A buyout is a huge decision to make, especially if that employee is not considering retirement yet or is unsure of what their next move will be. (Photo: Getty)

It can be one of the most important decisions for any working adult: Do you stay at your company or leave to begin the next act of your life? Do you stay with what you know or leave to try your hand at something new?

This is what’s going through an employee’s head when they’re handed early retirement options from their workplace.

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One of the most common ways for employers to save money and trim staff is to offer buyout options. These early retirement package options are second nature to an HR professional, but they can look like gibberish to your employees.

If you want your employees to accept these offers, they need to understand what goes into them and what they’ll mean for their lives. A buyout is a huge decision to make, especially if that employee is not considering retirement yet or is unsure of what their next move will be. This is not only a financial decision, but an emotional one.

Read below to see what you need to be aware of before offering buyouts to your employees.

Compensation

If the packages vary based on an employee’s age, time at the company or some other factor, that should be clear to them in the package. Other forms of compensation can include health insurance coverage for a certain amount of time. Some benefits include placement services if the employee wants to find a different job.

Employees should know if they’re going to receive the money in a lump sum or over a certain amount of time. A severance payout could also affect their tax situation; it may be useful to offer a projection on how much more they may owe in taxes. Someone from the accounting department can also go over this individually with employees so they’re 100 percent informed instead of shocked come tax time.

Retirement Plans

Employees who have 401(k) need to be aware of what their current 401(k) balance is and how much they’ll be taking with them when they leave. Most companies with 401(k) operate on a vesting schedule and your workers may not be aware of the details of that vesting schedule.

You need to explain how the 401(k)process will work. Will they receive 100 percent of all matched funds, even if they were not previously eligible? Will they be able to easily roll that 401(k) into an IRA? Will there be any fees or details they need to be aware of?

For example, employees younger than 55 who start withdrawing from a 401(k) after retirement will not have to pay an early withdrawal penalty. However, those who fall under that age will be subject to a 10 percent penalty on top of owing taxes on their distributions. That penalty could eviscerate their retirement account just when they’re about to need it the most.

If your company has access to a financial planner or someone with experience in that area, it may be worth having them do a presentation on 401(k)s, including what happens if someone takes a buyout. Having an expert show them the ropes will help them make the right choice and allow you to take some of the load off.

A financial planner can also help the employee understand what will happen if they take the buyout and retire immediately. Can they afford the kind of retirement they envisioned? How should they invest their buyout? What should they do with their 401(k) and any other retirement accounts they may have? If they have company stock, what should they do with it? A good financial planner can set your employee’s mind at ease about their monetary prospects.

Legal details

Employees should be aware of what rights they’re giving up when they sign the agreement. Are they foregoing any future claims to compensation? Are they signing away rights to sue your company? This should be made clear so all employees fully understand what they’re signing away.

Some agreements also include a non-compete clause, which employees should also be fully aware of if they continue to look for work after leaving your firm. You also need to clarify how signing this agreement can disqualify them for unemployment benefits from the government.

Explaining all these various options in detail is essential for your employees. It may be helpful to host a general seminar where you discuss the packages and then meet with an employee one-on-one. They may be embarrassed to discuss their personal situation in front of their coworkers or they may need time to discuss the packages with their spouse.

An article from the Society of Human Resource Management says that buyout acceptance rates may suffer because employees feel too overwhelmed by all the options they have. Like standing in front of a grocery store aisle with two dozen flavors of coffee, employees freeze and are unable to make the best choice.

Employees should have plenty of time to discuss this option before making a final decision. News like this can be jarring and it’s important to have all the right facts in place.

Make sure that they’re fully aware of the ins and outs before they sign. Your job is to ensure that both employer and employee are consenting to an agreement that they both understand completely.

Remember, if they don’t understand the option, they’re less likely to choose it.