Whether you’re heading to a new gig, you’re becoming self-employed or you’ve been laid off, when the time comes to leave, it’s important to know what your options are regarding your benefits.
Robin Solomon, a benefits attorney in Washington, D.C., believes that the large amount of information most employees deal with when leaving a job can make the benefits process confusing and leaves many people without a clear understanding of the options available.
“When people leave a job,” she said, “they have to make decisions about their old benefits, as well as learn about any new benefits offered by the next employer.”
Carol Katarsky, who left her job as an editor in 2014 to become a freelance writer, said that trying to sort through her options when it came to things like health insurance and her retirement savings was time consuming. “I found it to be a very confusing process,” she said, adding that she got conflicting advice from colleagues and her HR Department.
To help alleviate some of the confusion, here are some options to consider for common benefits when changing jobs:
If your current 401(k) has great investment options, it might be beneficial to keep the money there.
One of the biggest worries people have when leaving their jobs is what will happen to their health coverage, which usually ends on the last day of work or at the end of the month.
Some companies start health insurance coverage for new employees on their first day, which can make the coverage changes more straightforward. If your new company has a waiting period (typically between 30 and 90 days), you may be able to negotiate earlier coverage as part of your job offer.
If you’re facing a gap in health coverage for any reason, there are options. Thanks to COBRA, a law that allows you to continue your current health coverage at your own expense for 18 months, you don’t need to switch your coverage right after you leave your job.
While those who are planning on being self-employed for a while might choose to research their options and get a plan that is customized to their needs, if your coverage gap is relatively short, it might make more sense to stick with the plan you know rather than spend a lot of time researching other options. “With your existing group plan,” Solomon said, “coverage is seamless.” The downside is that you will have to pay the full cost of the plan — which is typically expensive.
Katarsky decided to purchase her own plan because of the cost. “I was offered COBRA but it was ridiculously expensive compared to the private plans I had seen,” she said.
If you’re in the market for an individual plan, the best place to start your research is to go to HealthCare.gov and select your state. You can buy coverage there and easily switch to your new employer’s plan at a later date, so long as you give your insurer 14 days notice.
If you were lucky enough to have a pension at your job, you may or may not be able to keep it or take out the money when you leave. It all depends on whether your contributions are vested (which means they’re fully yours) and the rules of the pension plan.
If you weren’t in your job for very long, then you might be out of luck. “Most plans utilize a ‘cliff vesting’ rule, in which your benefit becomes fully vested after three to five years of service,” said Solomon. If you haven’t been there that long, then you might forfeit some or all of the money in your plan.
That’s what happened to Katarsky. “I was only partially vested in my pension plan, so the majority of that money was gone,” she said. “A small sum was distributed as a lump sum to my 401(k).”
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While Katarsky didn’t have a choice, Solomon recommends not taking your pension out in a lump sum if you have the option. She’s found that many pension funds are able to get a better return than other options, which would lead to more money for you in retirement.
If you decide to take your pension out, you can roll it over into an IRA or a 401(k), or you could purchase a variable annuity, which is tax deferred and allows you to choose from various investment vehicles and then pays out an amount in your retirement that is based on the performance of those investments.
While an IRA or 401(k) gives you more control over your investments and your eventual disbursements, a variable annuity will give you the security of knowing that you’ll have money coming in every year during retirement.
If you have a 401(k), you will have to decide what to do with those funds. You can choose to keep the account as it is but not make any additional contributions, roll over those funds to a new 401(k), roll the money over into an IRA or cash it out.
If your current 401(k) has great investment options, it might be beneficial to keep the money there. But many people find that leaving their money in multiple 401(k)s from past employers makes it too difficult to keep track of their retirement savings. That leads some to roll over their 401(k) into their new employer’s 401(k) — something that makes sense especially if your new employer has good investment options. If not, you might want to look into rolling over your account into an IRA.
Katarsky chose to do this, partly to make it easier to keep track of her savings. “I rolled over my 401(k) into an existing IRA I had previously opened. That IRA consists entirely of 401(k) rollovers from various former positions,” she said.
IRAs can give you more control over your investments, allowing you to put your money into mutual funds, annuities or money market accounts. Another option is to cash out your 401(k) — something that might be tempting if you lost your job unexpectedly. The problem is that you will have to pay income taxes on the money and a 10 percent penalty on top of that.
Now that she’s freelancing, Katarsky has had to start making her own retirement contributions and recently started contributing to her retirement accounts — something that Solomon suggests if you become self-employed. There are various IRA options available for those who are freelancing, and freelancers who do their work through a small business can even open up a Solo 401(k) for themselves and their spouses.
LIFE AND DISABILITY INSURANCE
Most people worry about having a gap in their health insurance coverage but don’t spend as much time considering what might happen if there is a gap in their life insurance or disability income insurance. Accidents, illness and death are as likely to happen when you’re in the midst of a job change as any other time, so making sure you’re well covered is critical to protecting yourself and your family.
If your employer provided you with life insurance, you sometimes have the option to continue paying for coverage; but when it comes to disability income insurance, Solomon says that it’s rarer for a former employee to get the option to continue that coverage. However, it seldom makes sense to just keep that insurance coverage since it’s often not enough to meet your needs.
If you’re moving to another employer, a job change might be a good time to consider your options and take out your own coverage or supplement what your new employer offers.
If, however, you’re becoming self-employed, it’s even more important to obtain disability income and life insurance coverage for yourself. Katarsky was offered the option to continue both the life and disability coverage her employer offered, but after doing her own research, she found that the coverage was minimal and not as cost-effective as other policies that were available.