Here’s What to Know if You Receive Severance from Your Employer
Being laid off can be an overwhelming experience fraught with many emotions; it usually comes unexpectedly and may leave you feeling uncertain about your future. Nonetheless, it is important to remember that it does not have to be a completely negative experience, especially for those who receive a severance package as part of the process.
Viewing severance as an opportunity for growth and new beginnings is adopting a “glass half full” approach. However, if you receive severance from your employer, it is also important to understand the terms of the agreement and whether there are time-sensitive determinations you must make. Typically, you are given 21 days to accept a severance offer and another 7 days to change your mind upon signing an agreement.
Employees who are laid off may be eligible for continued medical coverage under the Consolidated Omnibus Budget Reconciliation Act, better known as COBRA. This is a federal law that requires companies with 20 or more employees to offer a continuation of health coverage for 18 months after the severance period has ended. It is key to know your options under COBRA and make the necessary elections in a timely manner.
You may also be eligible for unemployment benefits from your state’s department of labor depending on qualifications specific to state regulations. It is critical to research and understand the conditions of eligibility for unemployment benefits in your state along with the amount of time it takes to apply for them.
In many cases, severance pay is based upon your previous salary, duration of employment, and any accrued vacation and/or sick leave. This is often received as a lump sum payment; however, some companies offer to pay instead in installments. Keep in mind that how you choose to receive your payment(s) will affect whether you are eligible to receive unemployment or other government benefits.
Additionally, you can decide whether you would like any taxes withheld from your payment(s). And if you are in a more senior position and/or are a long-tenured employee, you may be able to negotiate for a higher severance package. You might also be able to negotiate for accelerated vesting on any outstanding equity or deferred compensation you are owed, so it is crucial to ask.
It is also important to consider your overall financial picture and determine how the severance payment will fit into it. A severance payment can help cushion the financial blow of unemployment and grant extra time to either plan your next move or sharpen your skills. Unfortunately, it can create significant tax implications you should be aware of.
Depending on the compensation amount and method your severance is received, taxes may need to be paid or withheld. You may also be eligible for certain tax deductions or credits that could help reduce your overall taxable income. Thus, consulting with a tax professional prior to accepting the severance can be beneficial to understanding the different options available and determining which is best for your individual circumstance.
Understanding whether you are required to sign any documents or release forms as a condition of the severance agreement, such as a non-disparagement clause or non-compete agreement, is key. You may even want to consult with an attorney prior to signing and accepting severance if you are unsure of what you are agreeing to.
Overall, when deciding whether to accept severance from an employer or not, remember that there are several factors to consider—some of them more time-sensitive than others. It can be a challenging experience being laid off, but by understanding your rights and the different options available to you, you can also use it as an opportunity for growth and new beginnings.
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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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