A severance package provides you with extra income in the form of a lump sum or a weekly payout to help tide you over while you search for another job. Though unemployment insurance is a federal program, each state makes its own rules for qualifying for benefits. A severance package can affect how and when you’re entitled to receive unemployment benefits, but it depends on the type of severance you receive and the state in which you’re applying for benefits.
Types of Severance
When your employer offers a severance package, you might receive a one-time, lump sum payment, or you might receive an amount equivalent to all or part of your usual weekly pay for a set number of weeks after you lose your job. Sometimes these payments are referred to as dismissal pay, separation pay or payment in lieu of notice, but most unemployment departments treat these payments as severance packages. Severance packages can also include non-monetary benefits, such as continued health insurance or assistance creating a resume and finding another job.
Unemployment and Wages
As soon as you are no longer employed, you’re entitled to file for unemployment benefits. The unemployment office in your state will look at your employment history and determine how much you’re entitled to receive in the form of weekly unemployment benefits. Your benefit is usually only a percentage of the amount you earned while you worked. In order to be eligible for benefits, you must look for work, be available for work and accept all reasonable offers of work in your field. Each week (or every two weeks, in some states) you’ll apply for benefits and you’ll receive a payment. If you do any work for pay during the week, the amount you earn will reduce the amount of benefits you receive. If you earn more from work than you would have received in benefit, you get no check that week, but you’re still eligible to apply for benefits the next week, provided you haven’t found a full-time job by that time.
Treatment of Severance
Most states treat severance pay like wages, in that the amount you receive in severance reduces the amount of your unemployment benefits, just as if you’d worked and received wages that week. But how long the severance will reduce your unemployment benefit depends on how your state views the severance payout. If your employer pays you a lump sum and doesn’t designate it as payment for X number of weeks, some states, such as Michigan, will reduce your unemployment benefits only in the week you actually receive the payment. Other states, such as Maryland, will divide the lump sum by your weekly wages to determine how many weeks’ pay the severance covers, and will reduce your unemployment benefits for that many weeks. At the end of that time, you’re eligible for benefits if you’re still unemployed, but until then you’re expected to live off the severance pay. In all states, if your employer pays out severance over a number of weeks, or if the employer designates the severance as representing X weeks’ pay, then the state reduces or eliminates your benefits for that number of weeks.
When you know you are going to be unemployed, call or visit your state’s unemployment office. The caseworkers will explain how severance packages are handled in your state and advise you whether you should apply for unemployment right away or wait until your severance period ends. They’ll also explain the requirements for filing for unemployment. In many states, you can file online or over the phone. You may be asked to present proof that you are looking for work and applying for jobs.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.