Facing unemployment can be one of the most overwhelming challenges in life. From concerns over handling basic necessities like day to day living expenses to addressing healthcare and other benefits, there are many factors to consider. Important decisions may need to made regarding severance, COBRA and retirement accounts. While nothing can fully prepare you to handle these stresses, developing a game plan may provide some help with this difficult transition period.
Review your severance package if applicable
While some employees may not receive a severance package, it is important to understand the terms of your agreement if you are offered one. A severance package may include compensation based upon years of service, unused vacation time or sick leave, stock options, insurance benefits and outplacement services. In exchange for these benefits, employers may require that you agree to other terms. These may include a non-compete clause which may limit your options to work for competitors as well as clauses requiring the release of any claims against the employer. Workers over the age of 40 have 21 days to carefully review their agreement. Be sure that you understand every aspect of the agreement and seek legal counsel as needed. It may be possible to negotiate certain terms of the agreement so do your homework.
File for unemployment
Depending on your individual circumstances, it may be possible that you can collect unemployment benefits. Eligibility and benefit terms may vary from state to state. According to the State of NJ, to be eligible for unemployment benefits in NJ, you must have worked at least 20 base weeks in covered employment or you must have earned $8,400. These wages must have been earned during a 52-week period that is called a base year. Unemployment benefits may also be available even if you are receiving severance pay as long as the payments are based upon years of service and do not extend employment.
Consider filing for benefits as soon as you are officially no longer employed. Also, keep in mind, unemployment benefits are taxable on your Federal income tax return. Be sure to speak to your accountant and consider withholding properly as it may reduce the chances that you receive a surprise tax bill.
Consider outplacement services
While some companies offer outplacement services as part of their severance agreement, it may be beneficial to seek some of these services on your own. These may include career counseling to help with re-vamping resumes and leveraging up-to-date job searching/networking methods in a digital world.
Explore the need for COBRA
According to the Department of Labor, the Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Cobra is usually offered by employers with 20 or more employees and lasts 18 months with some states offering extensions beyond 18 months. Keep in mind that you may be required to pay 102 percent of the insurance costs to continue the plan. Consider visiting www.dol.gov for additional information.
Address your company 401(k)
Deciding how to handle your company sponsored retirement plan can also be difficult. Since you have worked hard to accumulate retirement savings, and it is important to understand the options you may have available. The first option you have is to leave it at your previous employer. Doing so may make sense initially as it provides time to assess the pros and cons of your available choices. However, the challenge with leaving your account at your previous employer is two-fold. First, you are simply a participant and your investment choices will be limited to the menu of options available. Second, it is common for workers to accumulate multiple retirement plans at previous employers over time which can lead to a lack of monitoring and management – consolidating accounts can simplify this process.
The next option available is to roll your previous plan to your own IRA account. This may be beneficial as you will have more flexibility in how your funds are managed so they are consistent with your financial plan while also being able to consolidate multiple accounts into one. This may simplify the management of your funds.
Next, you could choose to take your money out. While financial hardships can necessitate this choice, it should be avoided at all costs. Remember, distributions from your retirement account are taxable as ordinary income and may subject you to a 10 percent penalty if you are younger than 59 ½. Also, keep in mind that existing 401(k) loans may have to be paid within 2 months of leaving your job. Failing to repay the loan will result in the amount of the loan being taxed as ordinary income while also subjecting those younger than 59 ½ to the same early withdrawal penalty.
Finally, you could choose to roll your account to a new employer plan. It is important to carefully review fees and the investment options available when deciding between the choices noted above.
Review your budget and emergency reserve
It is critical to have a good handle on your expenses when facing financial difficulties and monitoring your budget can help. Have you identified discretionary expenses that can be temporarily reduced? How long will your emergency cash reserves carry you? Do you have a home equity line of credit (HELOC) you can access under extreme emergencies? While it may be easier said than done, reducing spending may help prevent the build-up of debt during periods of reduced income. Bottom line - having a game plan for addressing short-falls in cash flow may help prevent additional financial damage.
Dealing with the uncertainty of losing a job is never an easy task. However, a pro-active approach toward addressing these challenges may help improve your financial position. Since everyone’s situation is unique, consider speaking to your legal, tax and financial advisers to determine the most appropriate approach for you.