By: AnnaMarie Mock, CFP®
Reviewing and adequately reacting when handed a severance package can be daunting. A flood of emotions and concerns can cloud your judgment and lead to rash decision-making. It's essential to pause and compose your thoughts before proceeding because some of your benefits will still be extremely valuable to your short and long-term plan.
Financial planning is like building a home as both take time and preparation. Constructing a home is done with the help of an architect and general manager to create a blueprint capturing your vision. The construction stage brings the blueprint to life, but modifications to the building process and materials will need to be made along the way. Once the property is built, ongoing repairs and maintenance are necessary to preserve the value of your investment.
Prepare Ahead of Time When Possible
Although getting laid off may be unexpected, preparing for it can provide peace of mind and the time to avoid rushed decisions, modify your plan, and keep you on track. It's best to prepare in advance and consider all your options while looking at your entire financial life to evaluate how the benefits can fit in with your plan.
In my last article, "Are You Concerned About Being Laid Off in the Life Science Industry," we covered four steps to take for the best outcomes while preparing for the unexpected. Step 3 addresses researching your benefits and separation packages before a potential layoff. Here are additional details on what to look for in your benefits package.
Review Your Benefits Package
Vested Equity Compensation
Before any employment change, download all your stock plan documents, including the stock plan document, grant agreement(s), and employment agreement. There are limitations set in the equity agreement that dictates how vested stock options and grants are treated during and after employment. You will want to review the plan document and your individual grant documents. Some characteristics to know are:
the number of options granted
the strike price (price to purchase the shares)
how the options can be exercised
vesting (date you have the right to acquire or exercise the options).
Equity compensation should not be based on one factor alone.
Restricted Stock Units (RSUs)
For public companies, any unvested Restricted Stock Units are lost at termination, but the vested stock is yours and does not require additional action to retain it. Private companies may have a caveat to maintain your vested shares.
Non-qualified Stock Options (NQSOs)
Non-qualified stock options (NQSOs) usually must be exercised 90 days after terminating or forfeiting the shares, but the period can vary by company. In addition, consider company repurchases and clawbacks, which may allow them to repurchase the shares at the same price. You may not want to exercise the vested options even if allowed because the current shares may be underwater and provide no real value. This is a concern if the company's prospects are unstable, especially if it's a private company with no market to sell the shares later.
For relatively short exercising windows, you may decide to exercise and hold onto them to fully determine the best course of action for them relative to your financial plan. Additionally, you should prioritize options that are the most "in the money." Keep in mind how much of the stock will comprise your net worth. It's advisable to cap concentrated stock to 10% of total investable net worth, as having excess exposure to one stock can be a roller coaster ride. Investors fear missing out on the upside but usually forget that there is a downside potential as well.
Exercising the options requires liquidity to cover the exercise price and potential taxes. Liquidity and the availability of cash are essential during this transitional period and are significant determinants in how to treat equity compensation, especially for stock options. The main focus is to ensure there's enough capital to sustain your lifestyle until a new employment opportunity arises. A cash buffer minimizes the risk of relying on debt, which can be disastrous over time.
If you cannot afford to exercise and lose the shares, there are alternatives, like using a third-party company to provide the funding needed to exercise the stock options within the defined window. By using the company, you may not have to pay anything upfront for the exercise but will need to pay a percentage of the stock at the sale or when the company goes public. In addition, consider the health of your prior employer and if there will be any future growth. I suggest understanding the third-party structure and contacting a trusted advisor before using the services to ensure it is right for you.
401(k) Plan Assets
Fortunately, you do not need to do anything to your 401(k) plan immediately, as the assets can remain in the plan. The 401(k) can be rolled into your new 401(k) plan or an IRA without any tax implications. You can transfer it to a Roth IRA, but the assets will be included as taxable income and potentially increase your tax bill. The money you contribute to the 401(k) is always 100% vested, but some employer contributions are not based on years of service.
Additional Things to Consider
Options for continued health insurance – either through COBRA or a state marketplace
Review your disability insurance
Apply for unemployment benefits
Vacation/ PTO Payout
This can be difficult to navigate on your own. I suggest contacting a trusted advisor to help you make the most advantageous decisions for you and your family.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.