What to Do if You're Laid Off from Your Job
Getting laid off is never fun, but it happens to the best of us. We’ve seen an uptick in layoffs over the last few months, especially in the tech sector. Twitter, Meta, Amazon, Microsoft and Zoom have all cut jobs. It’s not a huge surprise. 2022 was a hard year for the stock market and a tough one for growth in the tech sector. But it still sucks for people who’ve been let go (or think they might get let go) from a job they like.
It helps to remember that decisions get made for many reasons. We know it’s hard but try to remember that this stuff isn’t personal — and you’re going to get through it.
1. Adjust Your Budget
If there was ever a time to use your emergency fund, this is it, right? Beyond that, RightCapital and Tiller are both great budgeting tools to help you handle your expenses while you look for a new job. Let’s do a bit of belt tightening, which is probably a good idea anyway, thanks to inflation. See if there are any expenses you can reduce or eliminate altogether for the time being. You can always revisit your budget once your income has stabilized
2. Figure Out Your Stock Options
Get Your Equity Ducks in a Row
Make sure you have copies of the following:
Your plan document: This covers the whole stock plan.
Your personal stock option grant document: If your company uses a platform like Carta, this document (plus your equity) will be here. You’ll still have access to these systems when your employment terminates, but it's always good to have your own file on your personal Google Drive or whatever system you use that’s not related to your work email.
Understand Your Equity Compensation Details
That includes:
How many options you’ve been granted and their vesting schedule
The price at which you can exercise your options
How you can exercise your options
How and when options may expire
If your stock options can be revoked by any actions, such as working for a competitor
Incentive Stock Options (ISOs)
If you have ISOs, you’ll have 90 days from your termination date to exercise any vested options. Once those 90 days have come and gone, any unexpired, vested ISOs will be converted to non-qualified stock options (NQOs). Don't wait until the last minute because an exercise can take weeks with all the paperwork, payments, and back and forth. If you aren’t sure whether or not to exercise, talk to your financial planner sooner rather than later.
If the company is private, ask for an extension to exercise the options if you only have a short amount of time. It never hurts to ask! This can be a good option if you have a short window and you're not in the financial position to exercise those options. They’ll only be treated as ISOs for those 90 days, but you could be able to exercise them as non-qualified options if your employer allows.
Non-Qualified Stock Options (NQOs):
These usually come with a 90-day deadline to exercise vested shares, but it’s important to confirm this on your grant document. If the company is not publicly traded and you decide to exercise the shares, you will also need enough cash to cover tax withholding on the exercise.
One problem with non-qualified options, especially at public companies, is that it's very risky to exercise them when we don't have liquidity — meaning there isn't a public market for us to turn around and sell those options to receive a profit. Unfortunately, that means that you’ll not only need enough cash on hand to pay the exercise price or the strike price of these shares, but you're also going to be subject to ordinary income taxes. With NQOs, as soon as you exercise, that’s a taxable event.
Restricted Stock Units (RSUs):
All unvested RSUs are lost at termination, but anything that has vested already is yours to keep.
RSUs are given to you and considered taxable income as they vest, so no action is needed when you leave a job with RSUs.
We get a lot of questions from folks who work at private companies and have RSUs. We call those double-trigger RSUs, meaning they've been vesting the whole time you were employed, but you don’t actually receive the shares until that second trigger happens — like the company going public or there’s some other liquidity event or acquisition.
Make sure you're familiar with your documents. And ask your financial planner to reassure you that these are indeed your RSUs and if you leave, you’ll get to hold onto them and wait for that public event in the future. You don't have to be working at the company to receive that benefit when they eventually go public.
Exercising your equity
When deciding whether or not to exercise your vested shares before they expire, keep these considerations in mind:
If your company is private
What is the 409A valuation? This is the fair market value of the stock. FYI, exercising your options can be tricky if the company doesn’t have a 409A, or is in the process of updating it, or is going through an investment round. The right financial advisor can help you navigate these kinds of sticky situations.
Is there a secondary market for the shares?
How many shares are vested?
What is my strike price? (How much does it cost to exercise the shares?)
Do you have the resources to exercise?
Consider the tax burden and if you have the funds to pay that bill. (If the company is private, you may not get the opportunity to sell before the tax bill is due, so you’ll need to have these funds set aside in cash). Here’s a handy post that covers the tax implications of equity compensation.
If you don’t have cash to exercise, it could make sense to use a third party, such as ESO Fund or EquityZen. They’ll essentially loan you the money at really no risk to you, in exchange for participation in your exit. So if you’re at a buzzy private company and have incentive stock options and you're laid off, you might want to look into this. Every deal is different, but they’ll likely get 20% to 30% of your exit on the way out.
3. Make a Plan for Your 401(k)
Remember stop, drop and roll
Stop: You don’t need to do anything immediately
Drop: Call up your new 401(k) provider (drop in on them, get it?) when you have a new job and ask them about rollover instructions
Roll: Complete that rollover paperwork and get your check to complete a direct rollover
If you get laid off, don’t freak out about your 401(k). It’s fine hanging out with your former employer for a little bit (unless they’re shutting down, in which case you’ll want to move fast). 401(k) rollovers are fairly straightforward. You can either transfer the funds right into your new 401(k) with your new employer, or roll them into a traditional or Roth IRA.
A direct rollover is when you contact your 401(k) provider and ask them to complete the transfer for you, which is the most hands-off and convenient way to do it. Or they might give you a check made out to the new account, in which case you can just forward it along. With an indirect rollover, the old 401(k) provider releases the funds to you. Then it’s on you to deposit them into the new account within 60 days. Otherwise it’ll be considered a distribution.
Check Vesting on Employer Contributions
In some cases, employer contributions immediately vest — meaning that if you had a match in your 401(k) throughout the year, that would be your money right away. But sometimes, employer matches are subject to certain vesting requirements, like minimum years of service. Your plan document should tell you if your employer match is yours or if it might get called back, which sucks.
Clarify Your Year-to-Date Contributions
Make sure you know how much you’ve contributed YTD so that you don’t overcontribute to your new 401(k) at your next job. Your new employer won’t know what you’ve already contributed for the year. This 401(k) maximum contribution calculator can help.
A Note on Mega Backdoor Roth 401(k)s
Some 401(k) plans allow employees to make additional after-tax contributions, also known as the Mega Backdoor Roth 401(k). Make sure you convert the funds to a Roth BEFORE you leave your job. This is called an in-service withdrawal, and your 401(k) custodian should be able to help you handle this. It’s just easier to do it beforehand.
Pro Tip: Look at your new 401(k) plan document to see if they allow for additional after-tax contributions.
4. Think About Insurance
Keeping Your Health Coverage
For the job you’re leaving: Speak to HR to understand your options for health insurance and when your company benefits will end.
For the job you’re starting: Gather details on when your new health insurance will start. Keep in mind that your new company may have a waiting period before you’re eligible.
If you’ll have a period of non-coverage between leaving your current job and starting your new one, look into COBRA or the state health insurance marketplace. The latter is usually much cheaper, but COBRA might make sense in extreme cases — like you’re pregnant or in the middle of treatment for an illness and don’t want an interruption in your health care providers. Either way, we really don’t recommend going without health insurance.
One other thing: If you live with a partner you’re not married to, and they’re employed with access to health insurance, you might want to consider a domestic partnership. Some insurance providers will allow you to join their insurance. The cost will likely be lower than getting your own coverage through the marketplace.
What About Pre-Tax Health Accounts You Paid Into?
FSAs
You’ll lose remaining FSA dollars if you’re laid off.
For reimbursement of expenses, the purchase period must happen on or before your last day of work.
You have 90 days from the day you leave to submit these expense reimbursements.
If you need ideas of what to spend the money on, look at the list of FSA-approved items or use a website such as FSAStore.com.
HSAs
This money is yours and does not have a use-it-or-lose-it policy.
You can roll these funds over to your new provider and continue contributing if you have a high-deductible health plan, or keep them where they are.
Keep track of how much you’ve contributed at your prior company so that you stay within the yearly maximum contribution limit (currently $3,850 single/ $7,750 family).
Disability Coverage
Disability insurance is one of the most important parts of a financial plan. It essentially insures your income. Fun fact: Disability is four times as likely as death. We focus so much on life insurance, but disability insurance kind of gets left in the dust. The most common form of disability isn’t a freak accident — it's actually just back pain.
It’s a common employee benefit, but if your disability insurance was paid by your employer, chances are this benefit will end with your termination. Before you leave, if you know you’re going to have a gap in coverage, look in to the availability of other options:
Joining a professional organization that offers group disability as a benefit. These are usually reasonably priced. Research the details to better understand their policy requirements.
Reach out to your insurance agent to see what they could provide, (This would most likely be a more expensive route.)
A Few Other Important Things
Your Paychecks
Grab your paychecks! They might not be easily accessible (especially if your company is laying off a lot of staff or shutting down). These will be handy to project your tax bill and additional 401(k) contributions allowed.
If you disqualified stock options, you’ll also want to save those specific paychecks. The document that you're going to get at the end of the year is not going to show your tax preparer the individual transactions. If we don't see those individual paychecks and the withholding that happened, you could end up paying double taxes on your stock options. When you leave a job, download every single paycheck from the past year or two — or anytime you had options that were exercised or RSUs that were vested.
Nail Down an HR Contact
I always say make friends with HR because there will undoubtedly be something you need to contact them about. Be sure to get their information before you depart.
Apply for Unemployment
Every state is different, but it’s available everywhere. Typically, you can get unemployment while also receiving severance. This is extremely important because it can replace some portion of your income while you look for a new job. It usually comes through as a weekly payment. Check your state website for details.
Vacation Payout
Make sure you understand what the company policy is and whether you have a benefit accrued or not.
Some companies are starting an “unlimited vacation” policy, which sounds great, but really it helps limit the liabilities on the company’s balance sheet. When you leave, they aren’t required to pay you out for unused time.
Also keep in mind, if your company does offer set vacation days and you have taken more vacation time than earned, your final paycheck may be reduced by that amount.
Know Your Company’s Policy on Paid Tuition or Other Continuing Education Reimbursement
It’s common to see a company require the employee to stay at least one year after earning the degree, designation, or date of reimbursement.
If you fail to meet this requirement, you may have to pay this back.
Keep Your Address Updated for Your W-2
A lot of things are digitized these days, but for some reason, we still see a lot of W-2s being sent in the mail. That's the most important tax form that reports your income at the end of the year. If you have any kind of portal, like Workday, ADP or something similar, please make sure your address is updated there.
Getting laid off is a lot, but the information above covers the most important stuff. We’re also here if you’re looking for more one-on-one guidance.