If you’ve just been laid off, there’s a lot to do during your termination, including negotiating a severance, sorting out your belongings, sorting out your emotions, and starting to apply for a new role.
But don’t overlook the fact that there may be some costs in retirement, like paying off an overdraft with paid time off or paying down an outstanding 401(k) loan, experts say.
“Being laid off can be stressful and make it difficult to think clearly in the moment,” says Wende Smith, director of human resources at BambooHR. Anything you might owe is “usually tied into some sort of contract,” so that’s a good place to start, she says.
She suggests looking back at any contracts you’ve ever signed, including when you first started, and looking at any plan or program documents that outline the finer points regarding benefits and perks to see what will happen to these if you leave and what you might be owed if something were to happen.
While the details will vary depending on your specific situation and company policy, here’s what experts say employees typically do and don’t need to worry about when it comes to severance costs after being fired.
Things you can owe but probably won’t
Smith said that typically, in cases such as layoffs, organizations don’t get their money back if they ask someone to leave. “Funds that would otherwise be owed to you if you voluntarily left the organization are typically forfeited,” she says.
“Layoffs are dangerous business as companies try to avoid litigation,” said Tessa White, a former senior human resources executive who now runs career consulting firm The Job Doctor. “What they don’t want to do is poke the bear.”
Experts say it’s unlikely, for example, that organizations will recoup funds associated with tuition assistance programs, which often require a person to stay with an employer for a period of time after earning a degree. White and Smith say that if you decide to retire mid-term, you’ll likely have to repay some of your back pay, but companies typically won’t come after you for those funds if you cut them off.
Failure to return company hardware, such as a laptop or cell phone, after leaving your job could theoretically also result in damages, but experts say that is unlikely in practice. While companies sometimes send legal documents to companies that are holding back equipment they’ve been asked to return, that’s rare and “it costs a lot of money to get assets back that aren’t returned,” White said.
However, experts say they should do their best to return all of the company’s assets.
What you are likely to have to repay to the company or yourself
Your employer will likely deduct other expenses from your last paycheck, and in at least one case, you may owe yourself the money. Here are two common scenarios to be aware of.
PTO overdraft
Overdrawing paid time off relative to your future balance can be costly in retirement. “If you end up in the red and spend more time than you actually paid, it’s not uncommon for companies to recoup that profit by deducting the amount of extra time you spent on your final check,” says White.
Regulations such as the federal Fair Labor Standards Act, as well as state and local laws, affect what and how employers can and cannot deduct from employees’ paychecks, so they should also be consulted, Smith says. “It’s a very state-specific issue in terms of how final paychecks are handled,” she added.
What you may owe is usually deducted from your last paycheck, but if the amount is unusually large, your employer may allow you other repayment options, such as paying in installments over time, White said.
If you find yourself in a bind with issues related to things like PTO, you should ask exactly how and when your funds will be deducted, especially since you’ll need more money while you’re away from work.
401(k) loan
If you need cash, many employers offer loans from your 401(k). According to the IRS, you can typically borrow the lesser of $50,000 or 50% of the confirmed balance in your account. Loans typically have an interest rate of 1% to 2% plus the prime rate (currently 6.75%) and must be repaid over five years. However, you pay the interest back to yourself, not to the bank.
But financial experts say funding your retirement with savings is a big risk, especially if you’re worried you might get laid off.
That’s because if you quit your job voluntarily or due to layoff, the IRS requires that your loan balance be paid in full by the time you file your next tax return. If you fail to repay the amount in full, the unpaid amount will be treated as a withdrawal and you will owe income tax on that amount, plus a 10% early withdrawal penalty if you are under age 59 1/2.
“You have to be careful,” says Larry Luxenberg, a certified financial planner with Lexington Avenue Capital Management. “You could lose money, you could lose your job, and you could have to pay income tax at the same time.”
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