How to Account for Termination Benefits

In response to COVID-19, many entities have reduced employee headcount to remain in business. As a result, it’s more important than ever to understand how to account for termination benefits. This includes carefully considering which types of benefits are being provided and the overall timing of recognizing those benefits, ensuring you are recording them in the appropriate period.

Below are key benefits to consider, both during employment and after, and how to account for them.

New Benefits Offered During Employment

The Families First Coronavirus Response Act (FFCRA) established an emergency two week paid sick leave requirement. An employer now may be required to accrue sick leave if they make the sick payments vest. Vested rights are those for which the employer has an obligation to make payment even if an employee is terminated.

Benefits Offered After Employment

Benefits provided after employment ends require different accounting treatment. Consider the following:

• Contractual termination benefits. Terminations related to the pandemic are unlikely to fall into this category.
• Special termination benefits. These are benefits provided to an employee as an incentive to elect voluntary termination. Typically, voluntary termination benefits are accrued when the employee accepts the offer. If the employee is expected to provide services after the acceptance of the offer, then the expense would be recognized evenly over that service period.
• Other postemployment benefits. Typically, benefits covered in this category are salary continuation, severance benefits, job training/counseling, and continuation of benefits such as health, disability and life insurance. These are generally accrued when the:
  • Employer’s obligation is based on services already rendered.
  • Company is obligated to pay these benefits upon termination based on benefits outlined in an employee handbook.
  • Amount is probable and reasonably estimable.
• One-time termination benefits. These are benefits typically not based on a plan the company already had in place, and they are recorded upon communication to the employees.

When it comes times to terminate an employee, whether during or after the pandemic, be sure to carefully consider the termination benefits you are providing and how you are recording them to remain compliant with your financial reporting requirements.

Contact Tina Dzik at tdzik@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.