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Keeping Your Savings Intact…Even in the Midst of a Layoff

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By Grace S. Yung, CFP

Over the past year and a half, many people here in the oil capital of the U.S. have seen their economic worlds literally turned upside down. And as the price of crude oil continues to struggle, people in the Houston area have been bracing for additional job losses later this year.

If your job has been—or may soon be—affected, you probably have many questions regarding what to do with your employer-sponsored retirement plan funds, as well as with your health and other benefits that have covered you throughout the years.

The good news is that you may have more options than you might think—provided that you don’t rush into anything too quickly and you plan out a strategy that will provide you with the best available benefits for your needs.

To Roll Over or Not to Roll Over

First is the question of what to do with your retirement-plan funds. In many cases, you may be considering whether or not to roll your funds over, either into a personal IRA account or perhaps a new employer’s retirement account—provided that you intend to continue working and you have found another job.

Rolling the funds over to a new employer can make life simpler—at least in terms of having the bulk of your retirement savings all in one place. This, however, can also limit you to only the investment options that are offered by that employer.

Unlike any new contributions that you add to the new employer’s account, the rolled-over amount will not count toward any employer matching. You could also consider leaving your funds with your former employer. This, however, also leaves you with similar limitations.

Rolling your funds into your own personal IRA account can actually provide you with much more control and flexibility, since you can choose from an almost unlimited array of investments in which to place your funds.

In fact, there are some strategies that can help you to preserve your retirement savings by offering growth, predictability, and guaranteed income in retirement. These types of investments are not available in employer plans. With that in mind, for those who want to maximize their choices and control over their investments, rolling over into an individual plan is oftentimes the best way to go.

One item to keep in mind, though, is whether or not you will have any “net unrealized appreciation,” or NUA. This is the difference in value between the average cost basis of shares and their current market value. While not everyone will need to worry about this, it can come into play if you are distributing a large amount of highly appreciated shares of company stock from your retirement plan.

This is because NUA is not subject to ordinary income taxation, but rather to capital gains taxes—and because of this, it is oftentimes more beneficial to transfer these particular shares into a regular brokerage account versus rolling them over into an IRA account. Moving them into an IRA can make them taxable at your ordinary income-tax rate down the road.

Begin Taking Income

In lieu of rolling over your retirement funds, you may also consider taking income withdrawals from your plan. Most people are aware that they can start taking money out of their 401(k) plan without incurring a 10 percent IRS early-withdrawal penalty when they reach age 59½.

However, what many are not aware of is that there is a provision within the Internal Revenue Code that will allow you to take distributions from your 401(k) plan without penalty when you reach age 55, provided that you meet certain qualifications.

Under Section 72(t), if you leave your employer at any time during or after the year that you reach age 55, you can receive penalty-free distributions from your 401(k) plan, provided that the funds are not rolled into an IRA account.

It is important to note here, though, that your company’s retirement plan document may be more restrictive than what the IRS rule states. So be sure to check with your HR department prior to moving forward with any specific planning.

You will also want to be sure about how to proceed if you have any outstanding loans in your 401(k) account, because in some cases you may still be able to roll over the remaining funds. In other instances, though, the unpaid loan balance may be due immediately before you can proceed.

Other “Emergency Income” Situations

There may be cases where an individual who has not yet reached age 55 needs income in addition to his or her emergency fund, but yet may not need all of the income that withdrawals from the “average life expectancy” method on their IRA account will provide. In this case, there may a win-win option that allows you to continue growing some of your savings in a tax-advantaged manner. For example, you could establish at 72(t) IRA and “split” it, allowing one IRA to provide you with income while the other continues to focus on tax-deferred growth of the funds that are inside. By going this route, an investor can receive income while at the same time preserving other assets for continued growth. Also, if you need to access an amount over and above the “equal substantial payment” amount that the 72(t) IRA generates, one can tap into the other IRA. This would prevent payments under the 72(t) IRA from being disrupted and having retroactive penalties imposed.

Keeping Yourself and Your Assets Protected—Can Your Coverage Come with You?

In addition to keeping tabs on your income and your savings, you will also want to make sure you are still well-protected when it comes to insurance coverage. This includes health insurance as well as other options such as life, long-term care, and disability coverage. Even a seemingly small “incident” could end up costing you tens (or hundreds) of thousands of dollars—or more—in lost savings if your coverage isn’t portable and you have an unexpected illness or accident during a “gap” in coverage.

Health Insurance

Regarding health insurance, if you work for a company that has at least 20 or more full-time employees, then federal law mandates that you receive a continuation of your benefits through COBRA (the Consolidated Omnibus Reconciliation Act).

In this case, your company’s health-plan administrator is required to provide you with a notice that states your right to choose whether you would like to continue your employer-sponsored benefits (paid by you at 100 percent of the total insurance cost, plus an additional 2-percent processing fee). You will then have 60 days in which to either accept or reject the continuation of the coverage.

The COBRA coverage you are provided with must be the same as the coverage you had under your employer-sponsored plan. You will also be allowed the same benefits, choices, and services that you had immediately before you were laid off or had your hours reduced.

If you opt to continue your benefits, the COBRA coverage will begin on the date that it otherwise would have been lost by reason of a “qualifying event.” In this case, benefits would begin when your employer-sponsored coverage ends.

Your COBRA coverage will end when one of the following occurs:

• Your premiums aren’t paid on a timely basis;

• Your employer ends the group health plan;

• You obtain other coverage;

• You are entitled to Medicare benefits;

• You have reached the end of your coverage period.

Typically, COBRA benefits can be carried for a maximum of 18 months due to termination of employment, or even a reduction of full-time hours. However, there are certain qualifying events—or even a second qualifying event—that may allow you to obtain up to 36 months of COBRA coverage.

You, as the employee, are not the only one eligible for COBRA benefits. For example, according to COBRA, a qualified beneficiary can also include your dependent spouse, as well as your dependent children.

If you work for an employer that offers domestic-partner benefits and you are married to a same-sex spouse, it will be important to check with your company’s HR department in order to determine whether or not your spouse is allowed to continue their benefits through COBRA. According to the Society for Human Resource Management (SHRM), even though domestic partners don’t meet the definition of a “qualified beneficiary” under COBRA regulations, employers that provide domestic-partner benefits are allowed to design plans that can offer COBRA-like benefits. Employers that do so will oftentimes follow the same coverage, notice, and premium rules for continuous coverage that married couples have.

Because COBRA regulations do not guarantee life insurance, disability, or long-term care insurance coverage, you will need to make sure that these important coverages are also still intact—not only for yourself, but also for your spouse and/or dependents.

Other Available Benefit Options

While COBRA may be one potential option for you, in some cases this may be cost-prohibitive. Or, you may be able to find similar benefit alternatives by going with an individual health insurance policy.

Checking out your available options via the individual health insurance arena, as well as through the online “Obamacare” health insurance exchange, could offer you some viable coverage choices. Another way to go—especially if you feel that you may be close to finding new employment—is a temporary short-term health insurance policy. These policies will often provide a wide range of benefits at an affordable price, for periods ranging from 30 days to one year.

You may also want to consider the purchase of an individual disability insurance plan, as well as individual long-term care and life insurance—even if you may be offered these types of coverage with a future employer.

By having individual protection, you will be better able to customize the benefits to your specific needs. You will also be able to maintain the benefits, regardless of what your future employment situation holds going forward.

Taking the Next Step

If you will be losing your insurance coverage and/or your retirement savings plan due to a loss of employment, it will be important to sit down and discuss the situation with a professional who can help you consider all of your options.

Because everyone’s goals and needs are different, what works best for someone else may not be the best solution for you. Given the recent changes in same-sex marriage legislation, being married may also give you more options than what was available in the past.

Personal finance-related questions may be emailed to [email protected].

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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