The term termination benefits refers to compensation provided to individuals that have severed their employment relationship with a company. Termination benefits are typically classified as contractual, one-time, special and other postemployment.
Under certain operating conditions, a company may institute programs aimed at encouraging employees to voluntarily terminate employment. Alternatively, a company may deem it necessary to involuntarily sever its employment relationship with a group of individuals. When this occurs, the company may provide early termination benefits to those affected individuals.
Generally, termination benefits fall into one of the following four categories:
- Contractual: includes those benefits provided as part of an existing plan that outlines the assistance due employees upon termination of employment. For example, the company may provide employees with two weeks of severance pay for every year of service with the company. Contractual termination benefits are usually triggered by a specific event.
- One-Time: includes those benefits provided to employees involuntarily terminated as part of a program that includes the payment of a one-time benefit.
- Special: includes those benefits offered to employees volunteering to terminate their employment; typically consisting of a short-term offer by employers looking to downsize their workforce.
- Other Postemployment Benefits (OPEB): includes employer-sponsored benefits such as vision, dental and healthcare insurance, prescription medications, life insurance, as well as legal services. As the name implies, OPEB does not include the costs associated with defined benefit pension plans or other sources of retirement income provided by employers.
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