Before Your Last Day

I’m Mateo Dellovo, a fiduciary adviser for people paid in company stock. When you’re told your job is ending, whether it’s called a layoff, a reduction in force or an eliminated position, the company sets the last day. The money runs on other dates, and several of them are set by the day your job ends. This page covers the money side, from the notice to those dates, and the questions to answer before your last day.

If your company offers you money to leave on your own by a deadline, that’s an employee buyout offer, not a layoff. The guide Before You Answer a Buyout Offer covers it.

The separation agreement, if you’re offered one, sets the severance, can change what happens to your stock, and can ask you to give up legal claims in return. Read it with a calendar open.

Federal wage law doesn’t require severance. The Labor Department calls it a matter of agreement between you and your employer.

The federal WARN Act covers employers with 100 or more employees, generally not counting part time workers. It applies only to a plant closing or mass layoff that meets its size tests at a single site, so a smaller cut can fall outside it. When it applies, your employer has to give you written notice at least 60 days ahead, with the date you’ll be separated, apart from a few exceptions. An employer that gives less can owe back pay and benefits for each day it falls short, up to 60 days, less any wages it paid you for that time. Some states have their own laws, and some require longer notice.

If the agreement asks you to release claims and you’re 40 or older, federal law sets minimums for giving up age discrimination claims. You get at least 21 days to consider the agreement, or at least 45 days when the offer is part of a program for a group of employees. The count runs from the employer’s final offer, and a material change generally restarts it. You can sign sooner if the choice is yours alone. After you sign, you get at least 7 days to revoke, and the agreement doesn’t take effect until they pass.

Among other things, the release has to name your rights under the Age Discrimination in Employment Act, give you something beyond what you’re already owed, and advise you in writing to consult an attorney. In a group program, you also get written details, including the eligibility factors, the job titles and ages of everyone eligible or selected, and the ages of those in the same job classification or unit who weren’t. These rules cover age claims, and other claims follow other rules.

The IRS treats severance as wages, with Social Security, Medicare and federal income tax withholding. The Supreme Court held in 2014 that severance paid to employees who were let go is taxable wages for Social Security and Medicare.

When severance is paid apart from your regular pay, your employer can withhold federal income tax on it at a flat 22%. It must withhold 37% on the part of your supplemental pay that passes $1 million in a calendar year from one employer, and a bonus or vest earlier in the year counts toward that million.

Withholding is an estimate, not your final bill. The rate withheld can be below your rate, and the difference is yours to pay when you file. State tax, where your state has one, comes on top.

Each severance payment is taxed in the year it’s paid or made available to you, not when your job ended or when you signed. A payment in December and one in January land in different tax years, each with that year’s bracket, Social Security wage base and $1 million withholding line. Ask when each payment is made, along with how much.

Severance paid over time can count as deferred compensation under section 409A. If it does, the schedule is generally fixed once it’s set, and the law bars speeding up a payment apart from limited exceptions. When the time to sign and revoke can run from one tax year into the next, agreements commonly pay on a fixed date or in the later year, so you don’t get to pick the year.

Part of what you owe can come due before you file. The IRS expects estimated payments when you’ll owe at least $1,000 after withholding and your withholding covers less than the smaller of 90% of this year’s tax or 100% of last year’s, 110% if last year’s adjusted gross income was over $150,000, or $75,000 if married filing separately. The installments fall in April, June, September and the following January.

Withholding is treated as paid evenly through the year unless you show the IRS when it was actually withheld, so extra withholding later in the year, including at a new job, can cover a shortfall from earlier. An estimated payment counts on the day you pay it.

Unvested awards are usually forfeited when your employment ends. Your plan, your award agreement and any separation agreement decide the details. Some speed up vesting when you’re let go, or add vesting or a longer window to exercise. Read all three before you sign.

Whether awards keep vesting through a notice period depends on your plan and whether you’re still an employee then. Each RSU, including one that vests under the agreement, is taxed as pay when the shares are delivered, usually the day it vests, whether you keep the shares or sell them, and the tax on it is withheld under the same rules as severance.

Vested options have a window to exercise after you leave, often three months, and they expire if you miss it. The window is a term of your plan and award agreement, and it generally starts on your termination date. An incentive stock option keeps its status only if you exercise within three months after your employment ends, with a one year window after a disability. Exercised later, it’s taxed as a nonqualified option, and the spread at exercise is pay.

The window in your agreement and the three month rule can be two different dates. If the agreement offers a longer window, the law treats the extension as a new grant on the day of the change, which can cost an incentive stock option its status. An offer to extend that stays open 30 days or more counts on the day it’s made, even if you never accept it. So in a group program, with 45 days to consider, the offer alone can count as a new grant.

An employee stock purchase plan typically ends your participation when your job ends and refunds contributions not yet used to buy shares, usually without interest. Shares you already bought keep their holding periods, more than two years from the grant date, generally the first day of the offering, and more than one year from the purchase, with no need to stay employed.

Leaving does nothing to vests already delivered. The income was fixed in the year they vested, and the shares keep their basis and holding period. Unless your plan or agreement has a clawback or repurchase term, they’re yours.

If a large part of what you own is stock in the company you’re leaving, the income that came with it stops and the concentration stays. How much to keep is your decision. It can help to make it on purpose.

COBRA generally lets you keep the employer’s health coverage for up to 18 months after your job ends, at up to 102% of the plan’s total cost of providing you with coverage, at employers with 20 or more employees. Many states have similar laws, often called mini COBRA, for smaller employers.

You get at least 60 days to elect, counted from the later of the day your coverage ends and the day the election notice is provided to you. Your employer has 30 days to tell the plan, and the plan then has 14 days to send the notice, so the deadline that counts is the one in your notice. Elect within the window and coverage can reach back to the day your old coverage ended, though a waiver you later take back can leave a gap. The first premium is due no sooner than 45 days after you elect.

Losing job based coverage also opens a special enrollment period on the marketplace, from 60 days before your coverage ends to 60 days after. Dropping COBRA later, or no longer paying for it, doesn’t open a new window outside open enrollment. You can switch then only if COBRA is running out, your former employer stops paying its share, you’re still within 60 days of losing the job coverage, or another life event comes along.

Starting with tax year 2026, if you take advance premium tax credits for a marketplace plan, you repay the full excess when you file, with no cap. Severance raises the year’s income, so credits figured on a lower estimate can come back as a bill.

A health savings account stays yours when you leave, along with its balance.

A health flexible spending account generally pays only for expenses incurred while you’re covered, so care after your termination date isn’t paid unless you continue it under COBRA, where offered, and then only to the end of the plan year. Money left in it when your job ends is generally lost, even with a carryover, unless you continue it under COBRA.

The money you put in from your own pay is fully vested. Your employer’s contributions can vest over time, your summary plan description gives the schedule, and money that isn’t vested can be forfeited after you leave.

A layoff can vest the rest, if it leads to a partial termination of the plan. When a plan has one, the employees it affects become fully vested in their accounts, to the extent funded. The IRS presumes a partial termination when the turnover rate from jobs the employer ended is 20% or more for the period, usually one plan year, though the facts decide. Ask the plan administrator whether one has occurred.

If you have a 401(k) loan outstanding when you leave, the plan can offset it against your account, and the offset counts as a distribution. When the offset comes from leaving your job, you have until your tax return’s due date for that year, extensions included, to roll over an amount equal to it.

If your 401(k) pays you directly instead of rolling straight to another plan or an IRA, the plan must withhold 20% for income tax, and rolling over the full amount within 60 days means making up that 20% from other money. A direct rollover has no withholding. Money taken out before age 59½ generally carries a 10% additional tax on the taxable part. One exception covers money paid from the employer’s plan after you leave your job in or after the year you turn 55, and it doesn’t reach an IRA. Where the money goes is a separate decision.

Federal wage law doesn’t require your final paycheck right away. State law sets when it’s due, and some states require it immediately. Federal wage law doesn’t require paying for unused vacation either. Whether yours is paid out depends on company policy and state law, and some states require it. A vacation payout is wages.

Unemployment benefits are taxable income. You can have federal income tax withheld at 10% of each payment by giving the payer Form W-4V, or make estimated payments instead. Whether severance delays or reduces your benefits depends on your state, because each state runs its own program and sets who qualifies and for how much.

Put them in one place, because they come from different documents. Your notice gives your last day. The separation agreement gives the days to consider it, any days to revoke and the date of each severance payment, which decides its tax year.

Your award agreements give any last vest and the date each option expires, and the three months for an incentive stock option run from the day your employment ends. The COBRA election notice gives your deadline to elect. Each year’s estimated tax dates are on that year’s Form 1040-ES.

State law decides when your final paycheck is due and whether unemployment benefits can start while severance is being paid.

1. What is your last day, and when do your windows to consider and revoke the agreement end?
2. What does the agreement ask you to give up, and what does it give you in return?
3. When is each severance payment made, and which tax year does each land in?
4. What will be withheld from the severance, and how does that compare with your total tax for the year, federal and state?
5. Do you need an estimated payment, and by which date?
6. Which grants vest before your last day or under the agreement, and which are forfeited?
7. If you hold options, when does each one expire, and when do the three months for incentive stock options end?
8. How much of what you own is your company’s stock, and how much do you want there once the paycheck ends?
9. When does your health coverage end, when does your COBRA election window close, and what’s left in your flexible spending account?
10. How much of your employer’s 401(k) money is vested, could the layoff count as a partial termination, and do you have a plan loan?
11. When do your final paycheck and any vacation payout arrive, and how does severance affect unemployment benefits in your state?