After a layoff, deal with the decisions that have deadlines first and leave the rest for later. If you’re 40 or older, federal law gives you at least 21 days to consider a severance agreement (45 in a group layoff) and 7 days to change your mind after signing. You have 60 days to choose COBRA or a Marketplace health plan. A 401(k) loan and any vested stock options also come with their own deadlines. Severance is taxed as wages, usually withheld at a flat 22%. If your situation has moving parts, a one-time plan from a fee-only planner costs a median $2,000.
What has a deadline
| Decision | Deadline | What happens if you miss it |
|---|---|---|
| Sign the severance release (age 40+) | At least 21 days to consider, 45 in a group layoff; 7 days to revoke | You sign without advice, or lose a better offer |
| COBRA | 60 days from when coverage ends or the notice arrives, whichever is later | You lose the right to continue your plan |
| Marketplace plan | 60 days before or after job coverage ends | You wait for open enrollment |
| 401(k) loan | Repay, or roll over the offset by your tax filing due date, including extensions | The unpaid balance is taxed, plus 10% if you’re under 59½ |
| Vested stock options | The exercise window in your grant agreement | Options expire worthless |
| Unemployment claim | File as soon as possible | Lost weeks of benefits |
For a group layoff, the employer must also give workers 40 and older a written list of the job titles and ages of people chosen and not chosen. That list is worth reading before you sign.
How severance is taxed
The IRS treats severance as supplemental wages, like a bonus. Social Security and Medicare tax apply, and employers usually withhold federal income tax at a flat 22%, rising to 37% only on supplemental wages above $1 million in a year. In 2026 the 24% bracket starts above $105,700 of taxable income for single filers and $211,400 for joint filers. If your income for the year lands above those lines, 22% withholding leaves a bill in April.
A layoff year can also run the other way: a few months of pay plus severance may leave your income lower than usual. That’s when timing matters. If you’re still negotiating, a lump sum paid in December and one paid in January land in different tax years. Ask before the agreement is final; changing timing afterward is harder.
Unemployment benefits are taxable income too. You can ask for federal tax to be withheld from them by filing Form W-4V with your state. Eligibility, the weekly amount and how long benefits last are set by your state, so ask your state’s unemployment office how your severance affects when payments start.
Health coverage: COBRA or the Marketplace
COBRA lets you keep your employer’s plan, usually for up to 18 months, but you typically pay the whole premium yourself. It suits people midway through treatment or who’ve already met a large deductible.
A Marketplace plan is priced on your income estimate for the year you want coverage, not last year’s. After a layoff that estimate may be much lower, which can mean a smaller premium. Run both numbers inside the 60-day window. Once you’re on COBRA, dropping it voluntarily doesn’t open a new Marketplace enrollment period, so the choice is harder to undo than it looks.
Two less-known rules help pay the premiums. An HSA can pay COBRA premiums, and premiums for coverage while you’re receiving unemployment compensation, tax-free. And if you’ve received unemployment for 12 weeks, IRA withdrawals used for health insurance premiums avoid the 10% early-distribution tax.
The 401(k), options and the cash you’ll live on
Don’t cash out the 401(k) to cover the gap. The whole balance becomes taxable, usually with 10% added if you’re under 59½. If you’re leaving in or after the year you turn 55, withdrawals from that employer’s plan avoid the 10% tax, a rule an IRA doesn’t share; see the rollover glossary entry. Whether to move the account at all is its own decision, covered in our guide to rolling over a 401(k) when you change jobs. If the plan holds your employer’s stock, read about NUA before anything moves.
Check the loan. If you owe on a 401(k) loan, the plan will usually offset it against your balance when you leave. You can avoid the tax by putting the same amount into an IRA or new plan by your tax filing deadline, including extensions, as long as the offset happens within 12 months of leaving.
Find the option deadlines. Unvested RSUs and options usually end with the job. Vested options typically must be exercised within a window set in your grant agreement, and incentive stock options exercised more than 3 months after you leave are taxed as nonqualified options. Our guide to advisors for RSUs and stock options covers how each kind is taxed.
Count your runway. Add cash, severance after tax and expected unemployment, then divide by your monthly spending. If you need to draw on savings, the usual order is cash, then a taxable brokerage account, then Roth IRA contributions (which can come out tax- and penalty-free), with pre-tax retirement money last. A year of lower income can also be a chance for a Roth conversion; our career break guide covers how to use a low-income year.
Common mistakes
- Signing on the first day. The release usually gives up legal claims. Use the time the law gives you.
- Letting the health window lapse. The 60 days pass fast while you’re job hunting.
- Forgetting the benefits that end with the job. Group life and disability coverage usually stop; some policies can be converted within a short window. Spend down a health FSA before your last day if you can.
- Treating severance as a windfall. It’s replacement pay. Budget it to last.
- Hiring whoever calls first. A layoff makes you a target for rollover pitches.
Questions to ask
Ask HR or the plan:
- Is any part of the severance negotiable, including when it’s paid?
- Will the company pay any of the COBRA premium?
- When do my vested options expire, and what happens to unvested RSUs and this year’s bonus?
- What is my vested 401(k) balance, and what happens to my loan?
Ask an advisor:
- How many clients have you helped through a layoff in the past year?
- What would you do in the first 30 days, and what would you leave alone?
- How much tax will I owe on the severance beyond what’s withheld?
- Do you earn more if I move my 401(k) to you?
When a fee-only advisor is worth it, and what it costs
Most layoffs need a few clear decisions, not a long relationship. A planner earns the fee when you have vested options or RSUs, a large 401(k) with company stock, a severance worth many months of pay, or when the layoff turns into a question about retiring early.
US medians from prices firms publish on their own websites
Source: Wellspent fee report
A few hours at a median $300 an hour can cover a severance review and a health coverage comparison. A one-time plan at a median $2,000 suits a layoff with options, a 401(k) decision and a new budget. See hourly planner costs and one-time plan costs.
Be careful with any advisor whose pay depends on moving your money. At the median 1% of assets, a $500,000 401(k) rolled to an advisor becomes $5,000 a year in fees, based on that median rate. A fee-only planner paid a flat or hourly price has no stake in whether the money moves.
Where to look
Start with advisors for mid-life transitions or, if your pay included equity, tech employees and the equity compensation specialty. The tax planning specialty fits a severance-timing question, and flat-fee advisors suit a one-time project. If you’re 55 or older and the layoff may be the start of retirement, see advisors for pre-retirees and the retirement planning specialty.