Making a career or company change can be both exciting and stressful. While focusing on a pending transition, or getting up to speed at a new employer, you don’t want to forget about your benefits.
Not planning properly prior to leaving an employer can result in tens of thousands of dollars in lost benefits, and not selecting the right benefits at your new company can also be quite costly. Therefore, you want to carefully review both your former and new employers’ benefits packages and any grant or award terms to coordinate them with your financial plan and budgeting.
There are a number of resources available to professionals who are thinking about a career or company change as well as for those who have recently made a change. This report from Johns Hopkins University, for example, includes strategies for coping with your emotions, crafting your résumé, interviewing, negotiating a salary, and managing other intangibles.
From the financial side of things, here are answers to 10 of the most common questions for those making this change.
What should I do about my health insurance?
There is generally a waiting period at a new employer before you qualify for health insurance. For coverage prior to eligibility at your new employer, you should compare your COBRA options from your previous employer and a short-term health insurance policy. The short-term insurance policy will cost less, but usually only covers catastrophic events, which means you will have a high deductible to meet before it starts covering your medical bills.
Can I keep any of my benefits from my old employer?
The short answer is: possibly. The long answer is: It depends on your old employer, so consult with the benefits manager at your previous company regarding the terms and conditions of your benefits. Make sure you understand the different restrictions and liabilities of the type of benefits you have. We recommend you understand and compare the costs of your options and the financial impact before you make any decisions. Contact your financial advisor to discuss what benefits may be worth keeping.
What should I do with my 401(k) from my former employer?
It is important to keep track of your retirement assets, so consider consolidating your old retirement accounts to simplify your finances and give you a clearer view of your retirement future. There are typically four options to consider with your old retirement plan when leaving a company.
1. Leave your money in your former employer’s plan, if your former employer permits it. Choosing this option means you don’t have to make an immediate decision about where to move your savings. Your account stays subject to your previous employer’s plan rules, including investment choices, costs, and withdrawal options.
2. Roll over your money to a new 401(k) plan, if this option is available. If you’re starting a new job, moving your retirement savings to your new employer’s plan could be an option. Most 401(k) plans will allow you to rollover your old 401(k) assets to your new company’s plan prior to being eligible to contribute to the plan as an employee. Your new company’s 401(k) plan may offer benefits similar to those in your former employer’s plan. Most employers will not accept shares of stock from your old employer’s plan. To transfer your assets from a Roth 401(k) your new employer must also offer a Roth 401(k) option. Note that because certain benefits such as the net unrealized appreciation (NUA) will be lost when transferring assets from your old 401(k) to your new 401(k) plan we suggest you discuss this with your financial advisor prior to making your decision.
3. Roll over your 401(k) to an IRA. Rolling over your 401(k) from a former employer when changing companies or retiring is a way for you to consolidate your retirement savings while maintaining control and flexibility in managing your savings. When rolling over a Roth 401(k) it must go into a Roth IRA and your assets will retain their tax-exempt status. Any after-tax contributions made to the 401(k) will be distributed to you directly and not rolled into your IRA account. Because certain benefits such as the net unrealized appreciation (NUA) will be lost when rolling over your 401(k) plan we suggest you discuss this with your financial advisor prior to making your decision.
4. Take a cash distribution. While withdrawing all of your money may seem like a good idea in the short term, be sure you understand the consequences before you do. Money withdrawn will be taxable and subject to a mandatory 20% federal withholding rate. You may also face early withdrawal penalties.
How much should I contribute to my new employer’s retirement plan?
It’s important to get to know your new retirement plan. The type of plan offered—401(k), 403(b), 457, SIMPLE IRA, SEP IRA, etc.—will impact the maximum amount you can contribute, and the availability of a Roth feature will determine if you can contribute pre-tax or after tax. You want to learn about your plan’s features, investment options, and fees. You should also take advantage of any educational resources offered by your employer or retirement plan provider. Or you can consult your financial advisor for assistance in determining how much to contribute, how to allocate, and when to make changes to your contributions and assets inside the plan. Don’t pass up free money! If your new employer provides an incentive to participate in their retirement plan, such as a matching contribution, you should strongly consider taking advantage of that benefit. At an absolute minimum, you should at least contribute enough to maximize the employer’s contribution.
How should I invest in my new employer’s 401(k) plan?
The first step is to determine which account to contribute to, traditional or Roth 401(k). There are many questions that need to be addressed before determining which type of 401(k) makes the most sense in your situation. Such factors include age, income level, current retirement savings, spouse’s age and retirement savings, taxable savings, and years to retirement. Consider using some of the free calculators available to compare the growth of 401(k) contributions and the forecasted values for both a traditional and Roth 401(k). Or consult your financial advisor who can help you determine which type fits best in your financial plan.
The next step is determining how to invest inside the 401(k). Creating an allocation is dependent on a number of factors such as your risk level, time horizon, current investment allocation, and financial plan. You should again take advantage of any educational material your employer and 401(k) provider offer to help create an allocation. Remember, once you create your initial allocation that does not mean you are done with retirement planning. You will need to review your allocation periodically and adjust as the global economic markets change and your life evolves. We recommend you review your 401(k) at least annually. To help remember to review, pick an annual event as your review date, such as your birthday, so you won’t forget.
If you are not comfortable making these types of decisions, please consult your financial advisor. Small changes to an allocation can have a big impact over time on your entire retirement and this process needs to be taken seriously.
What happens to my stock options and/or restricted stock when I leave my company?
Prior to leaving your company you need to review the terms of each of your stock options, stock appreciation rights, and incentive comp grants/awards as each may have different terms. You should contact your HR department if you have any questions and to get copies of each award to review the terms. If you are negotiating a severance package you will want to consider the ramifications of each plan and each grant with the timing of your termination, especially if you will be leaving near the end of the year or close to a vesting date.
Frequently, there is an opportunity to exercise vested stock options after your termination, but the cause of termination and company-specific policies vary and make it imperative that you check before you terminate.
Additionally, proceeds from the sale of your shares could be subject to taxes, and the tax implications of equity awards are complex and vary by state, local jurisdiction, and country. We recommend you understand the impact on your finances before you make any decisions.
You should consult your financial advisor and tax advisors before you exercise your options or sell stock. You worked hard for your money; you don’t want to lose it for overlooking the fine print.
What happens to my disability insurance when I leave the employer providing it?
Disability insurance can be thought of as insurance for retirement. It protects your earnings stream from a potential debilitating event. If the insurance is offered as a company-sponsored benefit, it will most likely not follow you—but it is good to check with your old employer on the terms and conditions of the insurance plan.
Review your disability insurance needs. If you choose to have disability insurance, you should compare what is offered by your employer with policies that you can purchase directly from insurance companies. If you are not comfortable making these types of decisions, please consult your financial advisor, who can help determine the amount of coverage that makes sense for your situation and can get you quotes from appropriate insurance carriers.
What happens to my dental and vision coverage when I leave an employer?
The time period for which benefits remain active after leaving a company varies by company. Prior to terminating, you should contact your employer’s benefits manager and review your employee benefits handbook and employment contracts. Most employers keep benefits active through the end of the month in which an employee terminates. Under this arrangement, an employee who quits on the first day of a month may have four weeks of benefits coverage after leaving.
Should I convert my former employer’s group life insurance policy to an individual policy?
To answer this question, you need to first determine if you have a need for life insurance, and if so, what size policy makes sense. If you determine you need life insurance and you’re no longer covered by a group policy, you should compare the costs and coverage offered at the conversion from the group policy to that of a new individual policy. You should also compare the different types, costs, and coverage available from a new individual policy. Getting an individual policy usually requires underwriting, If you’re in good health this can be a benefit, while if you are not the cost could be prohibitive. With so many options and choices we recommend working with your financial advisor or insurance agent.
If you are joining a new company, you want to look at its benefits and determine if its coverage is enough or you need supplementary coverage. Again, contact your financial advisor to help determine the amount and coverage that makes sense for you.
Coordinate your new benefits with those of your spouse. If you have a working spouse, compare and contrast the benefits offered by each employer. It may be more advantageous to elect certain coverages as a family under one employer rather than being on separate policies, depending on the costs and benefits offered.
What happens to my flexible spending account (FSA) when I leave a company?
Some employers offer an FSA to let you put aside pre-tax funds to cover qualified health care expenses. If you leave employment before your FSA plan year ends, you can still submit claims to be paid out of the FSA dated prior to your termination. Keep in mind, often the claim must be submitted within 90 days after termination, but this varies per plan. Remember, you are entitled to use your full annual FSA amount prior to termination, which can exceed what you have paid into your FSA prior to termination. Lastly, the rules for dependent care FSAs are different. You can only submit claims up to the amount taken out of your paycheck.
Changing jobs can be stressful, but asking the right questions ahead of time can help ease the transition. Fortunately, many of the answers are right here. Happy job hunting!
