Equity and your tax year
Before You Sign Anything, Look at Your Equity and Your Tax Year
A layoff can put a release in front of you and a short window to think. Three decisions in that window are hard to undo once the paperwork is done: what happens to your equity, how this year's income is withheld and taxed, and how severance, if your package includes it, health coverage, and your 401(k) carry across the gap.
A layoff speeds up decisions that deserve weeks and gives you days. Any agreement in front of you usually settles more than a payment, and once it is signed, some of what it settled is settled for good.
This page walks through the three decisions that are genuinely time-sensitive, so you can slow the ones that matter back down. The first two apply whether or not your package includes severance. It is educational, not tax or legal advice, and your own plan documents and advisors govern your situation.
Your equity
Unvested Equity Usually Goes the Day You Do
Any release you are asked to sign often settles what happens to your awards, so the time to understand them is before, not after.
Unvested restricted stock units are almost always forfeited at an involuntary termination, under the terms of your equity plan, unless the plan or your agreement accelerates them. Some plans or separation agreements provide for acceleration, most often tied to a change in control or a reduction in force, but that is the exception and not the default. Do not assume you have it, and do not read a layoff as a reason you will keep what has not vested. This applies whether or not your package includes severance. Vested shares you already own are a separate matter, and what to do with them is the same question a concentrated position raises at any time, whether to sell, hold, or diversify.
What to confirm in your own grant agreement
- Whether unvested awards are forfeited or accelerated on an involuntary termination.
- The exact separation date the plan runs off, which is not always your last day worked.
- Whether you hold vested but unexercised options, and the date the exercise window closes.
- Whether the shares are RSUs, options, or an ESPP, since each is treated differently.
What to ask HR before you sign
- Does signing the release waive any claim to unvested or accelerated equity?
- Can any unvested awards be accelerated or partially vested as part of the package?
- What is the final date to exercise vested options, in writing?
- Does the separation date in the agreement match the one the equity plan uses?
The fuller picture, including vested options and the 401(k) and the order to take them in, is laid out in the four decisions that come due at separation. This page stays on the three that a layoff makes urgent.
Your tax year
Flat Withholding Can Fall Short of What You Owe
Supplemental pay and vesting equity are withheld at a flat rate that is often lower than the rate you owe. This applies with or without severance.
Federal tax is withheld on supplemental wages at a flat 22 percent up to one million dollars in a year, and 37 percent on anything above that. RSUs that vest, a final bonus, and severance if you receive any are all treated this way. For someone earning well into six figures, 22 percent is usually below the rate they actually owe, so the withholding can cover less than the real bill.
Stack that on top of the regular pay you earned before the separation and any RSUs that vest in the same year, and a single year can hold far more income than a normal one. The gap between what was withheld and what you owe shows up when you file, and if it is large enough it can carry an underpayment penalty on top. California adds its own supplemental withholding, and for equity and bonus income that rate is higher still. The practical step is to estimate the year early, while there is still time to set money aside or adjust what you can control.
Your severance, benefits, and 401(k)
Severance, Health Coverage, and Your 401(k)
Severance is not a given. Health coverage and your 401(k) are decisions either way, and two of them reward slowing down.
If your package includes severance, it usually arrives with a separation agreement and a release. Read what the release waives, whether the payment is a lump sum or paid over time (which changes how it lands in your tax year), and any conditions attached. Some reductions, including performance-based ones, come with limited severance, terms that differ from a broad layoff, or none at all. If yours does not include severance, the equity and tax decisions above still apply in full, and the benefits points below do too.
Health coverage is the real clock, but it is not a single door. COBRA keeps your existing plan, usually for up to 18 months, at the full premium plus an administrative fee, which is often a jump from what you paid as an employee. Losing job-based coverage also opens a special enrollment window on the marketplace, where a plan may cost less and a subsidy may apply depending on your income for the year. Compare both before the COBRA deadline rather than defaulting into the one in the packet.
A health savings account, if you have one, is yours to keep no matter which coverage you choose. You can keep spending it on qualified expenses, and you can keep contributing to it only while you are on a qualifying high-deductible plan.
The 401(k) is the one most people move first and the one with the least reason to rush. Leaving the plan in or after the year you turn 55 preserves an exception to the early-withdrawal penalty on that plan, and that exception does not follow the money into an IRA. Some plans also hold investment options or loan terms you would not be able to replace. Leaving it, rolling it, or moving it later are all reasonable, but it is a decision to make on its own timeline, not in the rush of the last week.
The Layoff Equity and Severance Checklist
One page per decision: the equity questions to settle before you sign, a simple way to see whether your withholding will fall short this year, and the severance (if offered), benefits, and 401(k) choices worth slowing down. Built to be worked through in the week you get the news, not filed for later.
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What People Ask After a Layoff
I was just laid off. Do I lose my unvested RSUs?
In most cases, yes. Unvested restricted stock units are almost always forfeited the day an involuntary layoff takes effect, under the terms of your equity plan. Some plans or severance agreements provide for acceleration, usually tied to a change in control or a reduction in force, but that is the exception rather than the rule, and it is not something to assume you have. The place to confirm it is your own grant agreement, and the time to raise it is before you sign the release.
Can I negotiate my equity as part of a separation agreement?
Sometimes, if an agreement is offered at all. Acceleration of unvested awards, a longer window to exercise vested options, or partial vesting can be part of a package, and a separation is one of the few moments an employer is weighing what to offer. It is not typical, and many companies will not move on it, so treat it as a question worth asking rather than a result to expect. Ask before you sign, because the release usually settles it.
Does every layoff or termination come with severance?
No. Severance is generally not required by law. It comes from a company policy, an employment agreement, or an offer the employer chooses to make, so it varies. Some reductions, including performance-based ones, come with limited severance, terms that differ from a broad layoff, or none at all. Check your offer letter, any severance plan, and the separation paperwork. The equity and tax decisions on this page apply whether or not severance is part of what you receive.
If I receive severance, how is it taxed?
Severance is supplemental wages. Federal tax is withheld on it at a flat 22 percent up to one million dollars in a year, and 37 percent on anything above that. For a high earner, 22 percent is usually less than the rate you actually owe, so the withholding on a large severance check can fall short of the real bill. California withholds its own supplemental rate on top. The 22 percent is a withholding rate, not the tax you owe, and the gap between the two is what surprises people at filing.
Should I roll over my 401(k) right away after a layoff?
There is rarely a reason to rush it. Your 401(k) does not have to move on your last day, and moving it quickly can cost you choices you would rather keep. Leaving the plan in or after the year you turn 55 preserves an exception to the early-withdrawal penalty on that plan, and that exception does not follow the money into an IRA. Some plans also hold investment options or loan terms you cannot replace. Leave it, roll it, or move it later, but decide it on its own timeline.
COBRA or a marketplace plan?
Compare both before the COBRA deadline. COBRA keeps your existing employer plan, usually for up to 18 months, but you pay the full premium plus an administrative fee, which is often far more than you paid as an employee. Losing job-based coverage opens a special enrollment window on the marketplace, where a plan may cost less, and a subsidy may apply depending on income for the year. If you have a health savings account it is yours to keep either way, though new contributions require a qualifying high-deductible plan.
Who prepared this
Prepared by Someone Who Does This Work Every Week
This checklist was prepared by Bradly Stevens, Vice President, Wealth Advisor at BAS Financial. Bradly Stevens holds MBA, CEPA™, ChFC®, CLU®, WMCP®, AIF®, LUTCF®. Based in San Diego, working with clients nationwide.
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