What’s Included in a Severance Package?

When people talk about a “severance package,” they usually mean the full suite of benefits offered during offboarding—not just a paycheck. A well-rounded package signals professionalism, compassion, and legal foresight.

Typical components include:

• Severance pay: Lump sum or salary continuation for a defined period.

• PTO payout: Accrued vacation or sick leave, depending on state law and company policy.

• COBRA/benefits continuation: Employer subsidies for health insurance premiums to soften the immediate impact of losing coverage.

• Outplacement services: Career coaching, resume writing, and job search support. Providers like TurboTransitions combine AI-powered coaching (via PruE AI) with human support to accelerate reemployment.

• Legal/admin costs: Payroll processing, drafting/reviewing agreements, and HR staff time.

Key takeaway: A severance package should be viewed holistically. The “true cost” often goes beyond severance pay to include benefits, compliance steps, and hidden administrative expenses.

Why You Need a Severance & Benefits Cost Estimator

Budgeting for a reduction in force (RIF) is rarely simple. Finance needs precise cost projections, HR needs visibility into employee-level impact, and Legal needs assurance that policies are applied consistently. A severance cost estimator brings these pieces together.

Key advantages:

• Automates calculations: Apply company policies across an entire workforce instantly.

• Visualizes impact: Breaks costs into buckets (severance vs. PTO vs. COBRA vs. taxes).

• Models scenarios: Compare “what if” options (e.g., 1 week vs. 2 weeks per year, with/without COBRA subsidy).

• Employee-level detail: Ensures accuracy for contracts and compliance.

• Exportable results: Create PDF reports for leadership presentations or CSVs for Finance tracking.

Key takeaway: Instead of guesswork, a calculator provides a data-backed plan that HR and Finance can confidently present to leadership.

How to Calculate Severance Pay

For HR teams without a dedicated tool, calculating severance requires a manual, step-by-step approach:

1. Determine base pay: Annual salary ÷ 52 weeks or hourly rate × weekly hours.

2. Apply policy formula: Example—two weeks of pay per year of service, with caps if applicable.

3. Add PTO payout: Based on state law and internal policy.

4. Include payroll taxes: Federal, state, Social Security, and Medicare apply to severance just as they do to wages.

5. Account for benefits costs: COBRA premiums × duration of coverage the company agrees to subsidize.

6. Factor in outplacement services: Per-employee cost if included.

7. Add administrative/legal costs: Often overlooked but still a real expense.

Key takeaway: While this can be done manually, calculations quickly become complicated at scale. An estimator reduces errors and saves hours of work.

Are Severance Payments Taxable?

Yes. Severance pay is treated as taxable income by the IRS and most states.

• Federal withholding: Lump-sum severance is typically taxed as “supplemental wages,” subject to a flat 22% withholding. Larger amounts (over $1M) may be taxed at 37%.

• Payroll taxes: Employers must still withhold and pay their share of Social Security and Medicare.

• State taxes: Many states impose additional withholding requirements.

Employees may also face different net amounts depending on whether they receive a lump sum or salary continuation.

Key takeaway: Payroll taxes and withholding significantly increase the employer’s total cost. Always factor them in to avoid under-budgeting.

Severance vs. Unemployment Benefits

One of the most common employee questions is how severance impacts eligibility for unemployment insurance.

• Some states delay benefits: Employees cannot collect unemployment until the severance pay period ends (e.g., if severance is paid as salary continuation).

• Other states allow overlap: Employees can receive unemployment even while collecting severance, especially if it is paid as a lump sum.

• Employer communication matters: Confusion about eligibility can frustrate employees. Including an FAQ in the separation packet helps manage expectations.

Key takeaway: Severance doesn’t automatically disqualify employees from unemployment, but the rules vary by state. HR should provide general guidance and direct employees to their state unemployment agency.

COBRA and Benefits Costs After Layoffs

COBRA continuation is often one of the most expensive and overlooked parts of a layoff. Under federal law, employees may continue group health coverage for up to 18 months, but at their own expense. Employers sometimes subsidize part of this cost to ease the transition.

• Average employer cost: According to the Kaiser Family Foundation, family coverage averages $23,968 annually ($1,997/month).

• Cost example: If an employer covers two months of premiums for 50 employees, that’s nearly $200,000 in COBRA costs.

• Additional benefits: Life insurance, disability, and retirement contributions may also carry continuation costs depending on policy.

Key takeaway: Benefits continuation can rival or even exceed severance pay. Include it in every cost projection to avoid surprises.

Using a Severance & Benefits Cost Estimator

Here’s how HR teams typically leverage these tools during planning:

1. Upload employee data: Salary/hourly rate, tenure, PTO balance, benefits status.

2. Set company policy: Define severance formulas, caps, and executive exceptions.

3. Add optional costs: PTO payout, COBRA subsidy, employer taxes, outplacement.

4. Generate report: Produces both a high-level cost summary and detailed breakdowns.

5. Export and share: PDFs for leadership presentations; CSVs for Finance tracking.

Key takeaway: A structured estimator ensures HR, Finance, and Legal work from the same assumptions. It turns a stressful, error-prone process into a clear plan backed by data.

How to Budget for a Reduction in Force (RIF)

RIF costs go beyond severance packages. To budget correctly, consider:

• Direct costs: Severance, PTO, COBRA, outplacement.

• Indirect costs: Legal, compliance, admin time.

• Opportunity costs: Morale and retention impact on survivors.

Using a cost estimator helps quantify direct costs accurately, so leadership can focus on managing indirect and cultural impacts.

Key takeaway: You can’t manage what you don’t measure. Start with accurate direct cost estimates.