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Your Guide To Navigating Actions After Losing A Job: Life and Disability Insurance, HSAs and FSAs, and Equity Compensation

December 17th, 2024 by Blake Pinyan

Losing a job can have a significant impact on your employee benefits. This article will be the second of two on this topic, specifically focused on Life and Disability Insurance, HSAs and FSAs, and Equity Compensation.

Topics covered include:

  • Life and Disability Insurance
  • Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
  • Equity Compensation

Life and Disability Insurance

Life and Disability Insurance are other employee benefits that ought to be addressed after losing a job. We’ll start with Life Insurance.

Life Insurance

Many employers offer group term life insurance as an employee benefit, often at a subsidized rate. Upon job loss, you may lose this subsidized coverage. While you may have the option to continue the policy, it will likely come at a significantly higher cost.

To address your life insurance needs after job loss, you have several options:

  1. Continue Your Existing Policy: You can maintain your current policy – but be prepared for increased premiums.
  2. Purchase a New Policy: Explore individual life insurance policies outside the former employer, which can offer equal death benefit coverage at a potentially lower rate.
  3. Wait for New Employment: Postpone purchasing a new policy until you secure a new job with employer-sponsored life insurance. This option, however, would create a gap in your coverage.

When evaluating these options, consider factors such as your family’s financial needs, your budget, and your health. It’s important to weigh the costs and benefits of each option to make an informed decision that best protects your loved ones.

Disability Insurance

Disability insurance provides income replacement in the event of a disabling illness or injury. The benefits are typically a percentage of your pre-disability income. Upon job loss, your employer-sponsored disability insurance policy may be terminated, leaving you without coverage.

To protect yourself during periods of unemployment, consider exploring the following options:

  1. Purchase an Individual Disability Insurance Policy (outside of your former employer): This can provide income protection regardless of your employment status.
  2. State Disability Insurance Programs: Some states, such as California, offer disability insurance programs for unemployed individuals.

It’s important to assess your specific needs and research available options to ensure adequate protection against potential disability.

Health Savings (HSAs) and Flexible Spending Accounts (FSAs)

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are common employee benefits that require attention upon job loss. Let’s start with HSAs.

HSAs

HSAs offer a triple tax advantage and are highly portable. When you lose your job, you have several options for your HSA:

  1. Use it for Qualified Medical Expenses: You can withdraw funds to pay for eligible medical expenses, such as doctor visits, prescriptions, and dental care. Any unused funds can be carried over to future years. Failure to use an HSA for qualified medical expenses will result in a 20% penalty and tax on the withdrawal amount. Those that are age 65 escape the 20% penalty but are still taxed on the withdrawal.
  2. Leave it Where It Is: You can leave your HSA with your former employer’s plan. However, this may limit your investment options and could result in higher investment fees (similar to the 401(k)).
  3. Roll It into a New Employer’s HSA: If your new employer offers an HSA, you can roll over your existing funds to the new plan. You’ll then be subject to the new employer’s HSA investment options.
  4. Roll It into a Retail HSA: You can transfer your HSA to a retail financial institution, such as Fidelity for example. This provides greater flexibility in terms of investment options and the ability to buy into positions with lower fees.

FSAs

There are three main types of FSAs: Health FSAs, Limited Purpose FSAs, and Dependent Care FSAs.

  • Health FSAs: Used to pay for medical expenses not covered by health insurance.
  • Limited Purpose FSAs: Used to pay for dental and vision expenses.
  • Dependent Care FSAs: Used to pay for childcare or eldercare expenses.

Unlike HSAs, FSAs are not portable. This means you must use the funds within a specific timeframe, typically the end of the plan year. Any unused funds at the end of the year are forfeited unless the employer allows for a specific carryover amount.

Upon job loss, you may have a grace period to use remaining FSA funds. However, it’s crucial to use them as soon as possible. If you don’t use them within the grace period, you’ll lose the funds. You can use Health FSAs for common items such as over-the-counter medications (cough and allergy medicine, etc.), vitamins, dental care, and vision care. It does not have to be for a major procedure or treatment.

Equity Compensation

When you lose your job, it’s important to understand how your equity compensation, such as Employee Stock Purchase Plans (ESPPs), Stock Options, and Restricted Stock Units (RSUs), will be affected.

Employee Stock Purchase Plans (ESPPs)

ESPPs allow employees to purchase company stock at a discounted price, typically through payroll deductions. Upon job loss, your ESPP contributions will cease. However, you retain ownership of any shares you’ve already purchased through the plan. These shares can be transferred to a different brokerage account or kept in the existing one, where you can hold or sell them as desired.

Stock Options

Stock options grant employees the right to purchase company shares at a predetermined price, often lower than the market price. The specific terms and conditions of your stock options, including what happens upon job loss, are outlined in your stock option agreement or grant document.

Generally, you’ll be given a specific timeframe to exercise your options after a job loss. This timeframe can vary depending on the circumstances of your termination. In my experience, laid-off employees tend to be granted a 90-day window to exercise their options. However, this can be shorter or longer depending on your employer’s policies. If you’re terminated for cause, you may lose your options entirely.

Be sure to review your stock option agreement carefully to understand your rights and obligations.

Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are shares of company stock granted to employees as part of their compensation package. Once the RSUs vest, according to a predetermined schedule, they become the property of the employee.

Upon job loss, you retain ownership of any RSUs that have vested. These vested shares can be transferred to a different brokerage account or kept in the existing one, where you can hold or sell them as desired.

Any unvested RSUs are typically forfeited upon termination. It’s important to understand the vesting schedule for your RSUs to determine how many shares you’ll own at the time of your separation.

Conclusion

Losing a job can be a significant life event and understanding the implications for your employee benefits is crucial. By being proactive, you are taking steps to protect your financial future.

At Anchor Bay, we’re committed to helping our clients navigate their employee benefits upon job loss. We provide guidance on decisions related to health insurance, retirement savings, and other benefits to ensure you make informed choices that align with your financial goals and objectives.