An executive severance package is taxed as ordinary income, and Mariner Wealth Advisors plans those taxes around timing: the year each payment lands in sets your bracket and, two years later, your Medicare premium. Severance counts as wages. It is subject to federal income tax and FICA (Social Security up to the $184,500 wage base the SSA set for 2026, plus Medicare), and your MAGI in the severance year sets your Medicare Part B premium two years later.
The decision usually shows up small. HR sends an agreement with a lump sum or salary continuation, a release to sign, and a deadline that feels short. You pick a payment form in an afternoon, and it can decide which tax year a six-figure payment lands in.
Mariner Wealth Advisors handles this for its own clients by laying out every payment the agreement and the deferred plans will make, year by year, before anyone signs. This article follows one hypothetical executive through that exercise, with a focus on what can go wrong and what can still be changed.
By Sarah Chen, CFP — Senior Financial Planner | Reviewed by Linda Foster, CPASarah has guided families through retirement transitions for over fifteen years, specializing in tax-efficient withdrawal strategies.
Withholding on a $400,000 severance is a placeholder, not the tax. If you land in the 37% bracket, plan an estimated payment before April rather than waiting for the bill.
Daniel Reyes, CPA and Tax Director at Mariner Wealth Advisors
We'd rather leave a year of room under the top bracket than squeeze every dollar into one year, because a health event or a law change is easier to absorb when income isn't already stacked.
Priya Nandakumar, CFP® and Lead Advisor at Mariner Wealth Advisors
Most of the damage we see comes from deadlines that start at separation: a 31-day life insurance conversion window or a three-month ISO exercise period doesn't wait for the tax plan.
Marcus Hale, Senior Financial Planner at Mariner Wealth Advisors
Three ways to take the same $400,000
Hypothetical: Sofia, 63, is widowed and files single. She just left a regional insurer after a reorganization with no plans to work again. She has already earned $200,000 of salary this year, has a $400,000 severance offer, and holds $700,000 of former employer stock in her 401(k) with a $90,000 cost basis. A net unrealized appreciation (NUA) distribution would add that $90,000 basis to her ordinary income. She expects $40,000 of other income in year two.
All three options use one assumption: Sofia files single, so the IRS 37% bracket starts at $640,600 for 2026. The Part B figures use the 2026 Medicare tiers, applied for illustration to the years she is 65 and 66.
Option A takes the lump sum and the NUA distribution in year one: $200,000 + $400,000 + $90,000 = $690,000. That puts $49,400 above $640,600 at 37%, about $18,278 of tax at the top rate.
Option B splits the severance evenly over two years. Year one is $200,000 + $200,000 + $90,000 = $490,000 and year two is $200,000 + $40,000 = $240,000. Neither year reaches 37%, but both land in the $649.20 Part B tier, so two years cost $15,580.80.
Option C takes the lump sum in year one and moves the NUA distribution to year two. Year one is $200,000 + $400,000 = $600,000, year two is $90,000 + $40,000 = $130,000. No income reaches 37%, and Part B costs $8,278.80 + $3,409.20 = $11,688.
Spreading income is not automatically safer. Option B puts both years in the $649.20 tier, while Option A puts only one year in a high tier.
On paper, Option A has the lowest Part B cost, $10,713.60. Sofia pays for it with $18,278 of top-bracket tax and has no room to move if a year goes badly. If you want this two-year comparison done with your own figures, the calculator here will rerun it.
Before Mariner Wealth Advisors suggests a payout schedule, it models two years of taxable income and the Medicare tier each year falls into. It does not lean on a forecast of where rates or markets are heading.
What each option costs
What the numbers don't show
If your final salary, severance and any income you control (an NUA distribution, an option exercise) would together top $640,600 single or $768,700 joint in one year, move the income you control into the next year before you negotiate how the severance itself is paid.
| Option | Income above $640,600 | Part B tier, ages 65 and 66 | Flexibility left |
|---|---|---|---|
| A: lump sum + NUA in year 1 | $49,400 at 37% | $689.90, then $202.90 | Low: one big year |
| B: severance over 2 years | None | $649.20 both years, $15,580.80 | Medium: payments locked |
| C: lump sum, NUA in year 2 | None | $689.90, then $284.10, $11,688 | High: NUA timing is hers |
Can you undo a severance term after signing?
Some terms can be undone, but only inside short windows. If you're 40 or older, you generally get 21 days to consider an individual release that waives age claims (45 days in a group program) and 7 days to revoke it after signing. Payment timing usually locks once you sign.
Severance and deferred pay governed by Section 409A can't be accelerated or re-timed later at will. Treat the schedule in the agreement as final.
Several deadlines start at separation and can't be restarted. Incentive stock options generally lose ISO treatment if they aren't exercised within three months. Group life coverage usually has a short conversion window, often 31 days; check the certificate.
And one door closes for good. If the 401(k) holding company stock is rolled to an IRA first, the NUA opportunity is gone.
Does a severance year raise Medicare premiums two years later?
It does if severance pushes your MAGI above the first IRMAA tier. Medicare Part B for any year is priced on income from two years earlier, so a severance year at 63 sets the premium you pay at 65. For 2026, single filers at $500,000 or more pay $689.90 a month against the $202.90 standard premium.
Part of the surcharge can be reversed. The SSA treats retirement or a work stoppage as a life-changing event. Filing Form SSA-44 asks it to price your premium on your lower current-year income. Keep the separation letter, because it is the proof the SSA will want.
Health coverage is the other exposed spot. COBRA generally lasts up to 18 months, so someone leaving at 63 can face a gap of several months before Medicare at 65. Marketplace subsidies are income-based, and a large severance year can wipe them out for that year.
Beliefs about severance pay that don't hold up
Look at the third column of the table: that is where each rule turns into an action.
Flat withholding is not the final tax. Employers often withhold on severance at a flat supplemental rate, but you owe tax at your marginal rate. On a $400,000 payment, that gap can mean a check to the IRS in April.
Severance is not exempt from FICA either. It is wages for Social Security and Medicare purposes.
Signing is not final the moment the pen lifts if you're 40 or older, because of the 7-day revocation. But the payment schedule usually is final once the revocation period ends.
| Common belief | What the rule says | What it means for you |
|---|---|---|
| Withholding covers the tax | Flat supplemental rate, actual tax is marginal | Plan an estimated payment before April |
| Severance skips FICA | Severance is wages for FICA | Social Security applies up to $184,500 |
| Spreading payments always helps | Part B uses MAGI from two years earlier | Two high years can mean two surcharges |
| I can re-time payments later | 409A restricts changes to timing | Treat the signed schedule as final |
| Signing ends my options | Age 40+: 7 days to revoke | Use the window to recheck the numbers |
Deferred compensation that pays out at separation
A nonqualified deferred plan pays on the schedule you elected years earlier. Separation often triggers that schedule, so a lump-sum election can land in the same tax year as the severance. Sofia's numbers would look very different with an extra $300,000 in year one.
Specified employees of public companies generally have separation payments under 409A delayed six months. Depending on the separation date, that can push a payout into the next tax year. Sometimes that helps, sometimes it stacks onto a year you wanted light.
Ask HR for the plan document and your election forms before signing the release. The question to answer is which calendar year each payment lands in, not just how much it is.
The choice between a lump sum and installments is covered on our deferred compensation planning page. If the employer's finances worry you, the article on NQDC plan employer bankruptcy risk covers what happens to your deferrals.
Does being widowed move the top bracket closer?
Yes. A widowed executive without a dependent child files single, so the IRS top 37% rate starts at $640,600 instead of $768,700 on a joint return. The same severance therefore reaches the top bracket about $128,000 sooner. Sofia's $690,000 year crosses that line; the same income on a joint return would not.
Group life insurance usually ends with employment. If heirs were counting on it, convert or replace it inside the policy's conversion window. That decision can't be made up later if health changes.
Update beneficiary designations on any new IRA the day it opens. Stock taken out through an NUA distribution gets no step-up on the NUA portion at death, which matters to adult children who inherit it.
An adult child helping a parent can do the most useful thing early: list every deadline in the agreement with its date, and collect the plan documents.
First moves before the release is signed
Do these in order. The first two take an evening and cost nothing.
Whatever you do with the cash, all investing carries risk and you can lose money, including what you put in. That's one reason to keep severance cash diversified and out of former employer stock. The article on company stock mistakes covers why.
- Write down the consideration and revocation dates, plus the ISO exercise and life insurance conversion deadlines.
- List every payment the agreement and your plans will make, with the calendar year each lands in: final salary, severance, bonus, deferred comp, NUA basis.
- Total each year and compare it with $640,600 single or $768,700 joint, and with the IRMAA tiers.
- Ask the employer whether payment form or timing is negotiable, and have an employment attorney review the release itself.
The part you can do alone, and the part for Mariner Wealth Advisors
You can collect the documents, calendar the deadlines and total each year's income on your own. Many employers won't change the form or timing of severance, especially in a group program, so expect some of this to be a no.
Modeling two or three payout schedules against brackets, Medicare tiers, an NUA decision and deferred comp elections is where a conversation with Mariner Wealth Advisors is worth having. Do it before the revocation window closes, using the request form on the site.
Brackets and IRMAA tiers change every year, and a successful SSA-44 appeal can lower the age-65 surcharge, so the comparison has to be rerun with current figures. This page doesn't cover state income tax or whether the release terms are fair; that's a question for an employment attorney.
Spreading income is not automatically safer: it can drag two years into a Medicare surcharge tier instead of one.
What people ask about executive severance package taxes
Can I change how my severance is paid after I sign the release?
If the total is the same, does it matter whether severance comes as a lump sum or as salary continuation?
Is severance pay subject to Social Security and Medicare tax?
Will a large severance year raise my Medicare premiums later, and can I appeal it?
What should an adult child check when a widowed parent gets a severance offer?
Can I collect unemployment benefits while I'm receiving salary continuation?
Primary sources
This content is general information and education. It is not individual investment, tax or legal advice. Investing involves risk, including the possible loss of principal. Before making any financial decision about your equity awards or assets, consult a professional adviser who knows your full situation.