Employee Termination FAQs
- Are employers required to establish a program to educate employees, former employees and beneficiaries about the benefits available to them upon retirement, termination, or death?
- What are some of the types of pre-retirement programs offered by organizations?
- What are the employees concerns and needs regarding post-employment insurance?
- Are there ways an employer can minimize the burden of carrying continuation insurance for retirees?
- What are some of the major concerns of retiring employees and their employers?
- What is an employer’s post-retirement commitment to its employees?
- What is COBRA and what does it require of employers?
- What types of events trigger the COBRA requirements?
- Do employees have choices when it comes time to withdraw their retirement plan distributions?
- What are the main objectives in planning for retirement distributions?
- Paychecks: How do I get my last one?
- Unemployment Insurance Claims: Where can I file?
- Recently laid off: What are my resources?
- Work Hours: Available information
- Overtime: When is it due to me?
- Breaks & Meal Periods: Do I get these?
Employers should be familiar not only with issues concerning employee benefits during the period of employment, but also what former employees and their beneficiaries are entitled to upon retirement, termination, or death. Moreover, employers must convey this information to employees, former employees and their beneficiaries.
An employee is faced with several important decisions affecting both the financial and tax consequences of the distribution of his/her benefits. In order to provide an employee with a basic outline of options, it is important to review the various choices available.
Generally, distributions are taxable as ordinary income under the same rules used in the tax laws for payments of annuity contracts. However, the tax consequences will be different to a plan participant if he/she chooses to take the distribution in a lump-sum. There are also different consequences if employer securities are involved. Moreover, beneficiaries often are entitled to a $5,000 exclusion for certain death benefits. Also, in lieu of paying taxes on the distribution, a participant or beneficiary may be entitled to roll over the distribution to another plan or an IRA.
Pre-retirement programs offered by some organizations to employees age 55 and older are designed to help them cope with the financial and psychological changes that take place in retirement. Employees may be given financial data to complete to give them a picture of what their financial position will be at retirement. Pre-retirement saving may be encouraged and income and estate tax considerations outlined. Some instruction also may be offered on changing relationships, second career possibilities, etc.
A common goal of life insurance—especially for younger workers—is to create what may be characterized as an “instant estate” for an insured who dies prematurely, before having had an opportunity to build an estate.
A retiree’s need for insurance does not conform to that proposition—if one has reached the normal retirement age (usually 65), a subsequent death cannot readily be viewed as premature or as coming before he has had an opportunity to build an estate.
Thus, neither the retiree nor the retiree’s former employer would ordinarily see any pressing need for continuing coverage of the retiree under a group-term policy. If obligated to pay the sharply escalating premiums as the retiree continues to age, the employer may find ther need to discontinue coverage.
The employer will generally not want to offer retirees continued group-term coverage, except as it may be bound by an enforceable contractual obligation, either a union contract or an individual employment contract. However, there may be special circumstances under which the employer may want to provide long-term coverage to certain individuals, such as where the business is a family corporation and the retiree is a family member or has had long service with the business, or possibly where the retiree does not have long to live.
The individual retiree who needs or wants the planning benefits that life insurance offers may want to take advantage of the privilege that most group-term policies offer, i.e. conversion to permanent life insurance at level premiums. Permanent life insurance offers tax-free buildup of cash value, conversion to an annuity, if that is thought to be desirable, and exclusion from estate and income taxation of the proceeds if the requirements of the Code are observed.
NOTE: If the employer pays the premiums for continuation of coverage, it will be entitled to deduct those costs as a usual business expense. This is a benefit that should not be overlooked.
Beyond the possible tax benefits, there are other ways an employer can mitigate the cost of continuation insurance, including:
- Getting some form of contribution for premiums from the retiree;
- Limiting coverage to a specified age;
- Using some form of decreasing term ending at a specified age; and
- Treating the employer premiums payments or some part of them as loans, repayable out of the insurance proceeds.
Retiree medical benefits are a matter of great concern to both employers and employees. For the employer who is committed to providing such benefits, rising costs cause concern. Costs are rising as people are living longer.
The first action the employer will want to take is to review its commitment to the employee. One major concern is whether it is binding or not. For example, if the agreement is found in a union contract, and is clearly found to be in force, then an obligation exists—versus something that may be interpreted to be implied in a manual.
It has been held that the plan description (SPD) required by ERISA and distributed to employees controls. If the SPD reserves the right of the employer to alter, modify, or eliminate the plan—which many do—this may override any implied promise of lifetime or no-cost medical benefits contained in an employee manual or brochure.
Care should be taken to review terms used in manuals or brochures to make sure that the intention of the employer is being properly communicated. If promises are made, their binding nature could be costly.
Each employer should make a cost-benefit analysis in terms of its own workforce, age categories, turnover rate, health state, and all other factors bearing on the present and future costs. On the benefit side, the employer will want to consider what is being offered by competitors tapping the same labor pool and what effect this will have on recruitment and retention of talent.
Federal law requires most employers with group health plans to offer employees and their spouses and dependents a temporary period of continued health care coverage if their employer-provided coverage should cease. These continuation requirements are commonly referred to as COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985). In general, employers must offer coverage for a period of up to: … Premium Subscribers Only
- The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
- COBRA continuation health coverage
- HIPAA nondiscrimination requirements
An employee can choose to take a retirement plan distribution in a lump-sum or in the form of an annuity. Lump-sum distributions can take on several formats, and the employee may be faced with several choices, as follows: … Premium Subscribers Only
When an employee is terminated, a number of sensitive legal and financial issues need to be handled with care. When an employee changes jobs, there are some similar and some different issues to be addressed.
Planning for retirement involves tax, legal, social, socio-economic and other personal considerations in deciding the best method for drawing on retirement funds. The employee must focus on immediate cash needs, as well as future retirement and estate planning goals.
The death of an employee places a cross-section of concerns on the employer and the beneficiaries of the employee. Unfortunately, most companies have few resources in place to help guide survivors through the maze of decisions. Most companies do not set up a vehicle to extend support to dependents of deceased employees and are reluctant to provide legal advice. Usually, the only investment advice that the beneficiaries receive comes from stock brokers or insurance agents, who may not always be objective. Surviving spouses frequently are overwhelmed by the myriad decisions they must make at this most trying time.
- Employers should establish a program in which employees, former employees and beneficiaries are educated about the benefits available to them upon retirement, termination, or death.
- Pre-retirement programs are offered by some organizations to employees age 55 and older, and are designed to help them cope with the financial and psychological changes that take place in retirement.
- A retiree’s need for insurance is not the same as that for a younger worker.
- There are ways an employer can minimize the burden of carrying continuation insurance for retirees.
- Retiree medical benefits are a matter of great concern to both employers and employees.
- Employers must first review their post-retirement commitment to employees.
- COBRA requires that employers provide certain employees, spouses, and their dependents with the right to elect to continue coverage under a group health plan following certain “qualifying” events.
- Costs of health care benefits for retirees (as well as active employees) are a matter of serious concern.
- An employee can choose to take a retirement plan distribution in a lump-sum or in the form of an annuity.
- There are three main objectives in planning for retirement distributions.
- Planning for distributions from qualified plans and IRAs requires careful consideration of various tax and non-tax factors.
- When an employee is terminated, a number of sensitive legal and financial issues arise.