Job Loss Financial Checklist

In recent months, the US job market has shown signs that can cause discomfort for working Americans. Historic downward revisions to job additions in May and June, as well as a weak initial report for July (just 73,000), can create an uneasy feeling in many people’s minds. Even if you feel secure in your current job, unexpected layoffs can strike at any time for reasons far beyond your control. If you find yourself in this situation, you may feel like you don’t know what to do that first morning when you wake up and don’t have a job to go to. 

There are a myriad of things to think about when you are recovering from a job loss. Updating your resume, searching for new roles, and connecting with your network to see if anyone can point you in the right direction are all on the “to-do” list. However, there is another set of tasks related to your previous role and adjusting to life with temporarily lower (or no) household income that should be addressed as well. Think of these topics, outlined below, as your “financial checklist for job loss”. Note that not every topic below will be relevant to your situation, nor is this an exhaustive list.

1.) Emotional Support

Losing a job is stressful and emotional. This is a very real part of the process of losing a job and ultimately overcoming the situation. Since I’m not an expert in this area, I thought it would make sense to outsource this section of the blog to the Harvard Business Review: Reeling From a Sudden Job Loss? Here’s How to Start Healing.

2.) Understand Your Severance Package

Severance packages vary, but usually will pay a former employee after job loss for some period of time beyond their termination date. The amount of pay is usually linked to how much time an employee spent with the company. It is common for a separation agreement to be signed before you are able to collect your severance pay. This usually includes an agreement to not file a lawsuit against the company or to disparage the company.

As Financial Advisors, we do not offer legal advice; it may make sense to hire an attorney to review a separation agreement before signing. There is no legal requirement for a company to provide a former employee with a severance package. Severance pay is taxable and will be included on your W-2 for tax purposes. Expect federal and state taxes to be withheld. 

Vacation and sick leave payouts are another item that might be in a severance package. You may be in a situation where some of the aforementioned items may be negotiable. Don’t be afraid to ask!

You may be on the hook to repay your employer before collecting your severance package, such as a signing bonus. Review the documentation to understand what you might owe back to the employer.

3.) Health Insurance

Your former employer may have been the source of procuring your health insurance (and dental, vision, etc.). Some job loss severance packages may offer you to stay on the same health plan for a period of time, potentially even with the same premium rate. People may have to continue their health insurance coverage through COBRA, enroll in a spouse’s health plan, or shop for insurance through the marketplace.

People may quickly find out how expensive health insurance can be once they no longer have their employer subsidizing some of the cost of their premiums; by continuing your health insurance coverage through COBRA you may be paying up to 102% of the cost to the employer plan.

Related to health care costs, you will likely lose any unused Flexible Spending Account (FSA) funds that you have. Ultimately the employer owns the funds in that account, even though your name is on the account. You may be able to still use your health care FSA funds if you elect COBRA coverage after termination. Similarly, losing access to dependent care FSA funds is also common upon termination, unless your former employer’s plan includes a special “spend down” provision. This is uncommon. 

Health Savings Accounts (HSA) will remain in your ownership even in the case of losing your job. This feature, in and of itself, is not a reason to participate in an HSA. You should assess your healthcare situation, insurance needs, and the financial impact of utilizing such an account.

4.) Unemployment Insurance

If you are receiving severance pay, you may be ineligible for unemployment benefits. That said, your employer has been paying for unemployment insurance through payroll taxes for as long as you were working. Unemployment Insurance is there for you for times like this! There is no need to be ashamed to file an unemployment benefit claim; it is there for a reason. For high income earners it may be a small fraction of the income you are used to receiving from your former job, but it is still there to help provide some income to help pay the bills. 

5.) Revisit the Budget

Your income has changed but some of your fixed expenses have not (mortgage, utility bills, property taxes, etc.). Usually there are some discretionary expenses that may need to be modified. Take the time to go through the practice of identifying your income sources, fixed expenses, and discretionary expenses and be prepared to make changes. Hopefully, with proper planning, an emergency fund is in place. Make a plan for how much you may need to pull from your savings and how long it might last. 

6.) Life Insurance

If your employer has a group life insurance plan, it likely will not transfer to you upon separation from the company. If your only life insurance is through your employer, you should reassess your situation. First, determine if you still need life insurance to help your loved ones out, financially, in the case of your death. Second, if needed, you should look into procuring a policy that fits your individual needs. In many cases, we advise that clients have a supplemental life insurance policy in addition to whatever group life coverage that they have through their employer. A supplemental policy, assuming you pay your premiums and keep the policy in-force, will travel with you even if you get terminated or willingly change jobs. 

7.) Retirement Plans

Taking action on your former employer retirement plan usually isn’t going to be as top of mind as health insurance, filing for unemployment benefits, short-term cash flow, etc. (hence why those topics are addressed earlier in the blog!). However, there are some decisions that may need to be made within a certain time frame after termination. For example, if you have a pension, you may only have 90 days after termination if you want to elect to take a lump sum from your pension and roll it into an IRA. If you miss that 90-day window, your only option may be to take the pension as a monthly income stream upon reaching your full retirement age as defined by the plan. When it comes to 401(k)s or 403(b)s, you usually don’t have to take immediate action. At some point when you land back on your feet you can assess your options on what to do with your account. 

8.) Deferred Compensation Plans

If you have elected to defer part of your compensation via a Nonqualified Deferred Compensation plan (NQDC), your payout will still follow your initial election unless the plan has a provision of early termination. For example, if you elected to defer a portion of your eligible compensation for 20 years, you would still receive the income 20 years from your initial election (assuming the company still has the financial ability to pay). However, the NQDC plan may say that if you leave the company within five years, for example, your initial deferment election may be paid out in a lump sum within 90 days of the termination date. Something to be aware of: This payout would be taxable in the year it is paid. 

9.) Equity Compensation

You may have received some form of equity as part of your compensation package. There are many flavors of equity compensation, including (warning: alphabet soup ahead) ISOs, NQSOs, RSUs, PSUs, RS, ESPP, SARs, and more! We have written several blogs on this topic in case you would like an overview. Hopefully you saved all appropriate documentation (initial grants, notices of exercise, incentive plan documents, etc.) of your stock awards/purchases and are able to access your equity compensation online. You should identify what you are vested in and if you need to take action on any awards, such as exercising a stock option within 90 days of termination. Note that there are many considerations when exercising an option. You should work with your financial advisor and accountant to discuss managing the risk/reward of these types of equity grants and understanding the tax consequences. You may have to forfeit any unvested options and restricted stock that isn’t fully vested.

As you can see, there are a lot of things to think about and actions that need to be taken after a job loss. Hopefully this list gives you some direction and can help you out during a difficult time. The good news is that it is just a phase and you can get through it. As Financial Advisors, we are here to help our clients through the good times and (arguably more importantly) the stressful times.