Unemployment insurance can be a boon when you're suddenly laid off, but getting severance pay may pull that financial cushion out from under you.
Like an unemployment check, severance pay is also intended to ease your transition to your next job. Yet some states may ask you to choose between the two.
So when and how does severance affect unemployment insurance? It depends on your particular situation, including which state you live in. Here are a few possibilities:
1. It May Have Little to No Effect on Unemployment Benefits.
Some states do not consider severance payments when determining eligibility for unemployment insurance. This may be true in states where it is also required to give employees some sort of severance after a lay off.
In California, for example, the payment of severance -- either in lump sum or intervals -- does not affect a worker's eligibility to receive unemployment insurance benefits. However, in California you must inform the state of your receipt of a severance when applying for unemployment benefits.
2. It May Reduce or Be Deducted From Unemployment Benefits.
Many states will use severance payments as a way to deduct or reduce -- but not necessarily deny -- your unemployment insurance. Michigan, for example, allows a worker to be paid unemployment benefits as
long as the severance amount is less than 1.6 times the worker's weekly unemployment payment. If it is less than this amount, the state will reduce payments based on the severance payment amount.
Some states will continue to pay unemployment while an employee is receiving severance payments, but will subtract the weekly severance amount from the weekly unemployment amount. In many cases, this leaves the worker receiving very little in the form of government unemployment benefits.
3. It May Disqualify a Worker From Unemployment Benefits.
Other states take a harder look at severance pay, especially if the payments are equal to or greater than what you may receive via unemployment. In New York, for example, you may not receive unemployment benefits unless your weekly severance payments are less than your maximum weekly benefit amounts. Benefits may continue again once you stop receiving severance payments, but you must notify the state if you receive any severance payments.
Texas, on the other hand, will not allow any unemployment payments while a worker is receiving any form of severance pay. But even in this scenario, unemployment benefits are only barred or delayed for the period that you receive unemployment.
If you're unclear on your state's laws, contact an experienced government program attorney in your area to discuss your options.