HR 4.0

Pay out severance pay during employment?

October 20, 2021 - 2 minutes reading time
Article by Marcel De Dood & Reintjan Weeber

In this payroll case study, we zoom in on severance pay. What do you need to consider and when can you pay it out?

Annabel has worked for her employer for fourteen years. She had a great career. In the beginning as a communications officer, later she climbed to manager of Marketing & Communications. However, after the arrival of a new director, the chemistry wore off. Annabel and her employer are therefore parting ways. After tough negotiations, both parties sign the settlement agreement. Both Annabel and her employer are satisfied with the outcome.

The agreement then falls on the desk of payroll administrator Tim "Please execute what we agreed upon." Annabel will remain employed through June 2021. However, she is released from work immediately. Severance pay is due as early as February 2021. "Strange," Tim thinks, "that is always paid out at the final settlement, isn't it? What now?"

The following questions go through Tim's head:

  • Is this income from previous employment something for the green table? Or should it be on the white table?
  • What is actually the difference with an additional bonus?
  • How does the Tax Authorities see this?
  • Do I still have to take into account the Early Retirement Scheme (RVU)?

That last question is quickly answered. Actually, the name "Annabel" says it all: it wasn't popular before 1960, so Annabel could never be right before the state pension age. The feeling is correct, Annabel was born in 1981. The other questions Tim consults with colleagues and the law & regulations specialist. So that’s how he solves it.

The difference between a severance payment and a regular bonus is that the bonus is in return for performance and the severance payment is compensation for wage loss and/or compensation to bridge the gap to a new employer.

As a general rule, the Tax Authorities considers a settlement agreement to be leading in determining whether there is a severance payment or something else .

So Tim pays out the severance pay in February on a separate Income Ratio with code type IKV 62. This IKV gets a start and end date on the same day (the day of payout) and Tim applies the green table for special benefits. The regular salary payment continues on the current IKV through June 2021. Splitting the payments into two separate IKVs is mandatory in this case because the green and white tax table may not appear in one IKV.

Lesson learned

Already during the employment, the severance payment can be paid. This must be on a separate Income Ratio and must result in a separate payment.

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