In the first half of 2023, nearly 200,000 US workers lost their jobs in mass layoffs, or layoffs impacting more than 100 positions (Source: Forbes, July 3, 2023). Job cuts have stretched across industries including Banking, Tech, Manufacturing, and Energy. Some questions that come up at a time like this are:
- How do I respond if my job is lost?
- Where do I go for support?
- What are the first steps I should be considering?
We’ve worked with dozens of people who have experienced a job change, and we believe our experience can provide support and direction if you, or someone you know, has experienced a layoff. The information below includes things to know and consider.
Severance pay is usually paid on the final day of service with your company. This payment can come all at once or be paid in increments over time. Additionally, some companies will offer a retention bonus for staying on with the company throughout the layoff transition period. For example, if a layoff is announced in October but your final service date is scheduled to be April, the company could incentivize you to stay by giving you a bonus on the final service day. Severance and/or retention bonuses can help bridge the gap between employment or provide a boost into retirement, but also should be considered when tax and financial planning. Some questions to consider:
- How will this be taxed and in what calendar year? If you receive this payout at the end of the calendar year (and if it covers several months), you may end up with a much higher income in the calendar year, resulting in potentially a higher federal or state income tax bracket.
- Will retirement contributions be withheld from this payout? This can be a way to boost retirement savings if you don’t need the cash flow. However, you may want to change withholding prior to this severance/retention payout, allowing you to increase your Emergency Savings at home. Doing so could help cover expenses while you look for a new job.
Medical/Dental/Vision Insurance Benefits
Your current Medical/Dental/Vision insurance plans will expire at the end of the month of your final service day. If you can negotiate a final service day at the beginning of the month, it may be to your benefit as you can carry these benefits forward through the last calendar day of that month. You do have to pay for this, but in general employer rates are substantially cheaper than alternatives.
Going forward, to receive your same Medical/Dental/Vision insurance, you will need to enroll in COBRA by the end of your first full month of unemployment. This option keeps your current plans intact for up to 18 months after your last day of service. COBRA is month-to-month, so you can cancel at any time during your 18-month window.
While convenient, COBRA plans are typically very expensive. The cost is 102% of the full cost of insurance: what you were paying, the portion your employer was covering, plus a 2% administrative fee. This may not be the most affordable option but may be the best option, especially if you already have significant medical expenses on your current plan. Depending on the time of the year and/or the status of your deductible, it still could make sense to utilize COBRA for the remainder of the calendar year.
COBRA is available typically for Dental and Vision plans, as well as Medical, but you can choose which you want to carryover. Many times, HSA eligibility does not transfer into a COBRA plan. In other words, any current HSA account balance is yours, but you will be unable to continue to fund your account in COBRA.
There may be cheaper alternatives to COBRA, but they will likely still be more expensive than your previous employer sponsored plan. You will also likely not be able to carryover any expenses toward your new deductible. There are resources online that help compare insurance options if you do not have a new employer immediately after your final service date.
Life and Disability coverages typically end on your final service date with the company. Fortunately, some policies are set-up to be portable, allowing you to assume the premiums and continue the policy. Some policies, especially disability policies, may require new underwriting to re-establish the policy.
To re-establish policies for either of these areas, you should talk to a Financial Advisor or Financial Services professional.
Your company’s 401(k) plan is held with a third-party 401(k) plan manager such as Fidelity, Schwab, or Vanguard. The money you have contributed to your 401(k) is yours. If your plan has an employer match you may be able to receive most, if not all, of the contributions your employer made depending on your company's vesting schedule. There are a few different options to consider after your final service date:
- Leave your 401(k) where it is. Keeping your money in the 401(k) is an inexpensive way to maintain similar investment options for your money in a retirement account.
- Rollover your 401(k) to an IRA and/or Roth IRA. Rolling over your 401(k) is common and easy to do. It also gives you access to more investment options than your current 401(k) plan offers. Rolling over your plan also means you could have your money managed professionally. Importantly, a rollover from a 401(k) into an IRA or Roth IRA is a non-taxable event, when done correctly.
- Cash out all or part of your 401(k). This may have tax and/or penalties associated with it depending on your age. We recommend you consult your tax or financial advisor if considering this.
If you are unsure whether to keep your money where it is or roll it over into an IRA/Roth IRA, it is a good idea to discuss it with a financial professional.
Company pensions are increasingly rare, so if you have one of these you are ahead of the game. Some company pensions have vesting periods with the majority vesting within three years. Often, those that do have a vesting period will waive the period if an employee is let go in a mass-layoff.
While traditional pensions use your last few years to determine payout (these are typically the highest earning years), a more common plan is a cash-balance plan. A cash-balance plan receives contributions made by the employer over time. It usually grows in conservative investments and is available penalty free at age 59.5.
Assuming you meet the vesting period, the pension account is yours to take if you are subject to a mass layoff. There are a few options to consider after your final service date regarding your pension:
- Leave your pension where it is. As stated above, the account is typically invested conservatively, so growth may be limited. At age 59.5, you may take out the lump sum of the pension balance or take monthly distributions.
- Roll your pension into an IRA. As with a 401K, this is common and easy to do for a financial professional. Rolling your pension over gives you the ability to invest in holdings that are more aggressive and offer higher potential returns than the holdings inside the pension. Importantly, this rollover is a non-taxable event, when done correctly.
- Cash out your pension. This will have tax consequences and may have penalties associated with it depending on your age. We recommend you consult your tax or financial advisor if this is a consideration.
Depending on your age, your pension plan may allow you to elect a lump sum option or the monthly payout. This decision of a lump sum vs monthly payout should be made with the following considerations in mind:
- Both you and your spouse’s other retirement income sources
- Your expense needs and retirement goals
- Your life expectancy
- Your risk tolerance
- Your general financial picture including other assets and liabilities
- Your long-term tax bracket
Deciding between a lump sum and monthly pension payout is an irreversible decision that can have significant long-term consequences on your financial plan. We encourage you to visit with a financial professional to help model your unique plan to determine the best strategy.
Restricted Stock Units (RSU’s) are a form of compensation that can be given to employees that vest over a certain period. Sometimes, the stock vests in parts over multiple years. If you are part of a mass layoff, the vested stock is yours to take. The owner of the unvested stock depends on your plan.
If your unvested shares do vest at time of severance, there will be a tax impact to you. While the withholding will likely be managed through withholding of RSU shares, it may throw you into a higher federal or state tax bracket. Appropriate tax and financial planning is important in regards to vesting of RSUs.
If you do own vested RSU’s, those are yours to keep if you are part of a layoff. It is a good idea to consult a financial professional on the best course of action as there are tax implications, diversification strategies, and other items to consider.
Employee Stock Purchase Plan
An Employee Stock Purchase Plan (ESPP) is a program in which employees can purchase company stock at a discounted price. Income or loss from the sale of shares you purchased through an ESPP is generally taxed as a capital gain or loss, though there are holding period requirements. Any shares purchased in an ESPP are yours to take if you are part of a mass layoff.
It is a good idea to consult a financial professional on best course of action as there are tax implications, diversification strategies, and other items to consider.
Finding a New Job
If your current employer asks you to stay on in return for a higher severance or retention bonus, you may wonder when you should start looking for a new job. A retention bonus can be enticing, but if it comes at the expense of a job opportunity elsewhere it may not be worth it. It is a good idea to begin updating your resume, LinkedIn profile, and networking with those both inside and outside of your organization soon after a layoff is announced, even if you intend to stay on through the retention period.
Building a resume that catches the eye of a recruiter is not an exact science, but the tips and tricks on this page should help get you in the right direction – Resume Tips
Your LinkedIn profile should be complete with an up-to-date resume, profile, and photo. This article guides you through the job search process within the LinkedIn space – LinkedIn Guide
It is also a good idea to start reaching out to headhunters and recruiters. A quick google search to find recruiters in your area and connections with those recruiters on LinkedIn is a great way to make your interest known.
These are just a handful of the many financial decisions that need to be made if you have been impacted by a mass layoff. If this guide sparked a question, concern, or an idea, we would love to hear from you to continue the conversation.
Content and opinions voiced in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.