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Opinions wanted: severance vs. stipend
Hi all,
A friend of mine is about to be laid off (amicably) from a government job and has two options:
- Take a severance package of approx. $50,000 and leave his job within two weeks.
- Leave his job in 6 weeks and receive a "severance" stipend of approx. $250 per month and retain full health insurance coverage indefinitely.
That is the essence of both options without getting into the nitty gritty. He asked me what I would do and I've been wavering back and forth. I would personally take option #1 because I can easily get health insurance coverage through my H's plan and I don't have pre-existing conditions or costly prescriptions that would complicate things. Also, this option is just so much more money up front which is appealing investment-wise. Option #2 was appealing to me because it allows more time for job searching and planning in general plus there's the guaranteed monthly check. I think he's leaning towards option #1 because he shouldn't have much trouble finding a new job. Also worth noting that I have no idea how taxes play into either of these options.
Since I'm really indecisive about this I'm curious to see what MM thinks. I'll update once he makes his decision.
Also, this topic reminded me of a chat I had with my H last week about whether we would do a lump sum payment or lifetime installments if we ever won the lottery. I think we both decided on lump sum unless there's a way to put the lifetime installments into a trust or turn them over to a descendant when we die.
Re: Opinions wanted: severance vs. stipend
@ AprilZ81 Thanks for weighing in on the taxes and lack of access to unemployment, I didn't realize that but hopefully those are all the questions that he's asking prior to signing anything. I agree with what you said though, the lump sum seems like the way to go.
@formerlyGDaisy09 He's not married, so no he won't have access to health care through a spouse. I'm not completely sure of his medical health so this might be a bigger factor to him than it seems to me. He has contacted a few head hunting firms just to review his resume and says that there's a strong demand for his skill set (technology engineering) but it's hard to gauge exactly how quickly he could be placed somewhere until he starts applying and interviewing.
Thanks for the responses, I think he has until the end of the week to choose but I already gave him my two cents. I knew you guys would have good perspectives on this
Lump sum.
The other option does have some appeal however.
H's lump sum prevented him from getting hardly any unemployment. From what I understand, it made him look like he earned most of his wages in a certain part of the year (like a seasonal worker) and he was denied benefits for 2015. He lost his job Feb of '14 and was able to collect a little at the end of the year when his eligibility started but then was denied when he reapplied in 2015. I think his eligibility was way delayed too because of the lump sum.
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Haha...I think the first two places I would go if I won millions in the lottery is 1) An accountant to guide me with the tax implications and annuity vs. lump sum and 2) An attorney to find ways to protect my money. I've also heard that if it is an annuity (may depend on the sweepstakes or lottery) and the winner dies before it is paid out, tough. Whatever wasn't paid out is forfeited and does not go to the estate/heirs. But that might be just a rumor.
@Xstatic3333, so, so true about the preexisting conditions! I spent close to half my adult life without insurance for my preexisting condition. I found that most people didn't realize the vast majority of group plans would not cover a preexisting condition for the first year of coverage unless there was a less than 30 day lapse in coverage. And for the periods of time when I was unemployed? Outside of COBRA, I couldn't buy medical insurance for anything, at any price. Not even just a major medical plan. I know ACA is very controversial and it has its problems too. But I lived the alternative and it was ugly and pure evil. (Slowly stepping back off the soapbox).
I'm going to say take the lump sum too because I don't trust anyone to pay over that long of a period. But also warn your friend about what it means for unemployment if he's planning to get it. When my dad got a severance package it counted as income and delayed his unemployment by maybe 6 months. For my parents who live pay check to pay check this was a huge hit because I believe they counted the pre-tax amount as income, but he had a lot of taxes out when he got the pay out. This may or may not happen for your friend, but is definitely something he should take into consideration.
@RosieC18 He works under the DOE.
Thanks everyone for the responses. He's meeting with HR this morning to discuss his options in more detail, but going into that meeting I know he was leaning towards the lump sum. I passed on the info about taxes and how unemployment could be affected and that was eye opening to him as well so again, thanks for the great insight!
UPDATE:
My friend agreed to take the lump sum severance payment and leave his job right after 4th of July. He didn't mention what the exact amount was (they have a long formula they use to compute it with some percentage of his base salary, length of tenure at the job, etc.) so I figure its still ~$50,000. He did say they told him to expect it to be heavily taxed upon payment, but that he can expect to see a lot of it back in his tax return. They also gave him the opportunity to directly contribute a portion of it pre-tax to his Traditional IRA.
As far as healthcare coverage goes, he will be covered for the month of July through his current plan for prescriptions but not for any inpatient appointments.
On the bright side, he said has two job interviews lined up for the next couple of weeks so he seems like a happy camper. This was definitely unexpected for him but it might end up being an awesome (and MM!) deal at a fresh start.