4 Steps to a Successful BP Severance
Oftentimes, the words "severance," "lay-offs," and "restructuring" invoke anxiety and paranoia in employees at major oil companies. Between determining your next steps for the future, securing your family's finances, and overcoming the shock of ending a long career at BP, there's a lot to juggle. The last things you may be thinking about are your employee benefits, evaluating package options, and determining how these can have a significant impact on what your next step should be, which is why we're here to help.
When BP employees are offered severance packages, it's an emotionally overwhelming decision that causes them to weigh their financial goals and retirement options earlier than they may have anticipated. However, severance doesn’t have to be a negative. By asking the right questions and getting a firm understanding of the options available to you, you can take full advantage of your benefits to get a structured plan in place. Our guide and checklist can help you assess your financial situation to bring clarity into this period of uncertainty.
Step 1: Determine if you can retire
One of the biggest questions we get from our clients when they're offered a severance is: can I retire? What they're really asking is — do I have enough money to make retirement work in case I'm unable to get another job? The right amount of retirement savings differs by person, but working with a financial advisor who can show you cash flow projections for various scenarios can ease much of the anxiety surrounding the question, "is it enough?"
Yes. I feel comfortable that I'm financially independent or I continued to work because I enjoyed it.
Congratulations! After taking your severance package, you can focus on transitioning into a tax-efficient retirement lifestyle — one where you begin to live off of your hard-earned assets rather than continuing to accumulate more. Your two biggest considerations now are:
- Now that you need your investment income for living expenses, consider how your investment allocation should change accordingly.
- The most commonly asked questions we get from retirees is "where do I pull from first?" It's important to develop a tax-efficient strategy for pulling money from the various savings vessels you've accumulated while employed. Understanding where the money will come from and what the tax implications are both now and in the future for withdrawals is pivotal to enjoying your early retirement.
No. I’m not sure that I am able to retire, even if I receive a severance package.
Unfortunately, the timing of severances doesn't always align with an employee's retirement plan. Many executives facing the decision to retire don't feel ready unless they've reached a specific age or amount in their bank account; however, when working with these professionals, we work to determine how much income they need, how many more years they need to work, or if they can retire simply by reducing your expenses. If retiring after separation isn't an immediate possibility, it's important to realize that returning to full-time employment isn't the only option available to you — depending on your long-term goals and existing cash flow, you may be able to consider part-time, freelance, or consulting work as options to supplement your income until you're able to retire.
Many executives leave major corporations, whether by choice or as part of a layoff, only to return as independent consultants. Doing so allows them to continue working and deferring withdrawals from retirement accounts or taking Social Security distributions. While consulting is often a great option for employees who can't afford to retire just yet, there are hidden costs and considerations that need to be evaluated beforehand.
If consulting doesn't seem like the best next move for you, consider working with a professional to build out a cash flow plan to determine when retirement is possible. A financial advisor can help you determine how much income you need to make for how long or if you could retire simply by reducing your expenses. The full extent of benefits BP offers is often underestimated by its employees when assessing whether they are able to retire. There are many missed opportunities with an increased retirement income, and also a few considerations that are extremely important in making sure you take advantage of everything available to you. By having an extensive understanding of BP benefits, our team of advisors can help you determine how to leverage your benefits to reach your financial goals.
Step 2: Take advantage of your benefits while you have them
When an unexpected layoff hits, many employees start shifting their focus to looking for a new job or setting up their retirement, but that can be a significant setback. Before your termination date, make sure you've taken full advantage of the various benefits BP offers. The last thing you want to do is leave money on the table on your way out.
You Can Receive Unemployment Benefits Alongside Your BP Severance Package
What many employees receive from BP is considered a "conditional severance." In addition to payout, pension considerations, and more, the design of this severance package also yields a significant benefit that many BP professionals often miss. To receive your severance, BP requires that you sign off and waive them from any hardship liability. By doing so, you then become eligible to apply for unemployment benefits. In wake of the recent Coronavirus pandemic, these benefits are substantially higher than in previous years and include higher weekly compensation, pay starting as early as the first week after employment, and an extension of unemployment benefits by 13 weeks.
Max out your Employee Savings Plan (ESP) — Pre-Tax, Roth, and After-Tax Contributions
Before your last day, make sure you've adjusted your contribution amounts to max out the various savings options within the Employee Savings Plan. By frontloading these contributions, you're able to better utilize the tax-efficient savings before they're no longer available to you.
- If you’re under 50, you can contribute up to $19,500 (2020) between pre-tax and Roth contributions.
- If you’re over 50, you’re allowed to contribute an additional catch-up amount of $6,500, for a total contribution option of $26,000 annually (2020).
- In addition to the $26,000 in ESP contributions, you can also contribute an additional $9,000 in non-Roth after-tax savings.
- Consider a potential backdoor Roth strategy if you’re a high-income earner and cannot contribute to a Roth directly.
Know the value of your BP Pension & BP 401(k) plan (ESP)
To better assess where you stand, it is important you know the balance of your BP retirement accounts. You can access both the value of your Retirement Accumulation Plan (RAP) and Employee Savings Plan (ESP) by logging into your NetBenefits or contacting BP Retirement Services at Fidelity.
Request a calculation of benefits from HR
If you’re considering starting your RAP Pension pension right after your termination, request a calculation of benefits and the pension paperwork at least 60 days prior to termination. Review the document with a professional before you make any elections to ensure that your receiving the maximum amount of your benefits while minimizing your tax bill.
Step 3: Get your plan in place — benefit elections and insurance
Make elections on your RAP Pension, Excess Compensation Plan (ECP) & Excess Benefit Plan (EBP)
Retirement Accumulation Plan (RAP) - If you would like to receive distributions from your BP Pension right after leaving BP, you will need to request the necessary documentation from from the BP Retirement Services at Fidelity (as early as 180 days) before your final day at BP. If you do not request distributions or the necessary documentation before leaving BP, you will be sent the information to access your account statement and select pension distribution options upon your termination.
Excess Compensation Plan (ECP) - BP matches 401(k) contributions up to 7% of an employee's salary. When an employee's income reaches the IRS's income limitations of $285,000 within the 2020 calendar year, both the employee and BP are prohibited from making contributions to the 401(k). Since they can no longer make these contributions directly into the 401(k), BP’s matching contributions are deposited into a non-qualified plan called the Excess Compensation Plan (ECP).
Excess Benefit Plan (EBP) - The EBP is another non-qualified plan like the ECP. The EBP is used in conjunction with contributions to your 401(k). The 2020 limit for BP employee contributions to pre-tax and after-tax sources in the ESP is $43,550, and if an employee contributes over and above that amount, BP pours over those funds into a fund called the EBP. Because this fund is based solely on contribution, you as an employee have a lot of control. We typically advise clients to avoid the pour-over of BP’s match to the Excess Benefit Plan because the funds in the EBP pool are not as flexible for long-term planning. The EBP has some very particular distribution election rules. To avoid the pour-over, we often advise our clients to carefully set up their employee contribution elections to the ESP and we help monitor the contributions throughout the year to ensure that they are not pushing the contributions over the maximum allowed for the ESP.
While both the ECP and EBP plans are non-qualified excess benefit plans, the important thing to understand is what triggers them both:
- The ECP is triggered by reaching a compensation amount that exceeds the IRS' income limitations
- The EBP is triggered by your employee contributions to the pre-tax and after-tax sources exceeding the IRS' maximum 401(k) contribution limits
For both the ECP and EBP, there are various payout election options, and as non-qualified plans, the EBP and ECP are subject to creditor liabilities of BP and BP’s financial health. BP has many non-qualified plans that each have specific payout considerations and rules, so it's important to discuss your options with HR. Typically, for the pre-2005 vested plans you can push your payments out over a span of 15 years following your retirement and you can choose a commencement date as soon as one month after your BP separation selecting monthly, quarterly, semi-annual, or annual payments.
You must make the elections 60 days prior to your last day at BP.
Determine what additional benefits you'll need after leaving BP
If you've been with BP for the majority of your career, you'll soon discover that you may need life insurance, disability, or other benefits after you leave. Some of these benefits are portable and it may make sense to keep what you have and take it with you. Some benefits you may be able to take with you or convert to your own policy include:
- Basic Life Insurance
- Group Universal Life
- Long-term Care
Note that Dependent Care Spending Account, Short-term Disability, Long-term Disability, Accidental Death & Dismemberment and Occupational Accidental Death will no longer be made available through BP after you leave.
Understand your options for healthcare after BP
Ensuring your health and well-being should be a primary concern as you plan your next steps after being laid off from BP. Otherwise, you may spend more than you intended on medical coverage or may neglect your health altogether, both of which can end up costing you in the long run. As you prepare to leave BP, you have a variety of healthcare options available to you. Determining which options make sense for you depends on your age, years of service with the company and health coverage needs. The three major questions to consider are:
- Are you eligible for BP retiree medical?
- Are you 65, and thus eligible for Medicare?
- Should you go out and buy your own health insurance plan or stay on BP’s Cobra plan?
Take advantage of the BP Wellbeing Program
BP offers the BP Wellbeing Program to active employees and retirees who are not yet eligible for Medicare. This program is designed to help BP retirees by controlling the cost of healthcare for their families and provides assistance with various factors that go into overall well-being, including health, financial, social and emotional programs.
Step 4: Prepare for the next steps
Don’t sit on the cash
Determine how much cash you should hold and how to invest the proceeds of the severance, any Employee Savings Plan payouts, bonuses, ECP ane EBP payouts, or RAP pension payouts.
Think about taxes
Often times the year you retire is your highest tax year. Consider a few of the options below to lower your taxable income:
- Contribute to charity by:
- Frontloading multiple years’ worth of annual gifts up front through donor advised funds
- Consider gifting appreciated stock so you never need to pay capital gains tax
- Determine your expected tax rate for the next few years and look ahead to when you are forced to take required minimum distributions. Understanding your tax brackets and managing them in retirement is a huge advantage to ensuring that you're not squandering your wealth by overpaying in taxes. In your first few years after retirement, use up lower tax brackets.
- Consider stepping up your basis on your stocks while paying 0% in capital gains
- Consider Roth conversions to move your pre-tax money to Roth money while in low ordinary income tax brackets.
- If age 63 (or older) think about Medicare premium taxes.
- Ensure that you have a plan for your investments that takes taxes into account. We see many people unknowingly subjecting themselves to double taxation or incorrect tax rates by not taking advantage of planning opportunities available to them.
- Contribute to charity by:
Negotiate the ability to keep your BP Restricted Stock
BP has the ability to take back any granted shares that have not yet vested in the Share Value Plan. Unless BP grants an exception, you’ll lose any unvested shares upon retirement from BP.
Generally speaking, BP will require a participant to obtain “Good Leaver” status to be granted an exception. There are a number of ways to qualify for "Good Leaver" status including termination by the company due to ill health, injury or disability. It can also be granted by BP’s directors — this option is typically used to reward employees with extensive tenure at the company.
If you think you will be offered a severance or have recently received a severance package, you should discuss what options you have with your manager to determine whether you may be able to keep you BP restricted stock. While your departure may be outside of the traditional definition of “Good Leaver” status, the restricted stock can add up so it's worth asking about.
Set a plan up to diversify your BP Restricted Stock as it vests
Many BP executives who receive company stock grants have a significant overweight of US energy equities in their portfolio. Diversification of your investments allows you to reduce your exposure to specific types of risk, including risks inherent to your specific company. While all companies face exposure to different types of risk, if your portfolio includes a disproportionate amount of your company’s stock, your exposure to these risk factors is amplified. Taking a diversified approach can help you ensure you’re benefiting from the stock options your company provides, while at the same time mitigating risk.
NUA opportunities could present significant tax savings
Depending on the amount of BP stock you have in your portfolio and when you purchased it, you may be able to utilize a net unrealized appreciation (NUA) opportunity to retain a significant portion of the stock's increased value when you decide to sell it. To determine whether this strategy is right for you, take a look at the stock's cost basis (the price you purchased the stock for) and compare it to the stock's current market value. If the stock's value has increased significantly from the time you purchased it, you may be able to save substantially by making a NUA distribution. There are a number of complexities and rules surrounding NUA, so be sure to work with a professional to execute the strategy.
The choices you’ll encounter upon the announcement of a severance are complex and nuanced. If you're not keeping track of the benefits available to you and utilizing them before your last day at BP, you're probably leaving money on the table. Our advisors can walk you through the process to better understand your specific offerings and help you make the most of what's available to you. If you need help navigating your severance package or have questions about your next steps, fill out the following form and we'll get in touch.
Willis Johnson & Associates is not endorsed by or affiliated with BP.