Severance Pay Goes Into an IRP Account by Default in Korea — Exceptions for Age 55+ and 3 Million Won or Less, and What If You Give No Account

The payment order set by law

Article 9(1) requires the employer to pay severance within 14 days of the date the payment became due after the employee leaves. If there are special circumstances, the two sides may agree to extend the payment date. Paragraph 2 says the money is to be paid by moving it into the IRP account the employee designates, and paragraph 3 says that if the employee designates none, it is transferred to an IRP account in the employee's own name. Missing the deadline also raises the question of late-payment interest; confirm the rate with the labor office. For the amount itself, first read how severance is calculated from average wage and the 3/12 bonus rule.

When you do not have to receive it in an IRP

The proviso to Article 9(2) exempts cases such as an employee who leaves at age 55 or later, along with other reasons set by presidential decree. Article 3-2 of the Enforcement Decree sets out roughly five exceptions. First, leaving at 55 or older. Second, where the benefit is at or below an amount announced by the Minister of Employment and Labor; that amount is stated to be 3 million won. Third, the death of the employee. Fourth, a foreign worker who worked under a visa status that permits employment and leaves the country after quitting. Fifth, where another law requires all or part of the benefit to be deducted. There is also the case of repaying a loan taken against the benefit, which is an exception only up to the amount that must be repaid.

The age 55 test is your age on the day you leave

"Retires at 55 or later" means asking whether you have already reached 55 at the time you leave. If your birthday falls close to that date, the age calculation may differ, so check with the company's HR staff or the pension provider before you set your last day. Even if you qualify for an exception, you may still choose to receive the money in an IRP.

If you do not give the company an account

If your last day is near and you have not opened an IRP, under Article 9(3) the company must transfer the money to an IRP account in your name. The law does not say at which financial institution it must be opened, so an account may be opened at the institution the company uses. It makes later fees and product choices easier if you open an IRP yourself at your main bank or brokerage before you leave and give the number to the company.

Tax is paid later, from the IRP

When the money is transferred into an IRP, it goes in as a pre-tax amount with no income tax withheld at that point, and the tax is settled when you take the money out. If you take severance in cash, retirement income tax is withheld then. If you receive it as an annuity after 55, there is a reduction that has you pay only part of the deferred retirement income tax depending on the year of annuity receipt. For the first ten years you pay 70%, and the ratio falls as the years go on. For exact ratios and calculations, check with the National Tax Service or your financial institution. Your own contributions, as opposed to severance, carry separate tax-credit and early-termination rates, so keep them apart by reading the 9 million won pension savings and IRP tax credit limit and the 16.5% early-termination rate.

Money in an IRP cannot be withdrawn at any time

An IRP is a retirement-savings account, so you cannot take money out whenever you like. The early-withdrawal reasons in Article 18 of the Enforcement Decree include a home purchase or lease deposit by someone without a home, medical expenses for you or a dependent who needs treatment for six months or more, a bankruptcy declaration or personal rehabilitation commencement within the past five years, and disaster damage. If you close the account without such a reason, you get the money but pay the deferred retirement income tax then, and other income tax may apply to your tax-credited contributions and investment gains. If you may need cash soon, check whether your situation is on the list before putting severance into an IRP.

Paperwork and insurance to handle before you leave

Once the payment date is set, other procedures should start too. If you plan to claim unemployment benefits, the company must file your separation certificate with the employment center, and a delay blocks your application. The deadline is covered in the 10-day separation certificate deadline and the fine if the company does not file. Your health insurance changes from employee to regional coverage and your premium may change. If you are considering continued voluntary coverage, the application window is short, so also check health insurance premiums after leaving and voluntary continuation.

Summary of the steps

Step 1: use your age and the severance amount to see whether an exception applies. If you leave at 55 or later, or the amount is 3 million won or less, you do not have to take it in an IRP.

Step 2: if no exception applies, open an IRP yourself before leaving and tell the company. If you do not, it goes to an account in your name.

Step 3: confirm the money arrived within 14 days of your last day. If it is late, ask the company in writing whether there was an agreement and why, and contact the labor office if it was delayed without one.

Step 4: if you plan to withdraw, check whether you meet an early-withdrawal reason.

This article is general information and is not a substitute for legal or tax advice. Please confirm the current text and the announced amount in the Workers' Retirement Benefit Security Act and its Enforcement Decree on the National Law Information Center and in Ministry of Employment and Labor guidance.