Maintaining Your Benefits
If you leave a job, you may want to maintain your benefits until you find another job or are eligible for coverage elsewhere.
If your employer has a group health plan, federal law requires it to offer you extended insurance coverage for up to 18 months if you leave your job. During that time, your employer charges you an insurance premium consistent with what it pays for your coverage.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 requires employers to offer affordable health insurance to departed workers. You may also use your COBRA benefits if your work hours have been reduced, you get divorced or a supporting spouse dies.
The Health Insurance Portability and Accountability Act (HIPAA) of 1996 added further protections to receive continued health insurance coverage. For one, these extra protections aim to make it easy to move your health care coverage from one employer to the next.
When you leave a job, your employer is likely to distribute any vested retirement benefits to you. These benefits include assets in your account for a 401(k) or other employer-sponsored retirement plan.
Your employer may seek to make a lump-sum distribution that may be subject to a 20% withholding for income taxes if made directly to you rather than to a custodial account.
If you are under age 59-1/2, you may also be liable for a 10% early-withdrawal penalty on amounts your employer pays directly to you. Worse, if you receive the distribution directly, you must roll over the full amount of the distribution even though you receive only 80% of your account value.
On the other hand, if you use a direct rollover, you avoid these withholdings and penalties. A direct rollover requires you to deposit your plan assets into another qualified employer-sponsored retirement plan or IRA within 60 days.
Since the tax rules for receiving a lump-sum distribution from a former employer have serious consequences, you may wish to consult a financial or tax adviser.