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Navigating a Layoff: Strategies for High Earners

July 9, 2024
Navigating a layoff: strategies for high earners

By Michael Henley, CFP®, CPWA®, CRPC®, RMA®

Job cuts are a reality in today’s business landscape. Earlier this year, FMC Corporation, a global leader in agricultural sciences, announced plans to cut its workforce by 8%. This move reflects a trend seen across many industries worldwide.

While losing a job can be challenging, especially for individuals nearing retirement, there are numerous resources available to help navigate this transition. Brandywine Oak Private Wealth specializes in guiding high-earners through the complexities of executing some of the most critical and timely decisions to help you feel confident in your financial future.

Explore the Possibility of Severance Packages

While not required, many companies offer severance packages to employees after a layoff to ease the transition during the first few months of unemployment. It is important to understand the parameters of your company’s severance packages and benefits in order to make an informed and educated decision. In our experience, these severance packages (you may hear it referred to as a “CTP” amongst DuPont Corporation and its affiliates) can be quite substantial, and like always, the more you plan, the more you will keep after taxes.

Many severance packages involve a lump-sum final payment which ranges from 3-15 months of compensation—creating an unusually high-income year. Here are a few key strategies to mitigate your tax liability:

Deferring income to your company 401(k) account: If you are laid off earlier in the year, increase your 401(k) salary deferral to maximize the IRS limit prior to your final day of service. Typically, you are not eligible to defer your severance payments into your company 401(k), however, nothing stops you from contributing as much as 50-60% or more of your salary into your retirement plan. 

Don’t forget about your HSA in the year of severance: If you are part of a high-deductible health plan, be sure to maximize your health savings account (HSA) individual/family contribution, as this is often entirely overlooked in our experience.  

Make quarterly estimated tax payments: A significant lump-sum severance payment can have immediate tax consequences, and a qualified tax professional should review your final paycheck and withholdings year-to-date to determine whether or not estimates are needed. In our view, it is far better to prepare than to repair. There is nothing more frustrating than the IRS imposing extra penalties because your former employer under-withheld income taxes from your severance! 

Consider Moving Funds Out of Your Former Employer’s 401(k)

After a layoff, there are several reasons to consider rolling a 401(k) plan out of a previous employer’s provider and either into a new company’s plan or an individual retirement account (IRA). Some of the advantages of doing so include:

  • Distribution Flexibility: Many companies only allow a certain number of distributions per year, do not allow for recurring monthly withdrawals from specific funds, and limit access to your hard-earned life savings after a layoff. 
  • Investment Options: When consolidating your 401(k) into your new employer’s plan or an IRA, it is important to consider where you have the best investment choices and how those choices align with your investment goals. Often a 401(k) has a limited menu of funds, which prevents proper diversification. A key to successful investing is disciplined rebalancing, which can be clunky and cumbersome in a company-sponsored plan. 
  • Simplicity & Professional Management: Consolidating your retirement accounts can make it easier to manage, track, and withdraw your savings since they will all be in one place. Having a collection of 401(k) plans makes required minimum distributions more complicated, and 401(k) plans do not permit qualified charitable distributions (QCDs) at any age.
  • Beneficiary Complexity: Depending on the plan, when a non-spouse beneficiary inherits a 401(k) plan, there can be rules around how the beneficiary must treat the plan. In some instances, there is even a draconian rule that deems the entire retirement plan taxable within 5 years.  

Utilize a Donor-Advised Fund (DAF)

Donor-advised funds are vehicles that allow you to receive an immediate tax deduction, which is ideal in an unusually high-income year. The donation to the DAF must be made in the same calendar year you received your severance to offset this additional income. Once the DAF is funded, you can distribute (grant) the money to your favorite charities over time in the manner you see fit.

Many corporate executives have received shares of their company in the form of Restricted Stock Units (RSUs), and these shares are perfect candidates for a DAF donation to avoid the capital gains taxes that would otherwise be incurred by selling the shares. 

Understand Net Unrealized Appreciation (NUA)

Many large companies let employees invest in their company stock through their 401(k) plans. Net unrealized appreciation (NUA) is a strategy that helps employees benefit from the increase in value of this stock beyond what they originally paid for it. This strategy is not widely used, but it can be very advantageous.

The IRS allows employees to take out their company stock from a retirement plan and pay lower capital gains tax on the stock’s increased value, instead of higher regular income tax. However, to get the most benefit from this strategy, it’s important to check the stock’s original price (cost basis) after a layoff.

If you have appreciated employer stock in your 401(k) plan, it’s important to consult a qualified private wealth advisor before simply liquidating and rolling over the entire plan, as this transaction is irrevocable and the tax savings can be substantial with NUA. 

Address Healthcare Needs Before Your Insurance Ends

When your employer-sponsored health insurance ends after a layoff varies from one company to another. Some employers require immediate termination, where your medical insurance ends the day of termination. Other companies will extend health insurance coverage to the end of the month in which the termination occurs. 

It is crucial to understand your company’s policy around health insurance so you can plan accordingly. If you have coverage through the end of the month, be sure to address any health issues before you lose your insurance. This could include scheduling routine checkups and tests, specialist visits, and filling outstanding prescriptions.

Next, you will need to line up sufficient coverage from another source. Some of your options may include:

Eligibility for Retiree Medicare Coverage: Many individuals may have earned a retiree medical plan option through years of service at a prior employer, and can access medical plan options by contacting the benefits provider at their current or former employer. 

Electing COBRA: You may be able to extend your existing employer-sponsored health insurance coverage for up to 18 months through Consolidated Omnibus Budget Reconciliation Act (COBRA). Although your existing coverage will continue, you will be solely responsible for premium payments.

Sign Up for Medicare: Individuals 65 and older and laid off can enroll in Medicare during a special enrollment period (SEP). This time frame lasts 8 months after the layoff occurs and allows individuals to sign up for Medicare without penalty, whether or not they elected COBRA. 

Explore the Health Insurance Marketplace: Individuals can fill out an application on HealthCare.gov and state marketplaces to obtain health insurance coverage after a layoff. Generally speaking, coverage begins on the first of the month following the date of enrollment. 

Get Brandywine on Your Side

Brandywine Oak Private Wealth focuses on the financial success of current and past employees of companies such as DuPont, FMC Corporation, Dow Chemical, International Flavors & Fragrances, Chemours, and AstraZeneca. We assist our clients with every financial decision they face, including the complexities that come with a recent layoff.  

Through our partnership, we strive to become a financial advocate, coach, and friend working to organize and streamline your entire financial life. To schedule a meeting to find out how we can help address your unique needs, call (484) 785-0050, email mhenley@BrandywineOak.com, or get started online now.

About Michael

Michael Henley is the Founder and CEO of Brandywine Oak Private Wealth, a private wealth management and registered independent advisory firm headquartered in Kennett Square, PA. Over the course of his 20-year career, Michael has been dedicated to helping wealthy individuals and families plan and manage all aspects of their finances and investments. With a passion for helping others look behind the curtain and understand the complex world of finance, he develops close relationships with clients as he helps them progress toward their financial goals. Michael loves to provide clarity and alleviate financial anxiety, help prevent families from overpaying in taxes, and give wealthy families permission to enjoy their life savings. He says, “No work is more gratifying than giving families outcomes to what matters most to them.”

Michael holds the CERTIFIED FINANCIAL PLANNER™, Certified Private Wealth Advisor®, Chartered Retirement Planning Counselor, and Retirement Management Advisor® designations. Residing in Chadds Ford, PA, with his two children, he enjoys outdoor activities, particularly maintaining trails on his property, hiking with his dogs, and being an actively engaged dad, always taking his kids everywhere. Michael’s latest hobby is tennis, he is obsessed with hot yoga, and he recently started ice skating to join his daughter Savannah. He can also be found moving logs to the firepit with his son Maverick on the tractor. Michael serves on the board of United Way of Southern Chester County and loves mentoring younger advisors. Great mentors helped him succeed, and he’s convinced that every leader needs to both have mentors and be a mentor. To learn more about Michael, connect with him on LinkedIn.

Brandywine Oak Private Wealth is a registered investment adviser.  Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.