As of June 2014, Pennsylvania’s unemployment rate was 5.6%, the lowest rate since September 2008. This is great news, but regardless of the state of the economy, employers will always have to deal with employee turnover and associated Unemployment Compensation (“UC”) claims. The receipt of severance payments and/or retirement benefits can affect the amount of UC benefits an otherwise eligible employee is entitled to receive. Understanding the nuances of the law in this area will allow employers to better serve their employees and their bottom line.
Generally speaking, employees who lose their jobs through “no fault of their own” (e.g. layoffs, facility closure, etc.) may file for UC benefits. If an employee earned enough money during the previous year and is ready, willing, able, and actively seeking to return to work, he or she will be eligible to receive UC benefits.
Under Pennsylvania law, the amount of UC benefits former employees are eligible to receive can be greatly reduced — to zero in some instances — if the employees receive severance payments. Many employers, by contract or otherwise, provide employees with severance or “separation” pay in order to soften the blow of termination, especially in the case of layoffs. Severance often acts as a financial cushion, which allows a departing employee to meet his or her financial obligations while hunting for a new job. In practical effect, severance pay often serves the same purpose as unemployment benefits.
Prior to 2012, former employees could receive large severance packages and remain eligible for full UC benefits. Act 6 of 2011 changed that, and now severance pay may serve as an offset against UC benefits. Former employees that receive severance pay in an amount that exceeds 40% of Pennsylvania’s average annual wage will have their weekly UC benefits offset according to a statutory formula. The offset amount is allocated to the weeks immediately following separation from employment, in an amount equal to the former employee’s full-time weekly wage.
For example, consider Joe Employee who received a $40,000 severance. In 2013, 40% of Pennsylvania’s average annual wage was roughly $18,000. Therefore, Joe will have $22,000 offset from his UC benefits in the first weeks following employment. Joe earned $1000 per week, so he is ineligible to receive UC benefits for the first twenty-two weeks following employment separation. Under the statute, Joe is only entitled to receive regular UC benefits for twenty-six weeks following separation; so, as you can see, Joe will only receive four weeks of UC benefits. A severance payment of $44,000 or more would completely eliminate Joe’s ability to collect UC benefits.
Similarly, a former employee’s actual receipt of pension, retirement, annuity, or other similar periodic payments (“retirement benefits”) can also result in UC offsets. An employee that actually receives retirement benefits under a plan maintained or contributed to by an employer, will have his or her UC benefits offset as follows: (1) if the retirement account was entirely contributed to by the employer, then 100% of the pro-rated weekly benefit amount serves as an offset; (2) if the employee contributed to the plan, in any amount, then 50% of the pro-rated weekly benefit amount will serve as an offset.
The key is that the trigger for UC deductions is actual receipt of the retirement benefits, or possibly becoming eligible to receive such payments without incurring a penalty. Consider 401(k) plans as an example. Individuals under the age of 59 ½ incur a 10% penalty for withdrawing funds from their 401(k); according to case law, any penalized withdrawals will not affect UC benefit eligibility. Conversely, anyone over the age of 70 ½ must begin taking 401(k) distributions, and therefore, the amount of benefits they receive will reduce their UC eligibility.
The rules governing individuals between the ages of 59 ½ and 70 ½ are not as clear. These individuals are eligible to make 401(k) withdrawals penalty-free, but are not required to do so. Arguably, under the plain language of the UC law, individuals who do not actually receive payouts from their retirement accounts, whether they have a choice or not, are not subject to an offset. However, the legislature and the courts have not given a definitive answer to the question.
Here are the big takeaways. If you give former employees who would otherwise be eligible for UC benefits a large severance package, they may not receive any UC benefits. This rule is clear cut. The retirement benefit rules are different, and to the extent that plan rules and federal law permit, creative employers can take advantage of the UC rules to design separation packages that allow employees to receive both separation benefits and UC benefits.