Laid Off During the Holidays
Pink slips are sure to spoil this holiday season for hundreds of thousands of American workers. Unfortunately, year-end layoffs have become an inescapable part of 21st century business. Many well known employers have issued year end dismissals including General Motors, Ford, BellSouth, Whirlpool, and Citicorp - just to name a few. Most laid-off worker wait until after Christmas to begin planning their next move. At that point it becomes critical to make smart financial choices to minimize the impact of the layoff. Now, more than ever, the help of a good accountant or independent financial planner is invaluable but people who have not used a financial adviser prior to the layoff are unlikely to seek one at this time. A number of resources are available online for free or at minimal cost to help laid-off workers cope with the sudden changes.
The first step is usually to contact your local unemployment office. Unemployment compensation (UC) is a federal initiative that is administered on a state-by-state basis though local county offices. Many counties now allow the application for unemployment compensation benefits to be filed online. In many states the local county UC office is combined with the welfare office and other social services, even though these are entirely different programs. A state-by-state listing of links to Unemployment Compensation offices can be found on the Workforce Security Web site. Unemployment compensation is available to replace part of the paycheck of workers who are dismissed for lack of work. UC is not available to workers who were dismissed for disciplinary reasons, incompetence or to workers who quit their job for any reason. Unemployment compensation is taxable income even though no taxes are withheld from the benefits payments so this may create a tax payment shortage on the following April 15 tax filing deadline.
The second step is to address health insurance benefits. Since employer-provided health insurance benefits are provided on a month-to-month basis, health insurance continues until the last day of the month that the employee was terminated. After that, the options available depend on the size of the employer. Most larger employers provide group health insurance that is governed by a law known as COBRA. COBRA provides the right to continue health insurance for up to 18 months after termination of employment by paying the full cost of the health insurance plus a small additional amount for administrative expense. This is especially valuable to those who are terminated during a pregnancy or while under treatment for an ongoing medical condition.
COBRA has several drawbacks. First, it is the most expensive type of health insurance available. Laid-off workers often cannot afford to pay the cost. Secondly, enrollment usually requires the payment of two or three months of coverage at once at a time when cash is tight due to the recent layoff. A worker with family health coverage who is laid off at the end of November could receive an invoice right after Christmas for more than $2,400 for COBRA insurance premium. Most would agree that this large bill could not have come at a worst time. Secondly, many employers have difficulty with the administration COBRA benefits as required under the law. Many laid-off employees do not understand the program, their rights or their responsibilities. A third drawback is that COBRA only applies to health insurance and does not apply to most consumer-driven health plans. Health Savings Accounts (HSA) and Health Reimbursement Arrangements (HRA) are not funded by the employer after termination. HSA account balances remain available, but HRA balances are forfeited at the time of employment. Employers may not pay the balance of HRA accounts in cash to terminated employees. Finally, COBRA is not available to the employees of small businesses. Small business employers who try to offer group health benefits to terminated employees can wind up in hot water, jeopardizing their contract with the health insurance provider.
Those who are not eligible or do not want to pay the high premium for COBRA coverage use a COBRA alternative. This term is simply a name for any comprehensive medical insurance that is available to replace the group health insurance coverage. MedSave has a list of low cost health insurance plans that typically cost less than half of the cost of COBRA. In most cases coverage can be issued online and a policy and ID card printed immediately.
Another health insurance option is called an "individual conversion". This allows a terminated employee to keep the same health coverage without the involvement of the employer. The group health insurance is simply converted to an individual insurance with no gap in coverage and no need to meet medical eligibility requirements. This health benefit is not guaranteed by law but most health insurance companies do offer an individual conversion program. Some workers are eligible for either COBRA benefits or an individual conversion. In this case, it makes sense to call the insurer for details on either option. For more information, simply call the current insurance company's member support department and use the term "individual conversion" so that the office understands your specific request.
According to MedSave's observations of enrollment choices in the first ten months of 2008:
- 9 out of 10 Americans laid off are eligible for some type of low cost unemployment medical insurance. Workers with serious health issues living in states with restrictive insurance laws like New York, Vermont and Washington are most at risk of not finding low cost insurance alternatives.
- of those eligible for low cost unemployment coverage, 8 out of 10 are eligible for short term major medical insurance, the remainder are eligible for limited benefit medical insurance.
- Prior to 2008 most people used short term major medical insurance to cover the gap between jobs. This changed dramatically in 2008. The number of people opting for limited benefit insurance over short term major medical insurance increased to almost 50% of unemployed enrollees this year despite the fact that short term major medical insurance is less expensive and offers higher coverage limits. The attraction of limited benefit insurance is that it has no deductible, allows "stacking" of benefits with other insurace, and provides limited coverage for pre-existing conditions. Also, there are many new limited benefit insurance plans introduced by insurance companies this year but virtually no new short term major medical policies. Limited benefit insurance is risky because it offers no "Certificate of Creditable Coverage" yet will be chosen by about half of those between jobs next year.
It seems clear that short term medical insurance is the best option for most people between jobs but the other options are better than going without any health insurance coverage during the gap in employment.
Life, Dental and Disability Income Insurance
The next step is to consider replacing other insurance benefits. COBRA makes no provision for life insurance, dental insurance or disability income insurance so these benefits must be handled separately. If disability income insurance will be continued, it is crucial to make an application for insurance before the end of employment. Millions of self-employed individuals have learned the hard way that disability income insurance is expensive and difficult to obtain if they wait and apply until after the former employment ends.
Life insurance is a much easier matter. Most people are surprised to learn how easy and inexpensive it is to replace employer-provided group health insurance. Online services now handle the entire process from comparing rates across thousands of policies to completing the application. Some insurers will even issue substantial amounts of coverage without a lab test; other require good results in a paramedical exam and various laboratory tests in order to access the best rates. If the insurance company requires these medical tests then the cost is paid by the insurer. If the insurance company requests copies of medical records, these must be provided at your own expense. This is one of the reasons why it makes sense to keep a copy of your own medical records at home.
Dental insurance is not an attractive option for individuals outside of an employer-provided plan. Seldom, if ever, does a short term dental insurance plan provide benefits that exceed the amount of the premium paid. Instead, consider a dental discount plan that almost always provides more savings than the cost of the benefit. See Ehealthdiscountplan.com for details of reliable discount plans and dentists who participate in your local area.
This is the time to make a smart plan to handle retirement plan funds. It may be helpful to realize that you now have more options available than you did as an employee. More options means the opportunities for improve as well as the potential to make more mistakes. When your job ended, you either had the right or the obligation to transfer and handle your accumulated retirement funds on your own. In almost all cases it makes sense to have the employer deposit funds directly into an individual retirement account (IRA) that you set up at another institution. Self-directed IRAs offer more options for account management, better account security, insurance options, more flexible tax planning, lower fees, and are generally considered safer than employer-managed retirement funds. Here is a short list of tips when handling retirement funds:
1. Do not leave retirement plan funds under management of the former employer if the funds are available for transfer.
2. Open your own self-directed IRA with a bank or investment firm of your choice. A rollover account is usually opened as an empty account without any deposit until your employer transfers the account balance.
3. Do not have the employer send you a check for your account balance; rather use a direct "trustee-to-trustee transfer". This is often faster, safer, and avoids tax withholding on distributions.
4. Make sure that your IRA account investments have no commissions, "12(b)(1) fees" or surrender fees.
5. Be aware of whether your investments are insured for loss of value, and if so, the cost of that insurance.
6. Review the beneficiary designations on all your financial accounts. If an ex-spouse is still named then maybe it is time to update your account.
7. Plan to minimize taxes on withdrawals using as many of the provisions provided under the law that may be applicable to your situation.
OnlineAdviser supports the transfer of employer-provided retirement funds into low cost self-directed IRA accounts with firms like Scottrade and Vanguard Group. These two investment firms, along with a handful of others, offer a wide range of exceptional services, no-load investments and minimal administrative fees. These accounts can be opened with or without the help of a financial adviser. Some types of investments - especially insured investments and some mutual funds - are available on a no-commission basis only if the account is opened under the code number of a Registered Investment Adviser who does business with the firm. Plenty of good investment choices are available regardless of whether you use adviser help or go it alone.
OnlineAdviserTM is a free e-mail-based personal support service that answers individual questions on taxes, benefits and other personal financial issues. Make sure to mention your state of residence and that you are laid off from employment so that the adviser can tailor the response and may be able to provide extra assistance on a case-by-case basis.