Your employer was probably helping with several aspects of your financial plan. It’s time to go through these benefits one by one and figure out what to do with each item.
You are losing your group health benefits, which are generally composed of three items: Health and Dental coverage, Disability Insurance and Life Insurance.
Health and Dental
Does your spouse have a plan? Make sure that you are letting the other benefits company know that you are opting back into their benefit plan (if you opted out), or that you are not coordinating benefits anymore.
If you don’t have a spouse, you can buy one of two types of plans to maintain coverage:
1. Buy standard private health insurance. The cost will be relatively low, but private health coverage excludes all pre-existing conditions. This is the option for people in excellent health, or with inexpensive existing health conditions. If you qualify without any exclusions, this is better than option 2.
2. For those people with existing health conditions that they would want to maintain coverage for, there are “roll-over” options available. This type of coverage will be more expensive, and the quality of coverage will be inferior to option 1, but these plans will cover pre-existing conditions. Be aware, you do not have to purchase coverage from the group insurance company you are leaving. Most companies have a private product that you can purchase within 30-60 days of losing coverage, regardless of who the group provider was.
You are losing your disability insurance – There isn’t much you can do here. There is usually no roll-over plan available. Private Critical Illness Insurance, and private Disability Insurance are available.
Some plans may differ, but when you lose your group life insurance you are usually allowed to purchase private life insurance from the previous group carrier. The amount you can purchase is normally equal to the amount of group coverage you are losing up to a maximum of $200,000. No medical questions are required, this is a“roll-over” product. Only people who don’t qualify for a normal, underwritten policy should apply for this type of guaranteed-issue product. GuaranteedIssue insurance is lower quality, and much more expensive. If you are in relatively good health, apply for an underwritten product, have a broker shop you around.
General Rules of Thumb, Going Forward
In a world where career changes are happening rapidly, you can’t rely on your employer to protect you and your family. You should apply for private disability insurance, and private life insurance so that you are not suddenly left without coverage.
Group RRSP or Defined Contribution Pension Plan
The two unique benefits of a work investment plan are: Matching contributions and lower fees. If you are leaving a group plan, you are losing the matching, and unless you are being allowed to stay in the pension, you are losing the lower fees. Group RRSPs will transfer to a private RRSP, held with the group provider. Defined Contribution Pension Plans will be converted to a private locked-in plan, held with with the group provider. You are now in the worst place – retail-like mutual fund fees, with no advice, and no matching. You need to get out of this position ASAP. You want to either get advice for your fees, or pay lower fees to do it yourself. Find a CFP who can manage your plan, or transfer it to a self-directed platform.
Defined Benefit Pension Plan
Often, you are given the option to commute your pension into a lump-sum when you are terminated. Speak to a professional. There are so many moving parts to this decision that it is very difficult for a non-professional to decide what’s best. Do you want a lump-sum to invest yourself? Or do you want a lifetime of pension payments? Lay the two options down beside each other, discuss the tertiary benefits (survivor benefits, inheritance considerations, indexing, etc.) and decide what’s best for you.
Severance is considered taxable income in the year that it is received, so if you find a new position right away, you may be in a position where you are headed towards a massive tax bill next year. When you first receive your severance, there will be a withholding tax deducted. This is not the true tax bill, this is just to make sure the government gets something if you decide to take off to another country or go off the grid. Come tax time, they will reconcile your severance with your income and determine your true taxes owed.
How can you manage the tax bill on a severance?
Taxes owed on a severance can be enormous. Consider someone who is hired immediately after termination, and who will make $100,000 of employment income 2023, but also received a $200,000severance after 20 years of service. They will owe $96,783 in tax on that $200,000 severance. The first step should be to ask if some of the severance can be shifted to 2024. By moving income that will be taxed at the highest tax bracket in 2023 to 2024, where it will be taxed less, there will be significant savings. It is unlikely that the employer will do that, but it has been done before, so ask.
If you have RRSP room, you can make a big RRSP contribution to lower the tax bill, and even recoup some of the withholding tax that you will have been charged. Does your spouse have RRSP room? Are they in a high tax bracket? You might be able to get some tax back on their side to offset your tax bill.
Shares in an Employee Purchase Plan
You have two categories of shares:vested and unvested. You will keep the vested shares, but your employer is not obligated to let you have the unvested shares. Recently, several tech companies have automatically vested all their terminated employee’s unvested shares, however, so you should definitely ask. As soon as you have these shares, you should probably sell them, and hold them in a safe position until you find new work.
If you were in a share purchase plan that accrues your contributions and then purchases quarterly on your behalf, make sure contributions are accounted for. You need to be awarded the stock, or refunded.
Safeguarding yourself ahead of time
It might be too late now for these next points, but here are a few ways that you can make things better if this ever happens again:
Get approved for a Home Equity LineOf Credit that is as big as possible. It’s hard to qualify for more debt without an income, so get this sorted out ahead of time, before any trouble.
Always have 6 months of emergency funds on hand to weather any storms. There are some pretty decent rates on High Interest Savings Accounts right now, which makes this option much more attractive than it has been for the last decade.
As you can see, there are a lot of considerations. Consult a lawyer, an insurance broker and a Certified Financial Planner to help guide you through these decisions. Good Luck!