To Clients: Severance package options

(April 2008) Managing cash flow, tax implications and the overall hit to any financial plan when a client is downsized or laid off can happen only if they think to come to you during this stressful time.

Remind your clients and prospects how important it is to visit or get in touch with you in a timely fashion after receiving news that affects their financial plans. Use this customizable letter to create a tip sheet on severance package options for use during this discussion.

Dear [Client’s name],

Hopefully we’ll never need to manage through such an unpleasant contingency, but there is always a chance that you or someone you love might face a layoff in the future, particularly during this time of economic uncertainty.

You might already be acquainted or all too familiar with the vexations that come with being dismissed suddenly. When this happens, or at any other time you receive news that affects your financial plan, please contact me immediately. Not only is it your responsibility to let me know when there are “material changes” to your plan, it is usually imperative that we manage your cash flow, investments, benefit plans and the tax implications that usually accompany employee severance packages.

Although receiving a large or modest severance package can help soften the blow of losing your employment, the sudden influx of cash can have serious tax consequences if not managed properly. In some cases, it might even be beneficial to negotiate with your employer and arrange to receive severance payments after January 1.

Your life and health insurance benefits also need to be addressed rather quickly — often your group insurance can be converted into an individual policy without the need to provide medical evidence, but there might be only a short period of time to do so. Unless you are in excellent health, this could be your only chance to obtain sufficient insurance coverage at a standard rate.

Severance packages and your RRSP

• Retiring allowances can sometimes be transferred to your registered retirement savings plan (RRSP) without using up your existing contribution room.

• Retiring allowances, as defined by the Canada Revenue Agency, include payments an employee receives when his or her job is terminated, either to recognize long service or to compensate for the loss of employment. This includes money paid for unused sick leave or damages (in the case of wrongful dismissal, for example).

• Retiring allowance does not included superannuation, pension benefits, funds given in lieu of termination notice or amounts paid for unused vacation time.

• The amount eligible for transfer depends on the length of time you have been with the company. The amount is equal to $2,000 for each year or part year you worked with the company before 1996, plus another $1,500 for each year or part year you worked with the company before 1989, provided you did not earn (or have vested rights to) benefits in a registered pension plan or a deferred profit-sharing plan.

• The amount of the retiring allowance eligible for transfer to your RRSP will be reported in box 26 of your T4A slip. Ineligible amounts will be shown in box 27.

• If the severance you receive does not qualify under these rules — if you’re leaving an employer you joined in 1997 or later, for example — the amount of severance that can be tucked away inside your RRSP will depend on the contribution room you have available.

• If your RRSP is full, that amount might need to be reported as income. If this is the case, it could make more sense to negotiate with your employer and arrange to receive this income after January 1.

Your pension and other benefits

• Deciding whether to stay in your company pension plan (if you have one) or move your funds into a locked-in, self-directed retirement account requires that we do a calculation to determine which investment (your pension plan is an investment!) will generate better returns over time.

• Thanks to recent pension regulation changes, locked-in accounts no longer need to be converted into a life annuity at age 80. This means pension payouts to a surviving spouse might not necessarily stop or be reduced when the pension plan member dies. Locked-in accounts might even be used to provide an inheritance to the member’s family.

• Finally, group life and health benefit plans can sometimes be converted into an individual policy without the need to provide medical evidence, but these things should not be left to fester. In some cases, there might be only a short period of time — usually 30 or 60 days — to make these arrangements. Unless you are in excellent health, this could be your only chance to obtain sufficient insurance coverage at a standard rate.

Although I hope you will never need to use it, this information is important to your financial well-being. Please remember to contact me if you find yourself in this situation or any other that could have an impact on your financial plans. If you decide on an early retirement — great! Let’s arrange to get the most out of your finances. If receiving a severance package is an unpleasant surprise, let’s manage the implications to help you get back on track more quickly.

As always, please feel free to get in touch if you have any questions. I would be very happy to hear from you.

Sincerely,

[Your signature]

[Your name]

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(04/01/08)