Employees leaving your company become (often vocal) brand ambassadors. From both a personal and professional perspective, creating a thoughtful experience for these employees can entail providing the same treatment when they walk out the door as when they were recruited in. Career and financial counseling and other meaningful benefits can send a powerful message—both to employees leaving and those who remain—that you care about your people.
We’ve helped serve as an extension of our corporate partners’ HR teams through a variety of separation strategies—including voluntary early retirement, voluntary separations, layoffs and events with systemic impacts. In this article, we’ll share a number of strategies we’ve seen companies deploy to help achieve their goals through these events.
Spotlight on voluntary separation/retirement
When companies are planning a voluntary separation or retirement offer, often one of their first steps is determining what populations will be impacted. For retirement offers, employers often determine the eligible group by analyzing the key demographic and plan design factors that impact an employee’s ability to accept an early retirement offer. For separation offers, factors such as division and job function may be used to create the eligible group. Regardless of the type of offer being extended to employees, companies should be sure to comply with applicable non-discrimination laws.
Some strategies we’ve seen our corporate partners implement include:
- Providing clear communications and customized packages with benefit estimates and premium rates
- Giving an employee sufficient time to decide if they will accept the offer—statutory deadlines will vary but include periods of 45 days—and, in some cases, it may be preferable to give 90 days
- Making financial counseling assistance available to help an employee understand the implications on their personal financial situation
- Offering transitional career counseling
Some benefit incentives we’ve seen companies offer include:
- Separation pay
- Medical coverage enhancements
- Acceleration of vesting and eligibility for retirement and executive benefits
Separation pay
Separation pay, or severance, in voluntary or retirement separations is typically handled differently than in involuntary/layoff situations. If it’s included, in our experience across Corporate America, severance is commonly provided as a one-time, lump-sum payment.
Some examples of separation pay provided by our corporate partners include:
- Lump-sum cash payments equal to 100% of base pay
- Lump-sum cash payments ranging from one-to-six months of salary, depending on job level
Medical coverage
The cost of medical coverage may be a major financial consideration in retirement—and companies may look into providing enhancements to coverage as part of a severance package, including:
- Subsidize or extend COBRA coverage for a set period
- Add to age and/or service to bridge eligibility for retiree medical coverage
- Offer additional Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA) contributions
Some specific examples from our corporate partners are included below.
- Extension of subsidized COBRA coverage at the active employee rate for 18 to 24 months
- An added year to both an employee’s age and service in the calculation for retiree medical eligibility
- One-time $10,000 lump sum payment into an HRA
Pensions
While active defined benefit pension plans are far less common today, two-thirds of our corporate partners still have an active or frozen benefit.1 In our experience, employees require clear pension estimates, illustrations, and/or a calculator to help them understand how a decision could impact their personal finances.
Some examples of pension plan enhancements for impacted employees are included below.
- Adding to an employee’s age and service to bridge to retirement eligibility
- Providing additional service credits for pension calculation
- Offering Social Security bridge payments
- Giving an employee a one-time option to take a lump-sum balance
Some specific examples implemented by some of our corporate partners include the following additional pathways.
- Traditional pension formula
- Adding two years to both the employee’s age and service for calculation of retirement eligibility and reduction factors
- Waiving early retirement reduction factors so employees receive full benefit before age 65
- Offering early retirement rather than term-vested reduction factors to employees below age 55
- Cash balance pension formula
- Enhancing benefit with additional three-week’s pay for each year of service, with a minimum of 40 weeks of pay
Other considerations for voluntary separation/retirement
401(k) plans
As the predominant retirement saving mechanism in Corporate America, 401(k) balances can be an important factor in an individual’s retirement decision. Employees offered retirement or voluntary separation will need to consider if their vesting will be accelerated and the process for repaying any outstanding loans. We have seen companies offer the ability to continue repaying the loan directly to the recordkeeper or to allow a short period of time to repay it in full.
Non-qualified deferred compensation (NQDC) plans
Employee deferral elections will generally dictate how and when NQDC plans will be paid but general plan rules may impact an early retirement or separation event. It’s important for employees to understand if employment termination will accelerate their payout based on plan rules.
Long-term incentive plans
Treatment of unvested equity awards can be a factor in an employee’s decision to accept an early retirement offer. From our experience helping employees navigate these types of events, there are several questions to be considered:
- What will be the impact of employment termination on unvested awards?
- Are there specific rules for retirement and what is the criteria for meeting retirement eligibility?
- What is the period to exercise outstanding stock options after separation?
- Will there be any enhancements to vesting or retirement eligibility for the voluntary offer?
Accrued and unused Paid Time Off (PTO)
Companies typically pay out accrued and unused PTO in a separate lump sum. Some companies have plan features that offer participants the ability to redirect a portion of this payment to their 401(k) or HSA.
Access to a career transition counselor
Although not as essential for retirement situations, we have started to see more of our corporate partners offering these services for both separation and retirement offers.
Spotlight on: layoffs/reductions in force
In our experience, designing a separation package is critical for a layoff/reduction in force—but just as with a voluntary separation/retirement, companies should approach the process with compassion and understanding for impacted employees.
Some strategies we’ve observed in our work across Corporate America include:
- Ensuring clear communications and customized packages with benefit estimates and premium rates
- Offering financial counseling assistance
- Providing transitional career counseling
Some benefits offered include:
- Severance payments
- Subsidized medical coverage
- Acceleration of vesting and eligibility for retirement plan benefits, such as 401(k) and pension
Severance
For employees impacted by these events, our financial professionals often hear severance is the primary concern. In our experience, some of the considerations HR leaders weigh include:
- Will a standard or enhanced severance plan be used?
- We most commonly see our corporate partners offer a severance formula based on years of service—one to three weeks for each year of service is most common, with a minimum number of weeks as a base. We also see variations tied to job level.
- Will severance be paid in a lump sum or as salary continuation—or will the employee have a choice?
- What compensation will the severance calculation be based on—and will it include base salary and bonus?
- It’s most common to see severance tied to base salary only and annual incentive bonuses paid on a pro-rated basis.
Severance payments may muddy the waters around an impacted employee’s eligibility for unemployment benefits. In most states, workers are not eligible while still receiving severance payments—in others, they may be eligible if they receive a lump-sum severance. Companies may assist employees by clearly communicating—and helping them understand—the rules of their state.
Medical coverage
Aside from severance, medical coverage is a top concern our financial professionals hear from an employee when they lose their job (both for themselves and their family). Many companies provide a period of continued medical coverage or employer-subsidized COBRA coverage, either for a fixed period, based on years of service or based on the number of weeks/months severance payments are received.
Some examples we’ve seen at our corporate partners include:
- One week of continued medical coverage at active employee rates for each year of service.
- 12 months of subsidized COBRA coverage at active employee rates.
- Providing retiree medical coverage enhancements similar to those offered to employees in a retirement offer.
Pensions
Pension treatment can also be confusing for employees to understand during an event. From our experience helping employees with their financial concerns, it’s important for companies to provide clear information on how and when an employee will be able to access their benefit in the future. For instance, unless a plan offers a lump sum payment option (or is allowing for a one-time lump sum election), employees generally won’t have immediate access to their pension balance if they aren’t retirement eligible. If a lump sum is available, employees should know their options for keeping their benefit in the plan or rolling the benefit to another eligible qualified plan or account.
401(k) plans
When it comes to unvested 401(k) plan balances, we’ve seen companies accelerate the vesting of company matching contributions in layoff/reduction in force situations. On paying back a 401(k) loan, in general we have seen companies consider the same strategies discussed in this article around participants impacted by voluntary separation/retirement.
Career transition counseling services
These services can be an important resource to ease the stress of the transition and assist employees in finding new employment opportunities. Over three-quarters of our corporate partners who have gone through an involuntary reduction in workforce over the last 3 years have offered these services. They can include personal career coaching, skills assessment, resume building, help navigating a job search, interview preparation, networking, and even psychological counseling. We have seen our corporate partners offer at least 6-12 months of access to a career transition counselor from providers such as LHH, Right Management or Challenger, Gray & Christmas.2
Other considerations for an involuntary separation include:
Employee Assistance Program (EAP)
Layoffs can cause a great deal of stress and anxiety. Clear communications around access to an EAP can be a valuable resource, especially if impacted employees can continue to leverage these benefits. Some of our corporate partners choose to continue paying for a period ranging from 6-18 months. Employees can also elect to pay for access to an EAP after separation through COBRA.
For PTO, non-qualified deferred compensation and retirement plans, and long-term incentive plan awards, the considerations shared in this article around voluntary separation/retirement approaches also apply to layoffs/reductions in force.
Retained-employee support
All employees are impacted by a corporate event—especially those who remain. Employees can be asked to shoulder extra responsibility while maintaining—or exceeding—company goals within an environment of uncertainty and reduced trust and confidence. These employees may need special care to ensure they feel cared for and remain motivated. Some approaches we’ve seen corporate partners deploy include:
- Demonstrating transparency in an event announcement
- Providing support and attention to front-line managers
- Keeping employees engaged by creating a retention strategy for top-performing/key employees
- Giving employees space to express their concerns—and having detailed plans for leadership to act on the concerns shared
Interested in learning more about how we can help HR teams and employees? Contact us.
