Experiencing a job loss is a significant life event, and the impact extends beyond the professional realm and into our personal lives.Many aspects of our financial lives are entangled with our employers and the shock of a layoff can be incredibly disruptive. Here is a comprehensive overview to guide you through this transitional period and position you for success in your next chapter.
Laid Off? A Comprehensive Guide for High Net Worth Individuals:
Severence Package: Maximizing Your Benefits
Losing a job often comes with a severance package. Your severance package may include extra pay, determined by a wide range of variables, most commonly based on years of service. We recommend attempting to negotiate the terms of your severance package. Severance packages are essentially contracts and contracts are negotiable. In these turbulent times, an extra week or two of pay can go a long way to improving the strength of your financial position and reducing the stress of your transition. When reviewing your severance package pay attention to details such as the timing of your last paycheck, proration of bonuses, and commission payout dates.
Health Insurance: Ensuring Continuity and Exploring Options
Understanding post-employment coverage is crucial during your transition. If you had health insurance through your employer, finding out when that coverage ends should be your first priority. After your employer’s coverage ends, you’ll need to evaluate your options for health insurance moving forward. COBRA allows you to remain on your employer's health plan for a limited time, usually 18 months after leaving your job. COBRA coverage is typically more expensive because you may be required to pay the entire premium for coverage and up to 102% of the cost of the plan.
If you're 65 or older, consider enrolling in Medicare Part A & B during your Special Enrollment Period. Your 8-month Special Enrollment Period begins when you stop working, even if you choose COBRA or other non-Medicare coverage. Reach out to your local Social Security office for more information on enrolling and work with your HR department to gather the proof of coverage information that may be required for enrolling in Medicare.
Unemployment Insurance: Securing Temporary Income
Unemployment insurance is an income source for workers who have been laid off and is paid out while they are searching for a new job. We recommend filing for unemployment benefits as soon as possible to provide an income stream for you and your family. The rules for whether you qualify to receive unemployment benefits vary by state. Unemployment is handled by the state using funds from a payroll tax, in essence, the business pays for unemployment insurance and if/when employees become unemployed, the employees collect from the state. We recommend you reach out to your local unemployment office to find out if you qualify. Although not directly managed by HR, they may provide guidance on the application process.
Flexible Spending Accounts (FSAs): Maximizing Benefits Before Departure
Prioritize spending down FSAs before leaving. Discuss medical expense accounts with your HR department to understand spending deadlines. FSAs typically operate on a "use it or lose it" basis, and unspent funds cannot be paid out in your final paycheck.
Health Savings Accounts (HSAs): Portability and Premium Coverage
HSAs, often used with high-deductible health insurance plans, are portable. Even if your employer contributed to your HSA, the account remains yours. No spending deadlines exist for HSAs. If you are enrolling in COBRA coverage, you can make tax-free distributions to cover COBRA premiums. In fact, HSA’s can also be used as a retirement funding vehicle after age 65 for expenses outside of those that are medical.
Retirement Accounts: Strategic Decision Making
Evaluate your options for your retirement accounts, considering whether to keep them with your previous employer, roll them into an IRA, or transfer them to a new employer's plan. High-net-worth individuals should review the details of their plans and consult with a financial advisor to discuss the best course of action.
If you have an outstanding 401(k) loan, understand the repayment terms. Failure to repay within the required timeframe may result in taxes owed and a 10% penalty if you're under 59½.
Life and Disability Insurance Considerations: Protecting Your Financial Future
If you had life and or disability insurance through work, it will most likely end on your last day of employment. The coverage provided by employers generally does not provide adequate risk protection on its own, but it is better than nothing. If the limited amount of protection you currently have is ending, it is a good time to evaluate your needs, especially if others are depending on your income such as children or dependent family members. Speak with your HR department and ask if your coverage is portable, then discuss your insurable need with a financial planner.
Financial Planning: Budgeting Tools and Strategies
Develop a budget to manage your finances effectively. Consider utilizing budgeting tools to track expenses and identify areas for adjustments. Many of our clients find value in our budget worksheet (see below) to get a firm understanding of where their money is going. It may be a time-consuming task, but the results are usually eye-opening and provide a valuable perspective on your spending habits. High-net-worth individuals may find value in comprehensive financial planning services to create a sustainable budget that aligns with their financial goals and lifestyle.
Stock Option and RSU Management
When confronted with decisions surrounding stock or options-related compensation, it is essential to carefully review the documentation received, which will provide details on the rules governing various awards. You’ll want to review the details surrounding the "post-termination exercise period." The tax implications associated with these awards can vary, with some options offering more favorable tax treatment than others. Timely action may be imperative to capitalize on these benefits.
In the case of restricted stock units, vested status before your last day is crucial; otherwise, they may become void. Some severance packages may include accelerated vesting schedules, providing employees with an opportunity to secure additional compensation.
Conversely, stock options, which grant employees the right to purchase company stock at a predetermined price, often expire within 90 days of termination. While some options may have extended expiration periods, incentive stock options, if exercised within the three-month window, can get a more favorable tax treatment.
Navigating these considerations requires a thoughtful approach. Things to consider when making the decision to exercise and hold options or sell them immediately include the exercise price, trading price, available cash on hand to purchase the shares, and potential tax implications.
For individuals lacking the financial resources to exercise options or cover resulting tax obligations, there are companies that offer loans for this purpose. However, it is prudent to make such decisions under the guidance of a fiduciary advisor, mandated to prioritize your interests over their own.
We are Here to Help
Figuring out what to do when you get laid off can involve a lot of detailed decisions and this transitional period can prompt reflection and a reevaluation of your goals. In times of uncertainty, strategic decision-making, and proactive planning can mitigate the challenges associated with a layoff. High-net-worth individuals should approach this transitional phase with a comprehensive understanding of their financial landscape, ensuring a smooth transition into the next chapter of their lives. As fiduciary financial planners, we are here to help ensure that the next chapter leads to the most successful outcome for our clients. If you’ve recently been laid off, we can assist, reach out to us through our website to discuss your best next step.
Consulting with a professional ensures a well-informed strategy aligning with your financial objectives and circumstances.