What to do and consider if you’ve been laid off
By ATB Wealth 14 July 2020 10 min read
If you find yourself in the unfortunate situation of being recently laid off, it can be very overwhelming. There are several choices you will have to make and many things to consider including, the details of your termination package, making choices regarding your severance and pension, handling your options in a tax-efficient manner, or applying for the government benefits that you may be entitled to with your lay off.
If your recent job loss is due to COVID-19, here are six things you should do. Even if your layoff was not due to the current pandemic, several of the recommendations discussed in the above article will apply to anyone who has recently experienced a layoff.
The top financial considerations following a layoff are discussed below:
Reviewing the terms of your termination
Before accepting the conditions of your termination you should speak with a qualified legal professional to discuss your particular situation and if the general conditions regarding your termination are fair.
There may also be specific conditions of your termination that should also be reviewed by a legal professional, for example:
- If you choose a salary continuance vs. a lump sum payment for your severance can the employer stop future payments if you find employment?
- Is there a non-compete agreement that would prohibit you from finding similar employment?
- Are there other restrictions?
For additional resources, the Financial Consumer Agency of Canada has a site, understanding your severance pay, that provides individuals with information on methods of severance pay, links to federal and Alberta's provincial labour regulations, taxation of payments and a host of other information that you will find useful in the event of a job loss.
Understanding your severance package
Regardless of the amount of your severance payout, there are important decisions to be made. You may have been offered a choice between a lump-sum payment, salary continuance, or deferred payments.
Issues to consider with your severance package:
- Ability to obtain other employment. In many cases when salary continuance is chosen, if you find other employment the remaining payments may be stopped.
- Health benefits and insurance coverage. Your severance package should outline what benefits your employer will continue to offer you, how long benefits will last and if any premiums are still required from you to maintain benefits. Choosing between salary continuance vs. lump sums may result in benefits ending at different points, post-termination. The provider of your group benefits may offer you the ability to convert some or all of your previous group benefits to individually owned policies. In some cases, the conversion requires no medical underwriting. However, the cost of converting existing group benefits to individual benefits may be higher than applying for new policies. Depending on your current health obtaining new policies may be a more viable option. Consider meeting with an ATB Insurance advisor to review the options available to you for personal insurance and medical and dental benefits
- Employment Insurance (EI) eligibility. If you are otherwise eligible for EI benefits, regardless of whether you choose salary continuation or lump sum severance, your EI benefits will be delayed following your unemployment as a result of the severance payment(s). In the case of a lump sum payment, since it represents a certain number of weeks of earnings, your payment is treated as if it was salary continuance paid to you over those number of weeks and your ability to collect EI is delayed. In either case, it is still recommended that you file a benefit claim as soon as you become unemployed so that your claim can be processed as quickly as possible.
- Generating Registered Retirement Savings Plan (RRSP) contribution room. Salary continuance is generally treated as employment income and will generate additional RRSP room. The payment of a lump sum severance is generally treated as a retiring allowance and does not generate future RRSP room.
If you were a very long-term employee and had been employed with your employer prior to 1996, some of your severance may be considered “eligible retiring allowance.” The eligible portion of a retiring allowance can be contributed to an RRSP without the use of RRSP room. The contribution will decrease your taxable income like any RRSP contribution and the amount that qualifies as eligible can be reported as a transfer so that it does not require room. The eligible portion is calculated by the following formula:
The sum of:
- $2,000 times the number of years before 1996 during which you were employed by the employer; and
- $1,500 times the number of years before 1989 during which you were employed by the employer and did not have vested contributions to a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP).
Employer savings and pension plans
If you have an employer sponsored savings plan such as an employee profit share plan (EPSP), group RRSPs, a Deferred Profit Sharing Plan (DPSP), or a Defined Contribution Pension Plan (DCPP), you may be able to transfer the value of both employer and employee portions of these accounts to appropriate personal accounts, subject to the vesting rules of your employer plan. If you have a Defined Benefit Pension Plan (DBPP) you will have additional options available and issues to consider.
Defined Benefit Pension Plan (DBPP)
If you are a member of a DBPP, your pension plan was designed to pay you a guaranteed income from retirement throughout your lifetime and the lifetime of your spouse or common-law partner. The amount of that income is determined by way of a formula based on your earnings and years of service.
As a result of being laid off, you will likely have the choice to take either guaranteed income payments from the pension plan or elect to take the commuted value or lump sum of those income payments. When your employment ends you will be provided with a package that summarizes the pension options available to you. Pension payout: your options explained discusses the issues to consider when determining if the pension income or the lump sum payment is right for you.
If you elect to take the pension income option you will have additional choices regarding your payments, including:
- When to start your pension payments. Depending on your current age, your length of employment and the specifics of the plan, you may have the ability to choose an early retirement benefit, or you may have to choose a deferred pension, which starts the income payments closer to the plans stated normal retirement date (usually 65). Your pension income amount if taken before your plan’s normal retirement date may be reduced by a certain percentage for each year of early retirement, or actuarially adjusted to take into account that you will be receiving more payments over your lifetime. As a result, the amount of the payment will be reduced accordingly.
- Single vs. joint pension options. If you are married or have a common-law partner, unless your spouse or common-law partner signs a waiver form, you will have to choose a pension payout that ensures there is lifetime income as long as either of you survives. You can choose to have the income level remain the same throughout both of your lifetimes, or choose to have income that starts higher while you are both living and decreases to a lower amount after death. Depending on the pension plan, this decrease may happen only when you pass away or may occur on the first death, either on your death or the death of your spouse or common-law partner. It is important to understand the specifics of your particular pension options. We recommended you meet with your ATB Wealth financial advisor to review your benefit options in detail.
Employee Profit Share Plan (EPSP)
Are non-registered accounts and can be transferred to your own non-registered account. Keep in mind, if you choose to transfer out of the group plan “in-cash”, which is to liquidate the investments, capital gains may be triggered and taxes payable. Alternatively, you may be able to transfer out “in-kind”, wherein your investments stay intact, as they transfer to your own non-registered account.
Registered Retirement Savings Plan (RRSP) & Deferred Profit Sharing Plan (DPSP)
Tax-deferred savings in employer sponsored RRSPs and DPSPs can be transferred on a tax-deferred basis to your personal RRSP.
Defined Contribution Pension Plan (DCPP)
The value of your DCPP is also tax-deferred, but is considered to be “locked-in” as it is subject to either provincial or federal pension legislation. As a result, there will be restrictions on the ability to make withdrawals and restrictions to protect spousal rights for retirement and death benefits.
The value of the DCPP will generally be transferred to what is essentially a locked-in RRSP, most commonly a Locked-in Retirement Account (LIRA) or a Locked-in Retirement Savings Plan (LRSP), depending on the applicable pension legislation. Generally, these accounts would not be accessible until a lifetime income is initiated with a transfer to a Life Income Fund (LIF) or a life annuity.
Deferred compensation arrangements
If you have Restricted Stock Units (RSUs), Deferred Stock Units (DSUs), stock options or a similar incentive plan, the specifics will vary from employer to employer and the details of vesting, payment and exercising of options will be outlined in your severance package.
The taxation and timing of these transactions need to be considered and included as part of your overall strategy for maximizing all of your termination options. We recommend seeking the advice of a tax professional.
Tax considerations with a layoff and opportunities for tax deferral
Your total taxable income in the year of the layoff may be substantial. Remember, your annual income taxes are based on your total income for the calendar year and this will include earned income and taxable benefits up to the date of termination, severance payments and other sources of taxable income.
Your total taxable income in the year of the layoff may be increased further as a result of electing to take the commuted value of your DBPP. The payment of the commuted value of a DBPP into a LIRA account is subject to the calculation of the maximum transfer value (MTV). Any amount in excess of the MTV is paid out as a taxable lump sum amount.
Lump sum payments are subject to withholding tax. Refer to Withholding rates for lump-sum payments to confirm the amount of tax withheld on any payments you have received. However, your total tax payable will be based on your total taxable income for the year. As a result, you will have to come up with additional cash at tax time to pay your tax bill, so it’s important to take advantage of any tax savings opportunities available.
Maximizing RRSP contributions up to your available RRSP contribution room is a simple and effective way to reduce your current tax bill. Amounts contributed to an RRSP are deducted from your taxable income and will reduce your tax payable. As mentioned, if some of your severance qualifies as eligible retiring allowance, that amount can be contributed directly to your RRSP without the use of RRSP room.
You should also maximize contributions to your tax free savings account (TFSA) and your spouse or common-law partner’s TFSA. Although this will not reduce your current tax, it will provide tax-free growth and withdrawals going forward.
It may be worthwhile confirming if there is an option to have any of your severance paid as deferred payments, allowing the amount to be paid to you over 2 years or more and therefore reduce the total tax burden. The potential tax savings should be considered in conjunction with the time value of money. For example, if the payment is deferred until a future year the opportunity to invest/utilize these funds for the remaining months in the year would be lost.
To ensure you are making the most of your termination payouts consider speaking with a qualified tax professional to discuss other tax savings strategies that may be available.
Looking at the bigger picture
Now more than ever it is important to ensure you have enough cash and liquid assets to maintain essential household expenses and ensure illiquidity does not become an issue. The ATB Wealth Financial Management Fundamentals Guide discusses financial management strategies that can help you make the most of your current financial situation including:
- Controlling your expenses
- Using credit wisely
- Debt restructuring
- Distinguishing between needs vs. wants
- Budgeting - including a link to a budget worksheet you can use to find areas where you can reduce spending and take some of the stress off during this very emotional time.
Your recent job loss and the options for your severance and pension should not be made in isolation but reviewed as part of the bigger picture. An ATB Wealth advisor can help you understand your options, how they fit with your goals and work with you to provide a path for moving forward.
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This document has been prepared by ATB Wealth. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. The information provided in this article is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. Professional legal and tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. This information is subject to change and ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund), ATB Investment Management Inc. and ATB Insurance Advisors Inc. reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents.