What to do after a layoff

In the first week after a layoff, file for unemployment, pick your health coverage and cut your budget to essentials. Then add up your cash, severance and benefits to see how many months you can cover, and leave your 401(k) alone.

File for unemployment right away

File with the state where you worked in the first week. Most states pay for up to 26 weeks, and the first payment usually comes 2 to 3 weeks after you file.

Health coverage has a 60-day window

COBRA lets you keep your work plan, usually for up to 18 months, but you pay the full premium. A Marketplace plan may cost less with savings based on your income. Both have 60-day enrollment windows.

Leave your 401(k) invested

Cashing out before 59½ usually costs income tax plus a 10% additional tax. If you move it, use a direct rollover to an IRA or a new plan so nothing is withheld.

Severance is taxed as wages

The IRS treats severance as wages, so income tax, Social Security and Medicare come out of it. Plan from the amount after tax, not the gross figure in the letter.

Day one and two

Before you leave, or as soon as you can, collect what you'll need: your last pay stubs, the separation letter, the severance offer, your benefits summary and the contact for HR. Save personal files, like your own tax forms, but don't take anything that belongs to the company.

Then file for unemployment. Find your state through the Department of Labor's CareerOneStop finder and file online. Do it even if you're getting severance or think you might not qualify. Your state decides, and filing late can cost you weeks of benefits.

Health insurance

Ask HR the exact date your coverage ends. You then have two main paths. COBRA keeps the same plan, doctors and deductible progress, usually for up to 18 months, but you pay the whole premium including the part your employer used to pay, plus a small fee. You have 60 days to elect it, counted from when coverage ends or when you get the notice, whichever is later.

The other path is a Marketplace plan at HealthCare.gov or your state's exchange. Losing job-based coverage opens a Special Enrollment Period, so you can sign up within 60 days. Savings are based on your expected income for the year, so a lower income after a layoff can mean a much lower premium. If your income drops low enough, you may qualify for Medicaid.

Your last paycheck and severance

Federal law doesn't require an employer to hand over your final paycheck right away, but some states do. State law also decides whether unused vacation must be paid out. Your state labor department can tell you the rules where you worked.

Severance is a payment some employers offer when they let you go. It often comes with an agreement that you won't sue the company, plus a deadline to sign. Read it closely, ask questions in writing and consider a short call with an employment lawyer if the amount is large. Severance is taxed like wages, and in some states it can delay or reduce unemployment benefits.

Your 401(k) and other workplace accounts

You don't have to do anything with your 401(k) right now. Most plans let you leave the money where it is, and later you can move it to an IRA or a new employer's plan with a direct rollover. A check paid to you instead has 20% withheld for tax, and you then have 60 days to deposit the full amount.

Cashing out is the expensive choice. You owe income tax on the whole amount, and before age 59½ there is usually a 10% additional tax as well. One exception: leaving your job in or after the year you turn 55 skips that extra tax on that employer's plan. If you have an outstanding 401(k) loan, ask the plan right away what happens to it when you leave, because an unpaid loan can be treated as a withdrawal. If you have an HSA, it stays yours and can pay medical bills, including COBRA premiums.

Count your runway

Cut your budget to essentials: housing, utilities, food, insurance, transport and minimum debt payments. Subtract your expected unemployment benefits to get your monthly gap. Then add your savings and your severance after tax, and see how many months of gap that covers.

Remember that benefits end, often after 26 weeks or less. After that, the full cost of your essentials comes out of savings. The worked example below shows how to count both stretches.