What Happens to Your Benefits When You Leave Your Job

Tom Gilmour is a senior director of Planning Experience Integration for Northwestern Mutual.

Whether you’ve been let go or furloughed from your company or found your next dream gig, leaving a company typically means making decisions about benefits like health insurance and retirement accounts.

First things first: If you were let go from your job, you will likely want to look into whether you qualify for unemployment benefits. These can be an important financial bridge to help you get to your next gig. So, make sure you’re tapping into them if you can.

Next, let’s go through some common benefits that employers typically provide as well as some you might not have been thinking about. You’ll get ideas about options.

Benefits to consider when leaving a job

1. When does health insurance expire after leaving a job?

One of the biggest worries people have when leaving their jobs is what will happen to their health coverage, which usually ends on either the last day of work or the end of the month.

If you’ve got a new job lined up, you may not have a big gap to worry about. Some companies start health insurance coverage for new employees on their first day. If your new company has a waiting period (typically between 30 and 90 days), an earlier start to the coverage may be something you’re able to negotiate as part of your job offer.

If you’re facing a gap in health coverage, there are options. Thanks to a federal law referred to as COBRA, you can continue your current health coverage at your own expense for 18 months. So, you don’t need to switch your coverage right after you leave your job. The downside is that you will have to pay the full cost of the plan—which is typically expensive. You’ll cover your typical portion plus what your employer was paying on your behalf.

Another option you may consider if you’re married is switching to your spouse’s coverage. While health plans typically allow you to sign up only during open enrollment, you’re typically able to make changes if someone in your family experiences a qualifying life event like losing coverage.

If you’re in the market for an individual plan, the best place to start your research is at HeealthCare.gov. You can buy coverage there and easily switch to your new employer’s plan at a later date, so long as you give your insurer 14 days’ notice.

2. What happens to your 401(k) or other retirement accounts when you leave a job?

If you have a 401(k) or a similar plan (like a 403(b), 457, SEP or SIMPLE IRA), you will have to decide what to do with those funds. You can choose to keep the account as it is but not make any additional contributions, roll over those funds to a new 401(k), roll the money over into an IRA or cash it out.

If your current 401(k) has great investment options, it might be beneficial to keep the money there. But many people find that leaving their money in multiple 401(k)s from past employers makes it too difficult to keep track of their retirement savings. That leads some to roll over their 401(k) into their new employer’s 401(k)—something that makes sense especially if your new employer has good investment options. If not, you might want to look into rolling over your account into an IRA.

When it comes to a 401(k) vs. an IRA, everyone’s situation is different. But if you have an existing account somewhere else, it may make sense to roll your funds into that account.

IRAs can give you more control over your investments, allowing you to put your money into mutual funds, annuities or money market accounts. Another option is to cash out your 401(k)—something that might be tempting if you lost your job unexpectedly. The problem is that you will have to pay income taxes on the money and a 10 percent penalty on top of that. You’ll also sacrifice the savings you were planning to use when you retire.

There are various IRA options available for those who are planning to go out on their own. A tool when going into business for yourself is a Solo 401(k), which solopreneurs can open for themselves and their spouses.

3. What happens to life insurance when you leave a job?

Most people worry about having a gap in their health insurance coverage but don’t spend as much time considering what might happen if there is a gap in their life insurance or disability income insurance. Accidents, illness and death are as likely to happen when you’re in the midst of a job change as any other time, so making sure you’re well covered is critical to protecting yourself and your family.

If your employer provided you with life insurance, you sometimes have the option to continue paying for coverage. If you’re moving to another employer, a job change might be a good time to consider your options and take out your own coverage or a supplemental policy in addition to what your new employer offers. One of the key benefits of getting life insurance or disability coverage on your own is that you remain covered even if you leave your employer.

If you’re becoming self-employed, it’s even more important to get your own coverage.

4. What happens to my pension when I leave my job?

If you were lucky enough to have a pension, you may or may not be able to keep it or take out the money when you leave. It all depends on whether your contributions are vested (which means they’re fully yours) and the other rules of the pension plan.

If you weren’t in your job for very long, then you might be out of luck. Some plans utilize a “cliff vesting” rule, in which your benefit becomes fully vested after three to five years of service. If you haven’t been there that long, then you might forfeit some or all of the money in your plan.

If you do have the option to keep your pension, you may be able to take funds out right away or to leave them in the pension. If you have the second option, it may be worth considering. While you’d be unlikely to get your full payments when you retire, you may still be able to get a lifetime stream of income from the pension, which can be more valuable than you might think.

If you decide to take money out of your pension, you can typically roll it over into an IRA or a 401(k); within your IRA you could purchase a variable annuity, which is tax deferred and allows you to choose from various investment vehicles and then pays out an amount in your retirement that is based on the performance of those investments.

Navigating a job change

Whether you’re changing jobs as a result of your own decision or one that was made for you, this is a big life event. A time of change like this is often a good time to take a step back and look at your money more broadly. Your Northwestern Mutual financial advisor will get to know you, asking the right questions to help you both now and for the future. He or she can help you build a plan for the path forward to help get you into the best financial position for what’s next.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.