Outplacement assistance benefits range from one-on-one counseling and group meetings to online job-search tools. According to outplacement experts, outplacement assistance not only benefits those who are laid off, but it also indirectly assists the company by maintaining morale among employees who remain after a layoff, and helps stem employment-based lawsuits from those who were let go. By and large, outplacement assistance is tax-free to employees. But there are pitfalls, which can turn a perfectly good tax-free benefit into taxable compensation.
Fundamentals for tax-free treatment. All the good will generated by offering outplacement assistance will go down the tubes if former employees find themselves staring at a surprise tax bill next winter. Keeping your outplacement assistance within these parameters will guarantee that these benefits will remain tax-free. Here's what you need to do.
Outplacement assistance must be provided in kind. If you give employees cash allowances instead of access to services, the cash is considered additional pay and is fully taxable. Similarly, if the value of the outplacement assistance reduces employees' cash severance pay (or other taxable compensation), the difference between the full amount of severance and the remaining amount of severance is fully taxable.
Outplacement services must be based on employees' needs. A 26-year-old employee who's been with the company for a year may need a different level of services than a VP who's been there for 25 years. Upshot: Provided all employees have access to some service, you may safely provide longer-term employees and terminated executives with greater levels of assistance.