Before you leave, be sure to confirm the benefits and salary you’re entitled to as a departing employee. This includes: continuing health insurance coverage through COBRA; collecting unused vacation and sick pay; and, keeping, cashing in, or rolling over your 401K or other pension plan.
Collect unused vacation and/or sick pay
Vacation time can be credited in advance, as you earn it, (sometimes called “accrued”), or after you’ve earned it. When you leave an employer, you will automatically be paid for any time that you have earned but not used.
For instance, if you get 14 days of vacation January 1, and terminate your employment on June 30, you will be paid for 7 days of vacation if the vacation time is accrued throughout the year. If the vacation time is awarded based on the previous year, you should be entitled to all 14 days.
Vacation days carried-over from a previous year but not used are paid to you upon termination.
Paid Time Off (PTO) is time that you can use for vacation, sick leave, dependent sick leave, short-term disability, or whatever you need the time for. PTO is paid out like vacation, as described above.
Most employers do not pay you for unused sick days because this is not usually considered an earned benefit.
Check your employee handbook, benefits book, or with your human resources department to learn how your paid time is accrued and paid-out upon termination.
Make plans for your health benefits
Health benefits (medical, prescription, dental, and vision) offered by an employer enjoy special treatment under two laws:
The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time.
COBRA is a federal law designed to protect employees and their dependents from losing health insurance coverage as a result of job loss or divorce. If you and your dependents are covered by an employer-sponsored health insurance plan, a provision of COBRA entitles you to continue coverage when you'd normally lose it. Most larger employers (20 employees) are required to offer COBRA coverage.
As an employee, you're entitled to COBRA coverage only if your employment has been terminated or if your hours have been reduced. However, your dependents may be eligible for COBRA benefits if they're no longer entitled to employer-sponsored benefits because of divorce, death, or certain other events.
Unfortunately, you can't continue your health insurance coverage forever. You can continue your health insurance for 18 months under COBRA if your employment has been terminated or if your work hours have been reduced. If you're entitled to COBRA coverage for other qualifying reasons, you can continue your coverage for 36 months.
Keep in mind that, whatever your circumstances, you'll have to pay the premium yourself for COBRA coverage--your employer is not required to pay any part of it.
However, if you're eligible for COBRA coverage and don't have any other health insurance, you should probably accept it. Even though you'll pay a lot more for coverage than you did as an employee, it's probably less than you'll pay for individual coverage. You won't be subject to any health screenings, tests, or other pre-existing medical condition requirements when converting to a COBRA contract. Your COBRA benefits and coverage will be identical to those provided to similarly enrolled individuals.
The Health Insurance Portability and Accountability Act of 1996 expanded COBRA.
In 1996, HIPAA expanded certain COBRA provisions and created other health-care rights. In many ways, HIPAA took a significant step toward health-care reform in the United States. Some of its provisions may affect you. The major provisions of HIPAA:
- Allow workers to move from one employer to another without fear of losing group health insurance
- Require health insurance companies that serve small groups (2 to 50 employees) to accept every small employer that applies for coverage
- Increase the tax deductibility of medical insurance premiums for the self-employed
- Require health insurance plans to provide inpatient coverage for a mother and newborn infant for at least 48 hours after a normal birth or 96 hours after a cesarean section
For example, assume you're pregnant and covered by a group health insurance plan at work. You decide to take a job at another firm. Under HIPAA, pregnancy cannot be considered a pre-existing condition for a woman who's changing jobs if she was previously covered by a group health insurance plan. So if you had insurance at your old job, you can't be denied health insurance coverage at your new job simply because you're pregnant.
However, many companies require you to be employed for 30 days or more before you become eligible for coverage. If you are nearing the end of your pregnancy, and that requirement poses a problem for you, you may be eligible for coverage under COBRA through your former employer.
©2003 Forefield, Inc.
Secure your retirement
When you leave a company, you may be entitled to money from the employer's pension, 401(k), or some other form of employer-sponsored retirement savings plan. There are generally two types of retirement plans:
Defined Benefit Plans: These types of plans provide a specified retirement benefit upon your retirement. The benefit is based on the number of years you worked for the employer and the pay you made during that time.
Defined Contribution Plans: These types of plans do not guarantee a benefit at retirement, but state the amount that will be invested now toward your retirement fund. The amount of money available at retirement is based on the funds put in and the money they have earned since contributed. For instance, 401(k) plans are defined contribution plans.
The amount of your retirement benefits you get can be complicated. The bottom line: any money you contributed (or its market value, which can actually be less than what you’ve contributed) is yours. You can take it with you, if you choose.
As for employer’s contributions, whether you are entitled to them depends on the plan’s “vesting schedule.” In defined benefit plans, the contributions are all from your employer. In defined contribution plans, your employer probably contributed “matching funds” that are subject to the vesting schedule. Generally, there are two vesting schedules used1:
- Five-year cliff vesting: Under five-year cliff vesting, employees must be 100% vested once they’re credited with no more than five years of service. Prior to completing the fifth year of service, the employee’s vesting percentage may be any percentage, including zero. This schedule is known as “cliff” vesting because the employee typically will jump from no vesting to 100% vesting once the employee completes the fifth year of service.
- Seven-year graded vesting: Under seven-year graded vesting, employees must be 100% vested once they’re credited with no more than seven years of service. Since 100% vesting can be delayed longer under this option, the law requires that a minimum vesting percentage apply to earlier years. The minimum percentages are as follows:
- Upon completion of 3 years of service – 20% vesting;
- Upon completion of 4 years of service – 40% vesting;
- Upon completion of 5 years of service – 60% vesting; and
- Upon completion of 6 years of service – 80% vesting.
Upon termination, your employer or it’s retirement plan administrator will provide detailed instructions on what you can do with your retirement benefits. Your options typically include:
- Transferring or "rolling over" your money to an Individual Retirement Account or annuity (IRA). The money can be transferred directly to the IRA to avoid penalties and continue the tax-deferred status. This means your hands never touch the money. Instead, it is transferred directly into the IRA by your current employer. You can also take receipt of the lump sum and then deposit it yourself within 60 days to another qualified new retirement plan. This gives you short-term access to the money—but there is a catch. Your employer must withhold 20 percent for federal income taxes from your taxable distribution, so you may only receive 80 percent of your money.
To illustrate, consider these tax consequences for a moment: If you withdrew a $50,000 lump-sum distribution from your 401(k) before age 59-1/2, all of which is taxable, $10,000—or 20 percent—would be withheld for federal taxes. The distribution would be subject to ordinary income taxes as well as a 10 percent penalty, which in this case could be an additional $5,000.
But, if you roll the money over into one or more IRAs, be sure you have established special "conduit" IRAs. In these IRAs, if the money from your lump-sum distribution is not mixed with any other funds, you may be able to transfer the money to another employer's 401(k) plan, if you choose.
- Move the money to your new employer's 401(k) plan, if permitted. After all, the 401(k) is a savings plan of choice for so many workers because it not only offers tax advantages, but also often includes a matching contribution from the worker's employer—say, 50 cents for every dollar that the employee invests, to a certain limit. Also, people who participate in a 401(k)—or a 403(b) plan for employees of hospitals, schools, colleges and non-profit organizations—can often borrow from their retirement accounts. That option usually is not available with an IRA.
Keep in mind there is usually a waiting period of months or a year before you can enroll in your new employer's plan.
- Leave the money where it is, with your current employer's 401(k) plan. The decision may come down to who offers the best investment choices for you—your old company's plan or the new one.
- Take a partial withdrawal.
1Internal Revenue Service, “The Fix Is In: Common Plan Mistakes - Vesting Errors in Defined Contribution Plans,” Retirement News for Employers, Summer 2005,
Copyright 2003-07, Metropolitan Life Insurance Company, NY, NY. All rights reserved.
Protect your loved ones
Your employer may provide and/or offer life insurance. In most cases, if your employer pays for life insurance, it is a “term life” insurance policy. That means it is only active as long as the employer pays the premiums. You may be able to convert the face value of the insurance to an individual policy offered by the insurance company. Keep in mind that you would have to pay the premiums directly to the insurance company. Since your employer paid the premiums while you were employed, you probably do not know what the coverage cost, but you will probably pay quite a bit more for the same amount of coverage yourself.
You also may have been given the opportunity to purchase additional life insurance through your employer’s plan. Like the insurance offered by your employer, you may be able to convert this coverage as well. If the coverage was a whole or universal life insurance plan, you also might be able to keep the coverage and pay for it yourself. This is called “portable” because you can just keep the same plan of coverage. Keep in mind that the premium will usually increase because you are no longer part of a large group, but an individual.
In cases of insurance you pay for, the insurance company will probably notify you of your options. In the case of insurance provided by your employer, you will have to take the initiative if you are interested in converting it. Information should be available in your employee or benefits handbook or from your human resources department.
Learn about all of your benefits
You may have many other benefits, as well, including disability, accident, stock purchase, long term care, auto, or homeowners that your employer made available for you. You can generally keep or convert these plans if you have been paying for them yourself. Check the documents for any benefits in which you are participating to learn their individual options upon termination with your employer. Remember that they probably have deadlines, such as 30 days, so it is a good idea to check as soon as you know you are leaving.