Should You Take A Severance Package?

If you have been with a company for many years, you may have to make a decision about taking a severance package.

Your boss is not required by law to offer severance pay. This is an optional move on their part and certainly a better alternative than a sudden lay off. But read the fine print.
Secondly, severance pay is typically based on the length of your employment. Weigh the financial impact of taking the offer versus staying at your job with an uncertain future.

Ask yourself these questions:

(1) How will taking the deal impact my cash flow, especially if I have to sign a non-compete agreement?

(2) Do I have a large enough cash reserve to replace my income if my severance runs out before I find a new job?

(3) If my company gives me the choice of receiving one lump sum or installment payments over a period of time, which one is best for me?

If the financial health of your company is shaky, taking the money up front may be your safest bet. (That is if you don’t blow through the dough too quickly.)

Collecting your severance in monthly installments may also have an impact on your eligibility for unemployment benefits. You will generally qualify for unemployment benefits, but you may have to wait to collect until after you have used up your severance, or your benefits may be reduced.

Your severance pay can include an opportunity to cash in your vacation pay to sweeten the deal. Find out if this is an option.

What about medical insurance? The federal law COBRA allows you to stay with your current medical insurance plan for a period of time, but the premiums are typically high. Unless your severance package covers these premiums, you are probably better off getting your own health insurance plan. Make sure there is no gap between your old and new health insurance plans. If you allow too much time to lapse, it could be extremely costly to get new coverage if you develop a medical condition in the interim.

Don’t forget to ask for a positive letter of recommendation. This slips the minds of many good employees who grab the deal and run.

Obviously, you can’t predict your future with any employer. Consider negotiating a separation agreement before you accept your next position. It will spare you future anxiety.

How much leverage do you have when negotiating a severance package? Can you ask for a less restrictive non-compete agreement or a deferred separation date to become fully vested in your retirement plan? Consult with an attorney who is versed in employment law to get the best answers for your situation.

Denisa Tova MBA, CFP, CFDP(TM), ChFC, CLU provides divorce financial expertise to divorcing individuals. She is a Certified Financial Planner(TM) practitioner and Certified Divorce Financial Analyst. You can find more information about Denisa Tova at: http://www.denisatova.com

Reprinted with permission of The Colorado Springs Gazette