Does Early Withdrawal Really Incur a Penalty?

By: Joe Strupp As Tribune Company slashes hundreds of jobs from the Los Angeles Times to the Orlando Sentinel, the severance being offered to most departing employees is not the usual straight payout. Because the Tribune Co. is using an over-funded pension to provide the two weeks' pay for each year of service that the majority of exiting staffers are getting ? whether forced out or not ? the money is actually going into their retirement accounts.

If the former employees want to tap into that money, they have to pay an early withdrawal penalty if they have not reached retirement age ? up to 10%, in most cases.

"Ten percent is a chunk of change," says Lynn Anderson, a reporter and Newspaper Guild leader at The Sun of Baltimore, who took a recent buyout and then left the paper in July. "I would have absolutely wanted to keep it."

But Tribune Senior Vice President/Corporate Relations Gary Weitman says the pension approach is not costing employees more, despite some paying early-withdrawal charges. "It is different," he told E&P, "in the sense that you are not getting a check handed to you, that is true." But, he explains, the eventual payout to employees is the same: "It is a payment made into the cash balance portion of their retirement benefits."

When Tribune was taken over by Sam Zell, the company rolled over all existing employee 401(k) accounts, while creating two new accounts for each worker, Weitman says. Those included an ESOP (Employee Stock Ownership Program) and a cash-balance account into which the company places additional retirement funds. During the current and recent Tribune job cuts, each recipient of a severance payment has had that payment placed in his or her cash-balance account. Those below retirement age who wish to withdraw the funds must pay a 10% penalty, as well as related income taxes.

Recipients can keep the payment in their retirement account until they reach retirement age to avoid a penalty, or roll it over into their 401(k) or an IRA. But if they choose to take the cash out now, it is assessed the penalty fee. Weitman notes, however, that when the payment is placed in the cash-balance account, no FICA or Social Security deduction (usually 7%) is made, and Tribune is adding a 3% bonus to each payment. Combined, that 10% boost offsets the 10% penalty, he contends.

"You make up the 10% you would incur by taking it out," he says. "It is essentially a wash."