Most tech workers sign their severance agreement within a few days of the layoff call. It is understandable: the paperwork arrives at the worst possible moment, and signing feels like a way to close the chapter. But a severance agreement is often the single most valuable financial document you will see all year, and once it is signed, its terms are generally fixed.
This guide walks through what to check before you sign, from the financial side. It is not legal advice, and an employment attorney is the right person to review the legal terms. What follows will help you understand what is on the page, what it means for your money, and what is worth asking about.
First, Know Your Deadline
If you are 40 or older, federal law gives you time. Under the Older Workers Benefit Protection Act, a release of age discrimination claims generally must give you at least 21 days to consider the agreement, or 45 days if you were let go as part of a group layoff. After you sign, you generally have 7 days to change your mind. In a group layoff, your employer must also give you information about which job titles and ages were selected and not selected.
If you are under 40, the deadline is whatever your employer sets, and it is often shorter. Either way, read the deadline line first, put it on your calendar, and avoid signing on the day you receive the agreement. A reasonable request for more time is common and is often granted.
Nine Things to Check Before You Sign
Many packages are based on a number of weeks of pay per year of service. Check whether “pay” means base salary only or includes bonus or commission, and whether a bonus or commission you have already earned this year is paid separately. Check how unused paid time off is handled, since some states require it to be paid out.
Severance is taxable as ordinary income. Employers often withhold federal income tax on it at a flat 22% (37% on supplemental wages over $1 million in a year), which can fall well short of what a higher earner actually owes. Know whether you will receive one payment or a series of paychecks, and in which tax year the money lands. A lump sum paid in December and one paid in January can produce very different tax bills.
Look for the exact date your employer coverage ends, which is often the last day of the month rather than your last day of work. Some packages pay several months of COBRA premiums, or a cash amount in place of them. Knowing what is covered, and for how long, shapes whether COBRA or an ACA marketplace plan makes more sense for you.
Find out exactly what is vested, what is forfeited, and whether anything accelerates. For stock options, note the post-termination exercise window, which is often 90 days. Incentive stock options exercised more than three months after your employment ends lose their ISO tax treatment and are taxed as nonqualified options. If you participate in an employee stock purchase plan, check what happens to contributions in the current offering period. If an RSU vest date is close to your separation date, it is worth asking whether the timing can change.
Check whether any employer match is unvested. When a layoff reduces a plan’s participants by more than about 20% in a year, the IRS generally presumes a partial plan termination, and affected employees must be fully vested. If you have an outstanding 401(k) loan, find out when it becomes due. A loan that is offset when you leave can generally be rolled over until your tax filing deadline, including extensions, to avoid taxes and penalties.
Severance is almost always paid in exchange for a release, meaning you agree not to bring certain legal claims against the company. Read what you are giving up and what is excluded, such as vested benefits and unemployment insurance. This is the section where an employment attorney’s review matters most.
Look for non-compete, non-solicitation, confidentiality, non-disparagement, and cooperation clauses. A non-compete can affect which jobs you can accept, and its enforceability varies widely by state. Know what you are agreeing to before your job search is underway.
Some agreements require you to repay severance if you break a term, return company property by a deadline, or are rehired. Some reduce payments once you start a new job. Severance can also affect when you can collect unemployment benefits, and those rules vary by state, so check with your state’s unemployment office.
Some of the most useful terms are the ones that are not on the page: outplacement support, a neutral reference, an extended option exercise window, keeping your laptop or phone, or a later separation date. If something matters to you, it is reasonable to ask.
Is a Severance Package Negotiable?
Often, at least in part. Companies usually start with a standard formula, but many will consider reasonable requests, especially for items that cost them little, such as timing, an extended exercise window, or outplacement. Requests tend to land best when they are specific, made in writing, polite, and tied to a clear reason, such as years of service, an equity vest only weeks away, or a role that was eliminated rather than performance-related.
Not every request will be granted, and there is no guarantee that asking changes the outcome. But you will rarely get what you do not ask for, and the window to ask closes when you sign.
A Before-You-Sign Checklist
- Your signing deadline and revocation period are on your calendar.
- You know the total amount, how it was calculated, and whether earned bonus, commission, and paid time off are included.
- You know when the money arrives, in which tax year, and how much tax will be withheld.
- You know when health coverage ends and whether COBRA premiums are covered.
- You have a list of every equity grant: what is vested, what is forfeited, and every exercise deadline.
- You know your 401(k) vesting status and any loan balance.
- You understand the release, any restrictions on future work, and any repayment conditions.
- An employment attorney has reviewed the legal terms, if the stakes justify it.
Where a Financial Planner Fits
An employment attorney reviews the legal terms. A financial planner looks at what the package means for your money: when to take payment for the best tax result, how much to set aside for taxes the withholding may miss, how long your cash will last, whether COBRA or a marketplace plan costs less for your situation, what to do with your equity before deadlines pass, and how to handle your 401(k). The two roles work best together, and both are most useful before you sign.
Common Questions
If you are 40 or older and the agreement releases age discrimination claims, federal law generally requires at least 21 days to consider it, or 45 days in a group layoff, plus 7 days to revoke after signing. If you are under 40, the deadline is set by your employer, and asking for more time is common.
Severance is ordinary income, taxed at the same rates as wages. The difference is often in withholding: employers frequently withhold a flat 22% for federal income tax, which may not cover what you owe if your total income for the year is high. Plan for the difference with an estimated payment or extra withholding.
It depends on your state. Some states delay or reduce benefits while severance is being paid, and others do not. Your state’s unemployment office can tell you how its rules apply to your package.
For a large package, significant equity, a non-compete, or any concern about how you were treated, a review by an employment attorney is usually worth the cost. Many offer flat-fee severance reviews.
Want a second set of eyes before you sign?
Schedule a free 30-minute consultation with Mark Chalem, CFP® to review what your severance package means for your taxes, health coverage, equity, and 401(k), with a fee-only fiduciary. Available to tech workers nationwide.
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