Call it laid off, terminated, downsized or dot-bombed, the result is the same—one minute you're working, and the next you're unemployed and without a regular paycheck. If you have recently joined the ranks of the jobless or fear a pink slip is in your future, your number one priority may be to find a new job, but there are several important financial matters you need to address as well. Here is some advice from the California Society of CPAs (www.calcpa.org) that can help you stay out of the red when you've been handed a pink slip.
Be Savvy About Your Severance Package
While severance pay is not mandated by law, many companies offer dismissed workers one to two weeks pay for each year of service. Consider whether you should negotiate for more severance pay or other perks, particularly if circumstances, such as your age, may make it more difficult for you to land a new job. In any case, resist the temptation to use your severance to pay off your mortgage or credit card debt. You may need the money down the road to keep you in the black.
Apply for Unemployment Benefits
Each state has different eligibility requirements for qualifying for unemployment benefits. Normally, if you've lost your job through no fault of your own (such as being laid off) and you meet your state requirements for wages earned or time worked during a certain period, you can qualify for unemployment benefits. Most states now pay up to 26 weeks.
Don't Forgo Medical Insurance
Most employees are accustomed to having the company pay all or part of their health insurance and other benefits. However, once you're laid off, the cost of benefits generally becomes your personal responsibility. Medical coverage is expensive, but make no mistake, no one—especially not the unemployed—can afford to be without it.
Under COBRA, a federal law that derives its name from the Consolidated Omnibus Budget Reconciliation Act, you and your family can remain covered by your company's health insurance policy for up to 18 months (longer in some cases). You pay the tab, generally at the company's group rate plus a two percent administration fee. You have 60 days to elect coverage under COBRA, and within that period you can choose to have the coverage begin retroactively.
Keep in mind that if you have dental coverage with your current employer, it is smart to take care of dental work while you are still covered by your employer's plan. Dental coverage under COBRA is expensive.
Treat Retirement Plans Astutely
If you have participated in a retirement plan, such as a 401(k) plan, you are entitled to all of your contributions plus any vested portion of the company's contributions. But to avoid tax consequences, you must roll over your 401(k) into an IRA or a new employer's plan. You also may have the option of leaving your vested 401(k) savings in the company plan, provided you meet a minimum balance requirement.
When it comes to retirement savings, perhaps the best advice is not to make any rash decisions. You should try, at all costs, to avoid withdrawing funds from your retirement account or spending lump-sum retirement payouts. Keep in mind that while your layoff is likely to be temporary, retirement isn't. And if you withdraw money from your 401(k) before you reach age 59 1/2, you will pay a 10 percent federal penalty fee and an additional 2.5 percent penalty for California as well as ordinary income taxes on the withdrawn amount. There are lost growth opportunities as well.
Act Quickly on Stock Options and FSAs
Unlike your retirement savings, you don't get to hold onto your stock options. Typically, companies grant former employees a limited time to exercise their options. Those not exercised at the end of this period are forfeited.
While you are still employed it is also wise to look at your flexible spending account (FSA) and to use up whatever savings you can for qualified expenses.
Slash Expenses
The first step is to prioritize your bills and take a hard look at how you may be able to reduce discretionary spending. If you have high debt and think you may not be able to keep up with your credit card payments, call your lenders before you fall behind. You stand a better chance of negotiating a reduced minimum payment or lower interest rate while your accounts are still current.
Still Working, But Worried?
If you still have a job but fear a pink slip may be in your future, there are several steps to take. For starters, you should build an emergency fund, pay off credit card debt and loans against your 401(k), and cut discretionary spending. A meeting with your CPA can uncover additional strategies.
In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.
