Personal Finance

How to Build Your Own Benefits Plan If You Leave Your Job

In this guide, we break down what to do in various scenarios and how to build your own benefits plan if you end up leaving your job.

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Whatever your reason for leaving a job, what happens to your employee benefits? What next steps should you take?

In this guide, we break down what to do in various scenarios and how to build your own benefits plan if you end up leaving your job.

What Should You Do When Quitting Your Job?

When you decide to quit your job, you should provide your employer with two weeks’ notice before leaving. This will keep you in good standing with your employer should you need references.

Make sure to talk to the person at your place of employment who handles employee benefits, which for larger companies is likely to be someone in human resources. Knowing when your benefits lapse will help you start planning for the future. Your employer may also offer suggestions or provide materials about alternative insurance options, pension, rolling over your 401(k), and more.

What Should You Do If You Get Fired?

Maybe you had a clash of interests with your boss. Maybe the reality of your role was different from what you imagined. Or maybe there was a mismatch of skills.

Whatever the case may be, getting fired may ultimately work out for the best. A setback like this can inspire you to pivot into a better career while building resilience for taxing situations in the future.

Polish that resume and work on securing references from other former employers so you can get a good start on the job hunt. Consider asking a colleague with whom you have a good relationship to serve as a reference for your next job.

What Happens When You Get Laid Off?

A layoff is not personal, although it might feel that way, especially if you have been with the company for several years.

Speak with your former employer about any and all benefits to which you are entitled, be they in the form of a pension or health insurance. They may also offer a severance package, so be sure to discuss this before you leave.

You will also want to file for unemployment benefits as soon as possible so as not to delay your first unemployment check.

What Happens to Your Employee Benefits When You Leave Your Job?

Some employee benefits will cease the moment you leave the company. Others may lapse after a predetermined period of time.

Below we break down the different types of employee benefits and discuss what happens to each when you leave your job.

Sick Leave/Vacation Days

While it is a good idea to make use of your paid leave before leaving your job, your life plans may not allow for that. Your employer will typically pay for any unused sick or vacation days.

Check with your company or department about their policy and ask specific questions. Do they pay for unused vacation and sick days? Is there a limit on how many days they will compensate (i.e., up to two weeks)? When will you receive your check for the unused leave?

Health Insurance

One of the most important benefits your employer offers is health insurance. Now that we are in a pandemic, having health insurance is more imperative than ever, regardless of your employment status.

In the case of most companies, your health insurance ends on your last day of work or at the end of the month. It is your responsibility to verify with your employer the exact end date of your coverage.

If you already have a new job lined up, then you can try negotiating with your new employer for health insurance coverage to start on your first day at the new job, thus minimizing the amount of time that you are without insurance.

COBRA

If there is a gap between the end of your current job and the start of your new one, you may need to acquire insurance for the interim period. Most midsize or large companies with more than 20 employees offer COBRA to departing employees.

COBRA provides health insurance to former employees for up to 18 months, although employees will typically pay for it. Depending on the terms of your departure, your employer may agree to pay for a certain amount of COBRA through your severance package.

Conversion Plans

Some health insurance companies allow you to convert a group plan acquired through an employer to an individual insurance policy. They may, however, impose eligibility requirements. Check with the health insurance provider to determine whether this is an option.

Continued Insurance

If you and your employer have mutually agreed upon your departure, they may offer a severance package. You can negotiate for continued coverage that will allow you to stay on your company’s health insurance plan for a specified period of time. Continued insurance operates separately from COBRA.

Check your contract for a continued insurance stipulation, especially if you are a senior employee with considerable responsibilities at the company.

Government Health Insurance

The Affordable Care Act established a health insurance marketplace exchange run by the federal government, also known as Obamacare. It offers plans at various monthly premiums for individuals and families. The price of the plan determines your level of coverage.

You can compare plans on the marketplace with COBRA to determine which would be preferable for your health needs.

Flexible Savings Accounts (FSAs)

Not all companies offer FSAs along with their health insurance, but for those that do, they serve as an incredible job perk. Through an FSA, you can add up to $2,500 of your salary tax-free to an account for medical bills. Even so, you must use your FSA money within a year.

If you choose not to continue with your employer’s health insurance plan via COBRA, you will lose these FSA benefits. Therefore, it would be in your interest to use up as much of the $2,500 as you can before leaving. If you deposit money into your FSA that you cannot use before you leave, you will not get a refund.

Life Insurance

Your employer typically provides life insurance through a group plan, which means they do not have to pay for your insurance after you exit the company.

As a former employee, you can:

  • Cancel your employer’s policy and seek your own coverage
  • Convert the group plan to an individual life insurance policy that you pay for out of pocket
  • Transfer the policy to another group plan under the terms of your new job

Life insurance coverage will usually cease when you leave your current job. You will need to reapply for life insurance based on your current health and age. I highly recommend Policygenius, which allows you to compare quotes from different insurers all at once.

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    Disability Insurance

    If you are receiving disability insurance or worker’s compensation, your employer will likely discontinue this coverage after you leave the company. Consider taking out your own coverage, especially if you intend to work as a self-employed individual and cannot rely on coverage from a new company.

    Retirement Benefits

    Many companies offer retirement benefits, such as a 401(k) or even a pension. Here's what happens to these retirement benefits when you leave a job.

    Pension

    Not all companies provide pensions to their employees. If you secured a pension with your job offer, however, you may retain the pension or withdraw those funds when you exit the company.

    In order for this to happen, your pension contributions must be yours alone (also known as fully vested). You also will need to have worked at your company for a predetermined time period, as many companies only let you keep your pension after working there for 3 to 5 years.

    Should you decide to leave before that time, you may lose some or all of your pension. Ask your employer about the terms of your pension before you announce your resignation.

    401(k)

    Many companies offer some type of retirement or mutual fund account such as a 401(k). When you leave the company, you have three options:

    • Maintain the current funds in your 401(k) without contributing any more money
    • Cash out the 401(k)
    • Roll over the funds into a new employer’s 401(k) or an individual retirement account (IRA) so you can begin contributing again

    Keeping your funds in the existing 401(k) remains the easiest option, but it can become hard to oversee your investments after you have left the company.

    Also, unless it is absolutely necessary, you should never cash out before you have reached retirement age. Cashing out early results in hefty withdrawal fees. For this reason, many employees choose to roll over their accounts. Ask your employer for instructions on how to roll over your 401(k) contributions.

    How Should You Build Your Own Benefits Plan?

    To build your own benefits plan, the first thing to do is set up a checklist of questions to answer:

    • Which benefits end when leaving your job?
    • Which benefits stay with you after leaving your job?
    • Among those benefits, do any of them lapse? When do they lapse?

    If you need help answering these questions, speak with your company’s human resources manager. Should you need further assistance, contact an appropriate customer service representative. For example, if your company maintains your 401(k) through Vanguard, you may want to contact Vanguard directly with questions about your retirement account.

    With answers to these questions in mind, you can begin to take the next steps toward securing your future:

    • Look into the insurance (life, disability, health) options mentioned above
    • If you wish, make plans to roll over your 401(k) to an IRA
    • If you choose to leave your job, make sure you have 3 to 6 month’s worth of savings before quitting
    • Downsize your budget to curb unnecessary expenses on items like entertainment and dining out
    • Build a list of references and update your resume as you begin your job search

    Should you find yourself managing your own retirement accounts, it’s good practice to consult with a professional. But rather than pay large fees to a local financial advisor, learn more about online robo advisors, such as blooom.

    With this type of service, you get all the guidance you want and need, without overpaying. In addition to a free plan, blooom has both a standard ($120/year) and unlimited ($250/year) plan with advanced features such as placing trades, withdrawal alerts, and most importantly, advisor access.

    Final Thoughts

    Whether you were terminated or are leaving your job by choice, it is never easy to make such a significant life change. Developing a benefits plan will make the transition to your next job that much easier.

    Chris Muller

    Chris Muller

    Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He's also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter @moneymozartblog.


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