How To Cover All Bases In the Wake of a Layoff

It's layoff season, in case you needed another reason to up the dosage on your antidepressant.

Financially struggling companies often choose to make staff cuts in the fourth quarter -- many notices unfortunately coincide with end-of-year holidays -- so the firms can charge layoff-related expenses to the current tax year and start the new year with a clean slate.

But as I pointed out recently in the first of this series on preparing for a layoff, getting up to speed on what your company may offer in the way of pay and benefits can take some of the fear and financial uncertainty out of being on the receiving end of a pink slip.

In this column, we'll look at how to handle stock options; what you need to know about health, life and disability insurance; and how to get the most out of outplacement services.

Stock Options

Many employees who are facing a possible layoff are drowning in underwater stock options, and wondering what the heck to do about them.

"Forget 'em," counsels Bruce Brumberg, editor of Mystockoptions.com, published by Mystockplan.com, Brookline, Mass. "You'll almost always get a better deal buying stock on the open market than exercising underwater stock options and holding them." However, he adds, if you have capital gains this year, you may want to consider the tax benefit of exercising your underwater options and taking the loss to offset your gains.

Financial planners generally advise that if you have options that are "in the money" -- or options where stock price is above your option price -- exercise and sell them immediately. Don't buy and hold.

There are no laws requiring employers to accelerate the vesting of your stock options -- or extend the period of time you're allowed to exercise those options -- in the event of a layoff, so depending on your situation some or all of your stock-option grants may disappear after the pink slips have been handed out. Many companies make a point of not accelerating the vesting of options since changing the design of a stock-option plan often forces companies to take hefty accounting charges.

If you have an employment contract, check the agreement to determine the period allowed under the contract for exercising options in the event of job termination. Otherwise, check the employee stock-option plan. Every company that issues options has a generic plan that is approved by shareholders. Employees with in-the-money stock options will need to move quickly to exercise and sell their options. Mr. Brumberg says most companies give laid-off workers just 30 to 90 days after termination to exercise their options, and some require workers to do so immediately.

Incentive stock options cannot by law be exercised later than three months after your date of termination, or the option will be treated as an nonqualifying stock option when you exercise. That's a big distinction -- because you may be hit with an array of federal, state and Social Security taxes, depending on which type of option you hold.

With NQSOs, you must pay income tax on the difference between the exercise price and the stock's market price when you finally buy the shares. This is commonly known as the "spread." If you exercise, and hold those shares for more than a year, you'll be taxed at the lower capital-gains rate -- typically 20% -- on any additional profit you've earned when it comes time to sell. Because it's considered compensation, you'll also get hit with Social Security and Medicare taxes on the profit.

With ISOs, if you exercise the stock and hold it for at least 12 months, the spread is taxed as capital gains, not as personal income. If you don't hold the ISOs for at least a year, it's called a disqualifying disposition and you'll owe income tax your profit. Then there's the now-infamous alternative minimum tax, which has forced many an unwitting option holder into filing for bankruptcy, because they didn't understand the implications of exercising options and holding on to the shares.

No doubt, mishandling stock options can unnecessarily inflate your tax bill come April 15. To avoid mistakes, read Wall Street Journal reporter Ruth Simon's spot-on article about your options when exercising stock options.

Insurance Coverage

The loss of health-care insurance is among the most frightening and costly issues facing someone who is dealing with a layoff. But thanks to the Consolidated Omnibus Budget Reconciliation Act of 1985, better known as Cobra, most employers are required to allow laid-off workers to purchase health-care insurance through the company's plan, enabling them to take advantage of the lower group rate.

If your company has more than 20 employees, and isn't on the verge of insolvency, you'll typically have up to 60 days from the day you receive notice of your job loss, or from the day your current coverage ends -- whichever is later -- to elect to purchase insurance from your employer's plan. You're eligible to participate for up to 18 months, in most cases more than enough time to bridge the gap until your new employer's coverage kicks in. (For more details about eligibility under Cobra, see the Department of Labor Web site.)

If strapped for cash in the event of a layoff, ask your employee-benefits counselor what the drop-dead last day is before your 60-day Cobra eligibility window closes -- and then wait until that day to sign up for benefits and pay your first premium. With luck, you'll have found a new job before then. And, if anything should happen to you during that 60-day window, you can apply for benefits retroactively and your costs will be covered. The going rate for most plans is between $400 and $500 a month, but there are cheaper alternatives.

Access to health insurance usually is the biggest worry after a layoff, but few people pay attention to two other insurance benefits that are equally important: life insurance and disability insurance. Employer-sponsored insurance often is the only life-insurance coverage many workers have. Most insurers will allow workers to convert group-term life insurance policies to individual policies.

If you're young and in good health, says Dennis J. Nirtaut, managing director of compensation and benefits at Arthur Andersen in Chicago, forget about taking on the employer's pricey premium payments and start shopping around for your own coverage.

"You really should first assess your personal financial situation, what your current obligations are, what long-term financial obligations you'll have, in order to figure out how much insurance you really need," he says. To gauge how much insurance you may need -- or to assess whether you need any life insurance at all -- use this calculator, offered by financial-news Web site CNN.com's CNNMoney channel.

Once you've determined how much insurance you need, if any, head for the Internet to shop for the best deals on life insurance -- rates for term life insurance are low and you may be able to find a better deal through a Web-based service such as InsWeb.com, IntelliQuote.com and Quotesmith.com.

But if you're approaching retirement and have a pre-existing condition that may prevent you from obtaining insurance on your own post-layoff, converting your employer's policy to an individual policy may be the only available option. If this speaks to you, you'll need to act fast, since most insurers demand the conversion take place within a month after the layoff. Premiums for converted policies can run as high as $1 a month or more for each $1,000 of coverage.

As with life insurance, disability insurance coverage usually ends the day your job is terminated. But a handful of states include some type of disability coverage as part of their unemployment benefits. The Department of Labor's Web site has contact-information links to all state agencies.

Outplacement Services

Many employers have outplacement counselors on hand the day layoff notices are issued, though experts say a surprisingly large number of workers don't seek outplacement advice right away.

Embarrassment plays a large role, says John Beck, vice president for global relations at Drake Beam Morin, a New York-based career-management consulting firm. "Even though most people know the routine management of businesses is what drives restructurings, and that layoffs are not at all related to job performance, there still lingers some sense of shame when you lose your job," he says. "People tend to think, 'If I had only done something different, it wouldn't have happened to me.' And that simply isn't true."

His advice: Get over it ... and schedule a counseling session as quickly as possible. Sitting down with an outplacement counselor immediately after you've received a layoff notice will not only help initiate the transition between your old job and your new one, but it also can help eliminate some of the stress and worry that typically plagues workers who aren't certain what their next step should be.

As with severance pay, no company is required by law to offer outplacement services unless agreed upon in a labor union or employee contract. But most large companies do offer some form of outplacement services. A typical outplacement package might include group or individual counseling, resume-writing and job-hunting advice and assistance, and tips on networking and interviewing.

Networking is key to quickly finding a new job, says DBM's Mr. Beck, though few know how to do it right. "Networking still accounts for two-thirds of the jobs that get filled in this country," he says. Meetings with former colleagues, long-time friends in your industry, former employers, and professional or industry organizations are all opportunities to network. "What an outplacement counselor can do is give structure to your networking strategy, where you just might not know where to look first," he says.

In fact, networking is so key to quickly finding a new position that it's a good idea to fire up your network connections now, even if you feel you're not immediately in danger of being let go.

Keep It Civil

One last note: Approach a layoff as you would any career transition, and do your best not to let anger and hard feelings get the best of you. As Michael Corleone said: "It's not personal, Sonny. It's strictly business."

Laura Cejen, a director in the compensation-consulting practice at management-consulting firm Watson Wyatt in Washington, D.C., says it's best to think of your former employer not only as a source for a favorable reference, but as a future networking partner who may help you find a new job.

"Layoffs are difficult for everybody," she says, "but the employee who doesn't burn bridges on the way out is going to have a better chance finding a job later on."

-- Ms. Cullen writes the Fiscally Fit column for The Wall Street Journal Online. To read past columns, subscribers can visit the Fiscally Fit archives.