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A sudden loss of employment can create a range of uncomfortable emotions and situations for employees, especially given the current state of the job market.
With tensions running high, employees may make rash decisions about their health benefits and their finances. That highlights the need for employers and their benefits advisors to help departing employees get quality advice about what happens next.
Employers should provide what help they can, directing the departing employees toward helpful support programs and trusted sources of information. That can emphasize the care the employer has for its employees, even if circumstances lead to the termination of an employer-employee relationship.
Assess the Situation
The first thing employers and their benefits advisors should do is talk to experienced human resources legal advisors to understand what they must, can and must not tell departing employees.
With the recommendations of legal advisors in mind, employers and benefits advisors can then analyze what benefits will be affected when employees depart and what happens to those benefits when employees leave.
How is the employer organized, where is the employer legally domiciled for purposes of analyzing each type of benefi?
When will a departing employee receive the last paycheck?
Will the departing employee get severance or other types of unusual compensation?
Local state labor offices or an employer's human resources advisors might have ideas about how to use nonprofit programs, online systems or other services to get departing employees personalized help with understanding what benefits will need attention and how to respond.
Health Insurance
Review a departing employee's health insurance situation is especially important.
Do federal COBRA coverage continuation requirements apply to the employer, and does the employee for COBRA?
For an eligible employee, how much would continuing the existing coverage cost, if that's possible?
What kinds of plans might be available from the Affordable Care Act public exchange system or other sources?
Encourage departing employees to check with their doctors to find out how possible changes in coverage could affect access to their providers.
Preserving Savings
Employees who are losing their jobs often consider pausing retirement contributions or attempting to cash out what they have saved so far.
Those decisions often cause more harm than good long term.
Employers and their benefits advisors may want to find ways to warn departing employees against relying on pre-tax funds to cover expenses when there are other options.
For a typical departing employee, cashing out a traditional retirement plan account can result in the departing employee owing federal income taxes, state income taxes, and penalties of anywhere from 20% to 35% of the withdrawal value. Especially if the economy is weak and unemployment is high, the prices of the mutual funds and other assets in a departing employee's retirement plan account may be low. If the value of the plan assets is down when a departing employees cashes out, that can add to the employee's financial pain.
Additionally, if the departing employee has borrowed from the employer plan account and has an outstanding loan, the employee will have to try to pay the loan off when employment ends. Otherwise, the IRS will consider the loan to be a taxable distribution from the account.
Some companies offer employers programs that can help employees build emergency funds. Giving employees a chance to establish an emergency fund equal to three to six months of expenses will safeguard departing employees during periods of unemployment and protect them from having to withdraw retirement savings at what may be the worst possible time.
If departing employees choose to leave assets in the employer's retirement plan, at least temporarily, the employer needs to make sure the departing employee understands the importance of keeping information about their address and beneficiaries up to date.
Julianne Hertel, CLU, ChFC, CLTC, LACP, is the owner of Dream Big Wealth Strategies. She specializes in financial planning and wealth management. Julianne is a 10-year member of Million Dollar Round Table.
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