Heed The WARN Period
Boom and bust cycles have long been part of the energy industry’s DNA. Yet workforce reductions still catch many workers (and their families by surprise). If you or someone close to you is impacted by a layoff or voluntary retirement option, take the time to review your options carefully. Never agree to anything (verbally or in writing) that you don’t understand—100 percent. The following case study involves hypothetical couples, with various realistic experiences. Due to the complexity of each scenario, we have combined them and are providing the solutions that were most applicable to their situation. The strategies provided may not be specific or applicable to your situation.
CASE STUDY
Some of our clients were let go on December 31st of last year. As per the WARN Act, there was a period of 60 days in which they remained on the payroll (with benefits), but were only required to come to the office at their employer’s discretion. If you’re not familiar with the WARN Act, it’s a US labor law requiring most employers with 100 or more employees to provide 60 calendar-day advance notification of plant closings and mass layoffs of employees. The company will then start the severance compensation after the 60-day WARN period ends (either via lump sum payment or payout over time) depending on company policy.
While 401(k) contributions are not taken out of your severance paycheck(s), those contributions CAN be made while you are still receiving regular paychecks during the two-month WARN period. MAX out those contributions while you still can! Our two aforementioned clients sure did.
Our clients received regular paychecks during January and February of this year before starting severance on March 1. So, we substantially increased their 401(k) contribution to well over 50-percent of each paycheck during January and February. This way, they could achieve their full year contribution of $18,000 for 2017 ($24,000 if over age 50). You can still do this, too if your termination starts mid-year or later. Just do a little math with you advisor and then make the appropriate changes through your company’s 401(k) website. If you have a Health Savings Account (HSA), do the exact same thing.
Furthermore, you can turn up the contributions to your spouses’ 401(k) or 403(b) if they work at an employer with such a retirement plan.
These strategies will not only add one final boost to your retirement funds but also provide some much needed tax shelter in a potentially high-tax year. I’ve seen lump sum pension payouts, on top of vested stock options, unused vacation days, sick days and a bonus add up to a total taxable income of a couple hundred thousand dollars.
I tell all of our clients that we’ll be happy to schedule a meeting with you and your CPA—or help you find a CPA--and strategize together about different things we can do for you before year-end to mitigate taxes. There are even more options to consider if you start your own business or become a consultant during this high-tax year.
CONCLUSION
Layoffs are never easy, regardless of your age, industry or stage of career. But, by maintaining your composure and keeping the big picture in mind, you can substantially increase your odds of finding your next great career opportunity or getting a rewarding jumpstart on your retirement. If you or someone close to you is concerned about a workforce reduction at your company, please don’t hesitate to contact us. We’d be happy to help.
Also see my new 3-part article series {Link to articles when live} about strategies for energy industry workers who are expecting (or reacting to) workforce reductions.