or as constructively received if not immediately paid). It is subject to federal, state, and FICA taxes. Negotiating to receive severance over multiple calendar years, rather than in a lump sum, is sometimes possible and can reduce the tax impact in very large packages.