We have faced an excruciating recession leading to several million job losses at all different levels, across all industries, and all across the country. Some people were lucky to get some severance package from their employers, very few were lucky to find another job, and a vast majority continues to struggle. In either case, while going through a job loss or job transition there are a number of things one needs to consider to avoid costly mistakes. Following are some of the key items one needs to review. But before making a decision it is important to consult a tax planner or financial adviser.
Make sure you check with the benefits department of your former employer to check the COBRA rules. In some cases, you may be allowed to switch to a different health plan if offered by this employer. For example, while employed, you may have been in a high deductible health plan and now you are considering to move to a regular HMO plan because that is more cost effective given the COBRA subsidy from government under Economic Recovery Act. Some employers do allow you to do that but only during plan enrollment period of their employees. So you need to make sure that you don't miss out the enrollment deadline...Show details

Some employers are generous to offer the severed employees continuation of health coverage at the same rate as regular employees during the severance period. Getting a 65% COBRA subsidy on top of that for 15 months (if you lost your job by 02/28/2010) really makes the health plan from your former employer a very compelling proposal. So, before you rush to jump to buy another health insurance plan on your own or join your spouse's health plan, you may want to do a little math.

As an alternative to COBRA, certain individuals may be eligible for a Health Care Tax Credit (HCTC). The HCTC is a federal tax credit that enables eligible individuals to pay only 20 % of qualified health insurance premiums for themselves and their family members. This is even better than the COBRA subsidy because in this case, you pay only 20% of the premium as opposed to 35% in the case of COBRA. If you are eligible, the HCTC is available to you monthly as premiums become due, yearly when you file your federal tax return, or a combination of both. To qualify for this benefit there are 3 requirements: Show details

  • You should be receiving certain pensions from Pension Benefit Guaranty Corporation (PBGC), Trade Adjustment Assistance (TAA) or Alternative Trade Adjustment Assistance (ATAA)/Reemployment Trade Adjustment Assistance (RTAA) benefits e.g. a job transferred to a foreign country.
  • You should not be receiving Medicare benefits or coverage through the US military health system, TRICARE.
  • You must have a health plan that qualifies for the HCTC For more information on HCTC, check IRS website.

  • Many employers offer group life insurance plans to their employees and, in many cases, pay the entire or partial premium for these plans for a certain amount of life insurance. The coverage for such plans typically ends on your last business day with the employer. During a job transition, insurance needs typically don't change. It is therefore important to make sure that you are not carrying the risk of being uninsured or under-insured. Most group life insurance providers allow you to convert a group life insurance policy to an individual policy. However, the premiums tend to go up significantly because you don't have the bargaining power. There may be other life insurance companies with similar credit ratings and offering a similar coverage at a much lower price. In some cases it can be as low as 50% of what you might otherwise pay for an individual policy from your group life insurance provider. SBLI, for example, offers some very competitive life insurances. Of course, during a job loss particularly, who would want to leave money on the table? But before you change life insurance, make sure you get all the information from your group life insurance provider on different charges (e.g. policy cancellation/surrender charges) and make sure that your there is no gap between the start date of your new policy and the cancellation date of your old one. This may also be a time to reevaluate your life insurance needs.
    Disability income insurance or disability insurance protects a portion of your salary in case you become disabled. Many employers offer short term and long term disability policies as group policies. As soon as you separate from the employer these coverages cease to exist. Unfortunately, when you are not employed there is no income to insure for disability (no insurable interest). However, in some cases, employers work with their group disability income (long term) providers to let their departing employees convert a group disability income insurance policy to an individual policy even when you are not earning. These policies tend to have limited coverage (maximum of $3,000 per month), significantly higher premium, and typically require total disability before they pay you back.
    Having both short term and long term individual policies could be cost prohibitive, especially in the case of a job loss. But if you need to pick one, you may want to consider along term life insurance policy because they generally pay out to you until the age of 65. The benefit is available when the person is permanently disabled. Keep in mind when you convert your group policy to an individual policy, your premium is going to be substantially higher.
    If you were enrolled in your employer sponsored retirement plan (e.g. a 401k plan), one important decision during a job transition is whether to leave your savings there, roll them over to an IRA account, or roll them over to your new employer's retirement plan. If you decide to perform a rollover, it is important to do a direct rollover - in which case your retirement account holdings are transferred as is to an IRA account at the same financial institution which is administering your plan or to a different one. If the rollover is not direct, then you get a check from your retirement plan for your account balance minus 20%. This 20% is withheld for tax purposes. You can claim it back on your tax returns provided you fund your rollover IRA account within 60 days from the day you got the distribution. You will also have to put an extra 20% from your pocket to make up for the withheld amount. If you fail to rollover within a 60-day period, the entire amount is subject to tax at ordinary tax rates. Additionally, if you are not yet 59 1/2, the entire distribution amount may be subject to early withdrawal penalty of 10%. So, it is very important to instruct your plan administrator to do a direct rollover.
    It is not required to do the rollover or take the distribution for the entire retirement account balance. You could also perform partial rollover if the plan allows. Some plans require you to maintain a certain minimum balance after partial rollover.

    Advantages of a rollover IRA:
  • The biggest advantage of rollover is the investment flexibility. For example, many retirement plans don't allow you to buy individual stocks and bonds or have limited list of mutual funds to invest in. In a rollover account, you have a lot more choices for investment products. However, you are not allowed to invest in "collectibles" (art works, coins, stamps, gems, etc.) and life insurance.
  • Some retirement plans limit the number of exchanges you can perform in a calendar year. In an IRA account, there is no such restriction.
  • You may be able to take early distribution for certain qualified expenses without incurring 10% early withdrawal penalty, but you will still have to pay the income taxes. Qualified expenses, in this case, include withdrawals in case of account owner's death, permanent disability, payment for medical insurance during the taxable year if you have separated from employment, have received unemployment compensation for twelve consecutive weeks, up to $10,000 for first time home purchase (principal residence).
  • A financial adviser can also manage your retirement money once it is rolled over to an IRA account because this account gives him/her the flexibility of investing.

    Disadvantages of a rollover IRA:
  • The investment choices and flexibility advantage could be your biggest disadvantage if you lack money management discipline. Take a situation where you get excited about a hot stock which has gone up by 50% in a short period of time and you invest a good chunk in it, and say it sinks afterwards. Thus, it is important to have a discipline around asset allocations and diversification.
  • Frequent trading in a rollover IRA account could lead to significant commissions cost.
  • Unlike many qualified retirement plans, an IRA does not offer any loan provisions.
  • Many employers offer different fringe benefits. They may include, a tax saver account to pay for medical and dependent care expenses with pretax dollars, computer purchase assistance, fitness reimbursement, tuition reimbursement, free health check etc. You may want to take a careful look at these benefits, as they can add up to a sizable sum.
    Have a question