Life After Layoffs: A Financial Guide

Losing a job ranks as one of life’s biggest stressors, something tens of thousands of workers have experienced in recent weeks, many for the first time.

Many aspects of our financial lives are entangled with our employers and the shock of a sudden separation can feel incredibly destabilizing. There’s so much to process at once — a job hunt and the seemingly overwhelming task of running your household without the steady and secure beat of direct deposit.

Workers in this situation are often facing some big financial decisions, a long list of administrative tasks and at least one new byzantine system to navigate: unemployment.

Give yourself some time, but not too much — some of these tasks are time sensitive. The following guide can help.

Negotiate the terms of your separation and severance package.

Many employees, particularly those in the tech industry, are lucky enough to depart with severance packages. Not all departure packages end up being negotiable, but that doesn’t mean you shouldn’t try anyway. “A separation or severance agreement between a company and an employee is a contract,” said Lisa J. Banks, a partner at the firm Katz Banks Kumin in Washington, D.C. “And the terms of a contract are negotiable.”

Whether or not you hire an employment lawyer, extra legal strategies can sometimes provide the most leverage, according to Jennifer Liu, the managing partner at the law firm of Liu Peterson-Fisher in Burlingame, Calif.

“There is guilt, sympathy; there is the issue of fairness,” she said. “And there are personal relationships. If someone is in with the head of H.R., I say give that person a call.” If your family is in some kind of crisis that makes a better severance package necessary, say so.

Less favorable terms, particularly when it comes to noncompete agreements, often appear in departure agreements from small and medium-sized employers, Ms. Liu said, adding that these firms sometimes try to impose those provisions on lower-wage workers who might need a new job the soonest. She suggests trying to revise or exclude them.

Nondisparagement agreements are often problematic no matter the size of the employer. “Nine times out of 10, it says that an employee won’t disparage the employer, and we always insist that that be mutual,” Ms. Liu said.

If you’re trying to avoid signing because you want to take a public stand against your former employer, you may be in for a difficult negotiation. In some states — California is one — there may be some legal protections for people who wish to speak out publicly about certain issues related to their employer. But you shouldn’t assume that you have protections, so a conversation with a lawyer is a good idea.

“I’ve had a number of cases where it was really important for a client to be able to talk about certain aspects of what happened to them,” Ms. Liu said. “And the employers are saying ‘What are we paying for, if not your silence?’”

Time can be as valuable as money during a layoff, and there are a number of ways to ask for more of it. Ms. Liu suggests asking for more than a few months to exercise stock options, in case you need to gather the money to do so.

You could also ask to stay on the employment roll a bit longer — without pay, even — so that more of your stock-based compensation could vest. This helps with optics too, since it’s easier to get a job when you still, technically, have one. You could also try negotiating for accelerated vesting of any options.

Create a spending plan.

The next step is figuring out how much you need to cover your costs and the resources from which you have to draw.Consider if your spouse or partner’s income can cover your expenses for some time. And if you have an emergency fund, calculate how long the money can cover your living expenses until you get another job.

What can you easily cut back? What’s tougher, but still possible? If you need more cash, perhaps your partner can temporarily dial back their contributions to retirement (or other tax-advantaged) accounts. That’s also an option for laid-off workers, if they’re still working for a little while longer.

“That is a totally reasonable choice,” said MK Lee, who works in Tacoma, Wash., as a financial planner for many employees in the tech sector. “For now, let’s aim for the cash and not for my future.”

Apply for unemployment insurance.

Unemployment insurance provides cash benefits to workers who lost their jobs through no fault of their own and pays the money out while they’re searching for a new job. It won’t replace the income from your paycheck, but it can provide temporary relief to those who have earned enough to qualify.

Each state administers its own program, so the rules vary. But unemployment insurance generally replaces a percentage of your income from the past year, roughly 40 percent to 45 percent of the average workers’ weekly wage, subject to certain maximums. For example, in early 2020, average weekly benefits were about $387, but they ranged from a low of $215 in Mississippi to $550 in Massachusetts, according to the Center on Budget and Policy Priorities. In most states, the benefits generally last up to 26 weeks, though a dozen states provide less weeks of benefits and two others provide more, according to the center.

Generally, you file a claim for unemployment benefits with the state where you worked. The Department of Labor has a list of all 50 states’ offices, with phone numbers and website links, where you can learn more about the types of information you’ll need handy to apply, as well as your state’s rules. For instance, some states won’t provide unemployment benefits if you are receiving severance pay, or you may only qualify for a lower amount.

After you apply, it could take several weeks to become qualified and to start receiving benefits (which are subject to federal income taxes and most state income taxes), said Michele Evermore, a senior fellow at the Century Foundation, a nonpartisan research and policy group.

Analyze your health insurance needs.

If you had health insurance through your employer, your first step should be to find out when that coverage ends — it could be on your last day, for example, or it could last several months after you’ve left if you have a generous severance package.

Then, you’ll need to evaluate your next-best options. The easiest and most familiar, COBRA — or continuing your employer coverage, usually up to 18 months — is typically the most expensive option, often prohibitively so. (That’s because you’ll now be paying your employer’s share of the premium, in addition to your own.)

But it can be worth considering if you have a chronic condition, you’re pregnant or have other medical needs that require continuing care. “Continuation coverage means you won’t have to switch doctors or drug formularies or restart your annual deductible,” said Karen Pollitz, a senior fellow at the Kaiser Family Foundation.

If you’re married or have a domestic partner with access to an employer-provided plan, your loss of coverage should entitle you to a special enrollment period for your partner’s plan — whether your layoff ends coverage for one or both of you (and potentially any children).

Another option: coverage through the Affordable Care Act marketplace, though these plans usually aren’t as robust as employer-provided coverage. In fact, through 2025, these marketplace plans have extra subsidies, which means more people will qualify for cheaper coverage than before the pandemic (and sometimes with no monthly premium). And if your income drops to less than 138 percent of the poverty level, you are likely to qualify for Medicaid in most states.

Medicaid may actually be the better option, Ms. Pollitz said. Eligibility is based on current household income — so if your income has fallen to, say, nothing, you may be eligible, she added. Marketplace plans, in contrast, are based on annual income — so if you earned $65,000 the year before you were laid off (and you expect zero income for the rest of the year), your marketplace subsidy would be based on $65,000. “Medicaid has zero premium in most states and little to no cost sharing,” Ms. Pollitz said, and “much more comprehensive coverage.”

If you were laid off and you’re 65 or older, sign up for Medicare. In fact, if you have very low income you may also qualify for Medicaid — that would cover your Medicare Part B premium, which covers doctors’ visits and outpatient care, and other expenses, she added.

Spend down flexible spending accounts.

If you have flexible spending accounts, whether for medical expenses or dependent care, you’ll want to use up as much of that money as you can before you leave: Leftover money cannot be paid out — from either account — in your paycheck.

Medical expense accounts may provide a parting gift: All of the money you elected to set aside is available to you upfront, even though it is incrementally deducted from your paycheck throughout the year. So if you elected to set aside $2,750 but you were laid off early in the year, you can “spend” all of that money, even though your employer hasn’t collected all of it yet.

“And the employer cannot take that money back in your last paycheck,” said Nicky Brown, vice president of public policy and government affairs at HealthEquity, a benefits administrator.

Though plan rules vary, expenses must generally be incurred on or before your last day of employment — though you should have some time to submit the claims. Check with your benefits administrator or human resources to clarify the specifics of your plan.

Dependent care accounts work a bit differently: The money must already be in the account to be used. If you’ve elected to set aside $5,000 but only $350 has been deducted from your paycheck, you can submit claims for expenses only up to that amount.

If you have a health savings account — which is typically used alongside a high-deductible health plan — that money is yours to keep. And there are no spending deadlines. In fact, if you don’t need it for qualifying health-related expenses, you can invest the money and let it grow tax-free.

Decide what to do with your retirement accounts.

If you’re borrowing money from your 401(k) or 403(b) retirement plan, you may have to pay it back quickly. Otherwise, the balance may be treated as a taxable distribution (with a 10 percent penalty, usually if you’re under age 55).

Loan rules vary by plan: Some will require you to pay the loan back within 60 to 90 days, according to Fidelity, one of the largest plan administrators, though others may let you continue to pay after you’ve left. Contact your plan administrator for specifics.

There’s a workaround if you fail to pay it back on time: You can avoid taxes and penalties by putting the missing money into an I.R.A. This is technically a rollover, and a good fix — as long as you do it by the time you file your tax return the next year.

If you don’t have any loans, you’ll still need to decide what to do with your retirement account. You may be permitted to keep the money in your old employer’s plan, though you will want to evaluate whether it’s worth eventually rolling it over into an I.R.A. or a new employer’s plan. (Employers may require you to move smaller balances, often under $5,000).

Just make sure any transfers are conducted as a direct rollover — ask your plan administrator to make the payment directly to another retirement plan or to an I.R.A., so there are no tax consequences.

Take stock of all stock compensation.

If you receive any type of stock or options-related compensation, you’ll want to consult the documents you should have received, which lay out the rules for different awards — particularly during the “post-termination exercise period.”

These awards have different tax consequences, some more favorable than others. And you may need to act quickly to take advantage of them.

Restricted stock units must have vested before your last day, otherwise they vanish — though some employers’ severance packages are offering accelerated vesting schedules so workers can walk away with more compensation in their pocket.

But stock options — which allow you to buy company stock at a set price — often expire 90 days from your termination date. Some may expire later, but so-called incentive stock options may have more favorable tax treatment if they are exercised in that three-month window.

There’s a lot to consider. “How many options would I want to exercise and hold onto, and how many would I want to sell right away?” said Ms. Lee, the financial planner.

It all depends on the exercise price (or the cost to buy the underlying shares), the trading price (if they are publicly traded), how much cash you have to buy shares — and then potential tax consequences.

If you don’t have the cash to exercise the options (or to pay any resulting tax bill), there are companies that can loan you the money and shoulder most of the risk involved in such a transaction, but these decisions are best made with the guidance of a fiduciary adviser who is required to put your interests ahead of their own.

“The decision to exercise is definitely something you want to talk about with a tax adviser or financial planner because there are so many tax traps,” said AJ Ayers, a financial planner and co-founder of Brooklyn FI, a financial advisory firm.

Consider life and disability insurance.

Any insurance perks that came with the job, including life and disability insurance, will probably disappear after you leave. A severance package may extend life insurance policies for a bit longer, so be sure to check.

But most employers generally don’t provide enough coverage anyway, so now is a good time to evaluate your needs. “If you have others depending on your income such as young children, you may want to seek out a term life insurance policy that isn’t dependent on an employer,” Ms. Ayers said.

A term policy is cheaper and easier to secure when you’re young and healthy.

Some employers’ life policies are portable — meaning you can take the policy with you and pick up the premiums — but that could be more expensive than buying a new policy on your own, said Jennifer Fitzgerald, chief executive of Policygenius. “However, it could be a good option if you’ve had a hard time qualifying for your own life insurance in the past.”

Disability insurance is much more costly — anywhere from 1 percent to 3 percent of the income you want to cover, according to Policygenius. That’s why too many people go without it.