First, review the severance agreement and make sure you understand the terms – most importantly, how long you have to sign and return it. If you work for a large company that just laid off thousands of employees, there’s probably not much room for negotiation.
But if you were in a small business, don’t assume you can’t ask for things, like job placement assistance. And don’t forget miscellaneous items like unused vacation days or unreimbursed expenses.
Regardless of the size of your business, pay close attention to any non-competition clauses that would prevent you from working for a certain period of time.
If part of your compensation was in the form of stock options or restricted stock units, the severance agreement must also detail how unearned stock compensation will be treated (you must also check your stock incentive plan and award documents, so you know exactly what’s left).
Some severance agreements specify that you will forfeit any unearned equity when you are terminated, while others may provide for immediate vesting of all or part of it, including a set period to exercise the actions. For example, Alphabet CEO Sundar Pichai said the company was accelerating the vesting of restricted stock units for a period of time for laid-off employees.
Tax-wise, severance packages can be tricky. It’s usually taxed at the same rate as the rest of your income – but like a bonus, the amount an employer withholds for taxes will depend on how severance pay is paid. If separate from normal salary, a flat withholding rate of 22% applies. If this amount is lower than your income tax rate, you may have to pay the difference at tax time. If part or all of your severance pay is paid out as a lump sum, it could put you in a higher tax bracket.
If you are receiving severance pay as a lump sum, it would be wise to put as much of it into the job as possible. Look for liquid safe havens that are paying more than they have in years – high yield savings accounts, money market funds and treasury bills.
When it comes to 401(k)s, laid-off workers usually have a few options. They can keep their retirement accounts with their old employers or transfer them to an IRA or a new 401(k) once they find a job.
Before you do anything, check to see if your termination is effective immediately or if you’re still on the payroll for a few more weeks. If it’s the latter, try superfunding your 401(k) to get the matching dollars from your employer — it’s essentially free money, says Rachel Elson, a certified financial planner.
The most important thing to remember if you’re doing a 401(k) rollover: Transfer it directly to an IRA custodian, not to you, the account holder. If you fail to do so, you will be subject to a mandatory 20% withholding tax.
For health care coverage, it is wise to assess the differences between pursuing coverage with your former employer through Cobra, through the individual health insurance market, or for those who are married, by joining a partner’s plan. (And you don’t have to wait for open enrollment for the last option; a layoff is considered a qualifying event for health care coverage.)
Finally, don’t forget any life insurance coverage you may have had within your company. Many tech companies offer such generous death benefits that some employees never bother to get additional coverage. If you’ve been fired, it’s important to review that, according to Elson. If you’re single with no dependents, you can probably let it go for now. But if you have someone who depends on you for income, such as a child or elderly relative, you might want to consider a term life insurance policy.
How long a person should expect to be out of work is anyone’s guess, especially in this economy. Still, those recently laid off should take heart: Bureau of Labor Statistics data shows that nearly 70% of people were able to find a job within four months.
More from this writer at Bloomberg Opinion:
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
More stories like this are available at bloomberg.com/opinion