How to design a severance plan: formulas by level, minimums, caps and the rules that apply

How should we structure severance pay?

Set a written formula by level before you need it: a number of weeks, often more per year of service after a tenure threshold, with a minimum and a cap for each level. Decide how it's paid, what continues (health coverage, outplacement) and what the employee signs in return. Most US employers work this way: in LHH's 2027 benchmark study of 600 US leaders, 92% of organizations pay severance and 82% add weeks per year of service past a threshold. No federal law requires severance, so the formula is a business decision, but once written, apply it the same way to everyone.

What employers pay, by level

Level	Average minimum (weeks)	Average maximum (weeks)	Share eligible for severance
CEO	6.0	24.2	70%
Senior management	5.3	20.5	70%
Directors	5.4	21.1	71%
Managers	4.8	19.0	66%
Supervisors	4.7	15.9	67%
Professional and technical	4.4	16.6	67%
Exempt	4.3	15.3	54%
Non-exempt	4.0	7.5	51%

Exhibit 1. Source: LHH, U.S. Severance and Separation Benchmarks: benchmark explorer titled 2027, data file labelled 2026 (Censuswide survey of 600 US HR and business leaders, September 2026). Minimums among the 52% of organizations that set one; maximums among the 29% that set one.

The averages hide a wide range. Private organizations set much higher CEO caps than public ones (33.6 weeks against 9.7 in the LHH data), and midsize organizations higher than large ones (32.6 against 10.2). Benchmark against organizations like yours.

How employers build the formula, in the same study: 40% weigh age, service, level and the person's ability to find new work; 28% use position level and years of service; 23% give flat weeks by level; 8% have no set formula. To see what a given formula pays one person, use the calculator below; the example is a $120,000 salary and 8 years at 2 weeks per year, a 4-week minimum and a 26-week cap.

Severance by formula

Annual base salary

$

Years of service

Weeks per year of service

Minimum weeks

Maximum weeks

0 = no capPartial yearsCompleted years onlyCredit partial years

Weekly pay (salary ÷ 52)

$2,308

Weeks of severance

16

Severance before tax

$36,923

Educational estimate, not legal advice. Nothing you enter leaves this page.

Executives at public companies

	CEO	Other named executives
Most common multiple, not tied to a change in control	2x pay (59%)	1x pay (45%)
Most common multiple, change in control	3x pay (47%); 2x (35%)	2x pay (54%)
Pay defined as base plus bonus (non-change-in-control)	68%	58%
Health continuation, most common period (non-change-in-control)	24 months (37%)	12 months (43%)

Exhibit 2. Source: Meridian Compensation Partners: 2024 Study of Executive Severance Arrangements Not Related to a Change in Control (S&P 500, FY2023 proxies) and Study of Change-in-Control Severance Arrangements (2023).

Proxy advisers watch the top end. ISS treats severance above 3 times base salary and bonus as a problematic pay practice in new or amended agreements, along with single-trigger change-in-control payments and excise-tax gross-ups. Separately, section 280G applies once change-in-control payments reach 3 times the executive's "base amount," their average taxable pay over the last five years. The excess parachute payment is everything above 1 times the base amount: the executive owes a 20% excise tax on it (section 4999) and the company loses its deduction for it. This isn't only a public-company rule. Small business corporations are exempt, and a private company can exempt payments with approval of more than 75% of disinterested shareholders after adequate disclosure.

How severance is paid, and on what conditions

Practice	Share of organizations
Paid as a combination of methods	35.8%
Paid as salary continuation	26.9%
Paid as working notice	23.8%
Paid as a lump sum	13.5%
Require a release in exchange for severance	63.5%
Stop payments once the person finds new work	61.7%
Allow employees to appeal or negotiate	61.0%
Enhance severance for those who sign a release	59.8%

Exhibit 3. Source: LHH, U.S. Severance and Separation Benchmarks: benchmark explorer titled 2027, data file labelled 2026 (600 US leaders, September 2026).

Salary continuation keeps people on payroll (and often on the health plan) longer; a lump sum is simpler and ends the relationship. Stopping payments when someone finds new work saves money but adds tracking, and it can feel punitive to the people you most want to land quickly.

The rules that shape the design

ERISA. A one-time lump sum triggered by a single event usually isn't an ERISA plan; the Supreme Court held in Fort Halifax (1987) that it needs no ongoing administrative scheme. An ongoing written policy with eligibility rules and a formula usually is. If it's a plan, it needs a summary plan description (within 90 days of someone becoming a participant), claims procedures (a decision within 90 days, at least 60 days to appeal), and a Form 5500 once it has 100 or more participants at the start of the plan year. It stays a welfare plan, not a pension plan, if payments don't exceed twice annual pay and finish within 24 months (29 CFR 2510.3-2(b)).

Tax timing (409A). Severance paid by March 15 of the year after the year it vests is a short-term deferral. Installments over a longer period fit the separation-pay exception, which covers only involuntary separations (including resignations for good reason) and window programs, if they total no more than two times the lesser of the person's prior-year pay or the 401(a)(17) limit ($360,000 in 2026, so $720,000) and finish by the end of the second year after separation. Small payments up to $24,500 in 2026 are also exempt. Watch release timing: the IRS's position is that when the consideration and revocation period can straddle two tax years, payment must be made in the later year, so the employee can't choose the year of payment by when they sign (IRS Notice 2010-6, as modified by Notice 2010-80).

Taxes on the payment. Severance is wages: income tax withholding, Social Security, Medicare and FUTA apply (IRS Publication 15).

The release. For anyone 40 or older, a release of age claims needs at least 21 days to consider (45 in a group program), 7 days to revoke and, for groups, written disclosures. See OWBPA release timelines.

State rules. New Jersey requires one week's pay per year of service in covered mass layoffs, and Maine on covered closings. See the WARN Act check.

What else goes in the package

• Health coverage: whether the company pays any COBRA premium, and for how long. See should we pay COBRA in a severance package.
• Outplacement: a named coach, starting the day of the notice. See how long a program should last and the questions to ask every provider.
• Bonus, equity and accrued vacation: what's prorated, what vests, and what state law already requires (several states require vacation payout; see the total cost of a reduction in force).

For the employee's view of the same decisions, see is my severance offer typical.

Sources

1. LHH, 2027 U.S. Severance and Separation Benchmarks (benchmark explorer and data), accessed Oct 30, 2026.
2. LHH, Severance and separation practices benchmark study (article, October 23, 2026), accessed Oct 30, 2026.
3. Meridian Compensation Partners, 2024 Study of Executive Severance Arrangements Not Related to a Change in Control, accessed Oct 30, 2026.
4. Meridian Compensation Partners, Study of Change-in-Control Severance Arrangements (2023), accessed Oct 30, 2026.
5. ISS, United States Proxy Voting Guidelines, Benchmark Policy (effective February 1, 2026), accessed Oct 30, 2026.
6. US Department of Labor, Severance Pay, accessed Oct 30, 2026.
7. Legal Information Institute, Cornell Law School, Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), accessed Oct 30, 2026.
8. Legal Information Institute, Cornell Law School (eCFR text), 29 CFR 2510.3-2(b), severance pay plans, accessed Oct 30, 2026.
9. Legal Information Institute, Cornell Law School (eCFR text), 29 CFR 2520.104-20 and 2520.104b-2, annual report exemption and summary plan description, accessed Oct 30, 2026.
10. Legal Information Institute, Cornell Law School (eCFR text), 26 CFR 1.409A-1(b)(4) and (b)(9), short-term deferrals and separation pay plans, accessed Oct 30, 2026.
11. Internal Revenue Service, Notice 2025-67: 2026 limitations adjusted as provided in section 415(d), accessed Oct 30, 2026.
12. Internal Revenue Service, Notice 2010-6, relief and guidance on correcting section 409A failures, including payments conditioned on a release (Internal Revenue Bulletin 2010-3), accessed Oct 30, 2026.
13. Internal Revenue Service, Notice 2010-80, modifications to the section 409A correction program, including release-timing provisions (Internal Revenue Bulletin 2010-51), accessed Oct 30, 2026.
14. Legal Information Institute, Cornell Law School, 26 U.S.C. 280G and 4999, golden parachute payments, accessed Oct 30, 2026.