Before COVID-19, many of us were unfamiliar with the term ‘furlough,’ unless you were a government employee during a shutdown. Now, we’ve all at least heard of the word passed around Zoom calls, but there still seems to be a lot of unanswered questions out there. What is the difference between furlough and laid off? Will I still get my health insurance benefit if I’m furloughed? What will my unemployment benefit look like? These questions and more are answered in this week's blog.
What does furloughed mean?
I had to Google it, too. A furlough is a temporary employer-mandated leave or reduction of work from your job. If you are furloughed, your company typically eliminates/reduces your pay, BUT (and this is a big BUT) it may allow you to maintain your benefits and your job. Furloughed employees may be able to volunteer when or how to take their leave. For example, my friend Sam in Chicago, IL was furloughed from her company. Her company required everyone to take 3 weeks of unpaid leave. Her employer allowed each employee to elect how to take those three weeks off. They could take their three weeks all at once, one week per month, or work reduced hours for the quarter (which is what my friend elected). According to my sister-in-law who works for Mayo Clinic, the major employer of Rochester, MN, they are currently seeking volunteers to go on furlough. Each company and offering is unique.
What’s the difference between getting furloughed and getting laid off?
If you are laid off, you are no longer employed by your company. This likely means you no longer have benefits from your employer either (including health insurance). As stated above, if you are furloughed, you may actually get to keep your health insurance and other employer provided benefits. For example, MN based Best Buy announced their furlough plan and stated employees will be able to hold onto their health insurance benefits for three months. In addition to benefits, the timing of a layoff and furlough are also different. A lay off can be indefinite, whereas a furlough is typically a smaller and specific amount of time.
What will my state unemployment benefit be?
If you find yourself laid off or furloughed, you may be eligible for unemployment benefits. Unemployment is a state run program, and therefore, your benefit amount will be specific to how your state calculates it. In general, your benefit amount will be calculated according to your highest paid quarter of the base period. In most states, the base period is the earliest four of the last five calendar quarters.
In Minnesota, your weekly unemployment benefit amount is about 50% of your average weekly wage up to the state maximum of $740/week. $740/week is equivalent to a $38,340/year salary ($740 x 52 weeks). Therefore, if you make above ~$80,000/year, your benefit amount will likely be less than 50% of your average weekly wage.
What will my federal unemployment benefit amount be?
Under the CARES Act, the federal government has expanded state unemployment benefits by $600/week. Minnesota was one of the first states to start paying out this additional benefit (go MN!). According to the Minnesota unemployment website, “You do not need to do anything to get the additional $600. We will automatically add it to your payment AFTER you request benefits for the week of March 29th (and every week after that you are eligible).” This is true for most states. If you were to receive maximum unemployment benefits from the federal and state programs (assuming MN) your weekly benefit amount would be $1,340/week (which is equivalent of a $69,680/year salary).
As with most states, you will not see the $600/week benefit amount on your online unemployment account. Instead, you will simply see the additional amount in your bank account or debit card statement.
How long will my unemployment benefit last?
Most states allow for unemployment to last up to 26 weeks (6.5 months). However, that’s now expanded by the CARES Act to provide an additional 13 weeks. Altogether, that’s almost 10 months worth of unemployment benefits.
However, the 13 weeks additional isn’t for the state and federal amount. That extension only applies to your state provided benefit amount. The additional $600/week federal unemployment benefit is currency scheduled to end July 31st (which is in 15 weeks). If I did the math, which I did, 26 weeks from now is October 16th. My MN benefit would last that long, but the $600/week payment would drop off at the end of July. My MN unemployment benefit would continue after October 16th for the 13 week federal extension, giving me until January 15th before all of my unemployment benefits are exhausted. This is cash flow planning (my favorite!!), which is knowing your inflows and outflows for extended periods of time. This is the main support beam to your financial foundation and the financial plans we create with our clients.
How are my unemployment benefits taxed?
For your state provided unemployment amount, you may or may not have the option to withhold taxes from your benefit distribution. The amount you are eligible for is a gross figure, meaning your benefit is fully taxable. If you choose to not withhold taxes now, you will receive your full benefit amount. However, if you received (as an example) $15,000 of unemployment benefits in 2020, when you file your tax return, it’s going to show that the $15,000 benefit amount has yet to have any taxes paid on it. This may leave you in a situation where you have to come up with a tax payment to the IRS that you weren’t expecting.
For your federal unemployment amount ($600/week), you will not have the option to have taxes withheld. Plan accordingly.
Your unemployment benefit will be reported on a 1099-G form, so be on the lookout for that come 2021 tax season!
Unemployment during furlough isn’t enough to cover my bills, what other options are there?
Emergency fund + cash reserves
The first place to look is your cash reserves, A.K.A. your emergency fund. This is the precise reason why we (financial experts) preach the importance of this reserve (we discuss this and more in A Millennial's Guide to a Recession). What I have personally struggled with is actually utilizing it. If you have unexpectedly experienced a reduction in income, this counts as an emergency. Remember, you should only need to take distributions in the amount of your net pay (the amount that hits your bank account every other week). If you haven’t created a budget yet, this is the easiest way to calculate how much you need. If you typically receive $2,500/paycheck in your bank account, then you know your expense need is $5,000/month. That’s assuming you don’t save any of that $2,500/paycheck and each dollar is spent on something. Not the case? Then reduce your expense need by the amount you slush away in savings each month.
Payment + interest waived for federal student loans
Are you paying federal student loans? Remember, payments and interest have been waived until September 30, 2020. Call your loan provider to discuss your options. Even if your student loan isn’t funded federally, your private loan servicer may be offering something similar.
Penalty free withdrawal from your 401k/403b/IRA
*Consider the two options above before utilizing these next two options.*
One place to access money during your financial hardship is your own retirement accounts. Typically, you have to wait until you are age 59 ½ to take a distribution and avoid the 10% penalty. That penalty is waived on distributions up to $100,000 if you are facing a financial hardship related to the coronavirus. If your distribution is pre-tax (like a traditional IRA), then you will still have to pay ordinary income taxes on the distribution. Typically, you pay taxes on the withdrawal in the year that it’s made (or when you file your taxes). However, another CARES Act benefit is that you can spread the taxes associated with the distribution over three years.
401k and 403b loan
Another option available to you is to take a loan on your employer provided retirement plan (ex: 403(b) or 401(k)). Prior to the coronavirus, you were limited to taking out a loan no more than $50,000 or 50% of the vested amount, whichever is less. Now with the CARES Act passed, you are able to borrow up to $100,000 or 100% of your vested amount, whichever is less. You get an extra year to pay off the loan, so instead of paying it back in 5 years, the CARES act pushes it out to a 6 year term agreement.
Borrowing from your plan may be a better option since you are not taking a distribution and you essentially pay yourself back with interest. However, if you default on the loan, the CARES act will not protect you. It will be assumed the funds were a distribution and a 10% penalty will apply even if you used the funds in 2020 due to COVID-19 relations. Yikes!
You will want to confirm with your employer if the penalty free withdrawal and loan changes have been adopted in the plan.
If you have received notice you will be furloughed (either now or in the future), go to your state’s unemployment website and start familiarizing yourself with what’s needed to apply. For example, Minnesota unemployment applications are only available to your on certain days of the week, depending on the last digit of your social security number:
Last digit of your SSN Day of week
0, 1 or 2 Monday
3, 4 or 5 Tuesday
6, 7, 8 or 9 Wednesday
Be aware of any non-payable weeks, like in Minnesota (week 1). Also, you will likely need to request an unemployment benefit payout each week you are unemployed. It’s not a one and done application, it’s ongoing to ensure adequate payout to those in need.
And finally, know that you are not alone. You likely already know someone who is undergoing unemployment benefits. We sure do. If you have questions on your furlough process, or how to start preparing now (which we should all be doing anyways!!), we are here to help.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.