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Questions & Answers

The Income Replacement Payment

1. How is the Income Replacement Payment calculated?         

  • For salaried employees (Academic and Professional Exempt Staff) who are eligible for the 6-month income replacement payment, the amount is 6 times the monthly base salary. 
  • For salaried employees who are eligible for the 10-month income replacement payment (Tenured faculty, Clinical faculty, and Librarians), the amount is 10 times the monthly base salary.
  • For non-exempt employees (e.g., Professional Overtime Eligible Staff and Support and Service Staff), this amount is 26 times weekly base wages.
  • Base salary/wages does not include overtime, supplemental pay, summer pay, call-back pay, shift differentials, or any other non-base salary or wages.

2. What can I use the Income Replacement Payment for?

The payment may be used in any way that the participant wishes.

3. When is the Income Replacement Payment paid?

It will be paid within one month of the employee’s separation date.

4. Can I avoid paying taxes on the payment by putting the money into a retirement savings account or a tax deferred annuity?

  • The Income Replacement payment is taxable income subject to federal, state, and local taxes.  Per IRS rules, such lump sum payments are not eligible for salary deferral into a retirement savings account or a tax deferred annuity.
  • Separating employees who are not already maximizing their contributions to the IU TDA Plan and/or the IU Retirement Savings Plan, may be able to allocate tax-deferred contributions to these plans from base compensation received during the months prior to separation. See the Web page IU TDA Plan and the IU Retirement Savings Plan for more information.

5. Do I receive PERF or IU Retirement Plan contributions on the Income Replacement Payment?

PERF and IU Retirement Plan contributions are not made on the Income Replacement Payment.

6. How will my Income Replacement Incentive payment be taxed?

ERIP participants' Income Replacement Incentive payment will be taxed at normal rates, except for the federal rate, which will be 25 percent. (Normally, federal tax rates vary based on the employee's income bracket but for this one-time payment the rate is a flat 25 percent regardless of the tax bracket.)

Applicable taxes for most participants will be:

Federal: 25.0%
State:   3.4%
Social Security:   4.2%*
Medicare:   1.45%
Local: varies** See list of Indiana counties on IN.gov Web site

 

*Social Security was reduced to 4.2% for the 2011 tax year only and will revert back to 6.2% beginning 1/1/2012.  Incentive payments made for a separation date of 12/31/2011 will be taxed at 6.2%. Income above $106, 400 is not taxed by social security.

**Local taxes are determined by the county in which the employee works and lives; there is a resident and non-resident rate for each county.

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