Buyout Vs Retirement Packages

A spread of old pennies.

There are frequently two types of separation monetary payments made to leaving employees who are not departing on the basis of quitting, termination or for medical reasons. These two categories are retirement and buyouts. They are unique and different from each other and should not be confused. That said, for those who are nearing the end of their career, both options can seem attractive, depending on the individual employee’s retirement plans.

Buyout Packages

Also known sometimes as “early retirement packages,” buyout packages are essentially an option exercised by an employer to offer a lump sum payment to an employee to sever her employment relationship voluntarily. The amount is above and beyond current earnings, so it can be an incentive for an employee to leave service earlier than planned. Eligible employees are those with good standing, and the buyout plan has nothing to do with any disciplinary procedures. Most buyouts are voluntary before a forced layoff plan is implemented.

Because the lump sum payment is considered income, you must report it as income for tax purposes. Buyout payments also are frequently paid as an after-tax payment; however, it may be possible to have an employer deposit the amount or a portion in a 401(k) or similar employer retirement plan to avoid taxes in the immediate tax year.

Retirement Packages

Unlike a buyout package, a retirement package is designed to reward an employee after a set number of years of service is provided to an employer. It is considered a labor benefit, and specific criteria need to be met before it can be paid. The employee must be vested, must have served a set number of years of service and must have chosen a specific payout approach once separation occurs. The retirement package is not paid until the employee actually retires from service. The employee is not forced to retire by the employer and can choose when to implement the process.

Historical retirement packages were paid in the form of a pension. The employee at retirement usually could choose from a lump sum payment, a full pension and survivor benefit for a spouse, and a modified lower pension with the same amount guaranteed for a surviving spouse on death. The exact specifics varied by company and what they would offer. Today’s retirement packages are in the form of 401(k)s and similar accounts.

Most retirement accounts are in the form of pretax funding, so a departing employee will need to decide if he wants to take distributions and pay taxes or rollover the package to an individual retirement account, thereby deferring taxes until later.

Who is in Charge of Implementation

Buyout packages can be implemented by any employer on its employees. Frequently, private-side employers use this offer to get higher-paid employees in units designated surplus off the books. This avoids the confrontational and bitter approach of layoffs and possible litigation since the employees choose to put the package into effect. Due to civil service restrictions, government agencies are frequently barred from implementing buyout packages on public employees unless they receive special legislative permission.

Retirement packages are implemented both with public and private-side employers. As noted above, they are frequently established for new employees as self-funded or matching-funded 401(k) accounts and similar. Traditional defined benefit packages such as pensions are few and far between now, with only government agencies still offering such packages to new hires.

Package Cost

Buyout packages are one-time expenses, but they can be very expensive in the year they are implemented. Depending how many employees take up the offer, the general buyout package usually represents 6 months to a year of full salary for the affected employee. However, once the employee is separated and paid, the company no longer has the payroll cost for the position, so the expense begins to be offset after a year.

Retirement packages were historically much more expensive over time, since pensions had to be funded until the retired employee died. Today’s retirement packages such as 401(k)s are only funded while deposits occur, so once the employee is separated, the company has no further obligation to pay into the employee’s account. Not surprisingly, many companies have switched to such plans for employees’ retirement benefits.

Rollout

Retirement packages need to be defined and detailed to an employee at the time of hire. It is considered a labor benefit, so an employee needs to know what she is working for in terms of compensation perks when starting employment.

Buyout packages are determined when management decides they can be helpful in reducing overall staffing costs. Buyouts can happen at any time management determines they are useful. Once announced, management should follow through, as buyouts usually send a strong signal to everyone that the entity is serious about reducing staffing levels.