Offered A Voluntary Separation Package? Ask These Three Questions
A voluntary separation package is a financial offer given to an employee who voluntarily resigns from their job. It’s often given as an alternative to layoffs or as a way for the employer to downsize their workforce. These packages usually come with compelling incentives beyond just a financial payout. If you’re reviewing a separation package from your company, it’s essential to understand the details of the offer, including:
Does the voluntary separation package include health benefits?
Knowing the details of your current and future health benefits is crucial for planning and ensuring that you have the right benefits in place to help with any future needs. Given the rising costs of health care and unpredictable nature of health incidents, we believe strongly that this is not only prudent, but essential.
If your company’s separation package does include health benefits, you need to understand how these benefits will integrate with Medicare once you reach Medicare age. If health benefits are not extended as part of the offering, you will need to consider the costs of COBRA versus health care plans on “The Exchange.”
As we shared in our recent piece on evaluating a separation package from P&G, health care costs can be “one of the riskiest unknown expenses that could otherwise derail even the best of financial plans.” Our advice is to be clear on what is offered in the package specific to your situation and ensure you have a plan to continue coverage for you and any dependents.
Additionally, on the topic of insurance, be sure to understand how a separation package may affect any life insurance policy you have through your employer. Understanding how a separation package may affect any insurance policies you have through your employer is important to ensure that you can make informed decisions about your coverage and plan for any necessary changes. It’s possible that you may need to seek out other insurance options after your separation, so being prepared with this knowledge can help you avoid any gaps in coverage.
How will nontraditional compensation be treated in the voluntary separation package?
If you were awarded non-traditional compensation such as stock option grants, restricted stock units (RSUs), or stock appreciation rights, you need to understand how the separation package will treat them. For example, a recent separation package from Comcast allowed individuals an added 24 months to exercise stock options and an added 24 months to vest RSUs after their retirement date. Understanding how your stock options will be treated is crucial to realizing the full value of those assets.
How might a voluntary separation package impact your retirement accounts?
You need to examine your employer’s retirement plan to understand the rules and potential impact of separating from the company. Depending on the rules of your company 401(k) plan, you may have to withdraw assets upon separation. While you should not face any early withdrawal penalties through the terms of the separation, you need to understand the future impact of making early withdrawals. If the separation package comes years before retirement, working with a financial advisor is essential to evaluate whether your financial plan can handle early withdrawals. You should also understand how your employer’s contribution match to your retirement accounts will be affected.
Also, your company may offer a deferred compensation program that allows employees to take part of their salary and/or annual bonus and defer receipt to a later year. The program provides immediate tax savings while also offering a valuable retirement asset for one’s income distribution plan in the future. In the case of Comcast’s voluntary retirement program, individuals were granted higher pre-retirement earnings rates on deferred compensation tranches for an extended period after their retirement date, allowing for a more efficient income distribution plan in the future.
Pause, Don’t Panic.
If you find yourself reviewing a separation package from your company, it’s essential to hit the pause button and take the time to understand the details of the program. Knowing the implications around health care benefits, stock options, RSUs, deferred compensation, and your retirement assets is a great starting point to properly evaluate whether the package makes sense for you and your financial plan. Working with a fiduciary financial advisor who can run the numbers and help you understand if this will affect your availability to retire how and when you want is crucial.