A layoff is a shock, and the paperwork they hand you is designed to be signed quickly. Slow down. The order you handle things in the first two weeks matters more than almost any single decision — here it is.
1. Do not sign on day one
The separation agreement is a legal release: in exchange for severance, you usually give up the right to sue. That is a real trade, and it deserves a real read. The agreement states its own deadline — commonly 21 days to consider and 7 days to revoke after signing for workers over 40. Verbal pressure ("we need this today") does not override the written deadline. Take the document home, read every clause, and get it reviewed if anything is unclear — especially non-compete terms, which can quietly block your next job.
2. Run the severance math before anything else
Before you decide whether the offer is fair, you need three numbers: the total package, the weekly equivalent, and how many months of essential spending it covers. The formula most companies use is one to two weeks of pay per year of service, plus any unused PTO payout. But the lump sum is not the number that matters — the runway is. A $25,000 package at $3,500 a month in essentials is about seven months. The same package at $6,000 a month is barely four. Run your own numbers with our severance pay calculator before you negotiate, because "more weeks" is a much stronger ask when you can say exactly how short the runway is.
Worked example: six years at $75,000
Take a worker earning $75,000 a year, laid off after six years, with a two-weeks-per-year policy and 40 hours of unused PTO:
- Weekly pay: $75,000 ÷ 52 = $1,442
- Severance: 6 years × 2 weeks × $1,442 = $17,308
- PTO payout: 40 hours × $36.06/hour = $1,442
- Total before tax: $18,750
At $3,500 a month in essential spending, that package covers about 5.4 months — before tax, which will take a real bite. At $5,000 a month, it covers 3.75 months. This is why the first question after a layoff is never "is this a big number" but "how many months does it buy me."
3. File for unemployment immediately
Do not wait for severance to run out. Some states delay benefits while severance is paid, but the claim clock starts when you file, and a late claim can cost you weeks you never get back. Report the severance exactly as your state agency asks — the rules differ by state, and misreporting creates overpayment headaches later.
4. Protect your health coverage before the window closes
Job loss triggers a special enrollment period, but it is time-limited — usually 60 days. Compare three options: COBRA (same plan, often very expensive), the ACA marketplace (usually cheaper, especially with subsidies), and a spouse's or partner's plan. Price all three before picking, and do not let coverage lapse while you decide; one emergency room visit without insurance can erase a severance package.
5. Decide on the 401(k) — and do not cash it out
You have three good options: leave it where it is, roll it into an IRA, or roll it into a new employer's plan. The bad option is cashing it out: you pay income tax plus a 10% early-withdrawal penalty if you are under 59½, which can easily take a third of the balance. If you need cash, that is what the severance and the emergency fund are for.
6. Negotiate — the first offer is rarely final
Leverage you may not realize you have: unvested equity, unpaid bonuses, a non-compete clause (waiving it has value), unused benefits, and any potential legal claim. Common asks that succeed include more weeks of pay, extended health coverage, outplacement services, a later termination date (which extends benefits and vesting), and a neutral reference. Ask in writing, stay professional, and remember that the worst outcome of asking is usually just "no."
Frequently asked questions
How long do I have to sign a severance agreement?
The agreement itself states the deadline, commonly 21 days to consider and 7 days to revoke after signing for workers over 40 under federal law. Never let a verbal rush override the written deadline — if the deadline is unclear, ask for it in writing.
Is severance pay taxed?
Yes. Severance is taxed as supplemental wages, with federal withholding often at a flat 22% plus state tax, Social Security, and Medicare. Your actual tax bill settles when you file, so a large lump sum can push you into a higher bracket for the year.
Can I collect unemployment while receiving severance?
It depends on your state. Some states delay benefits until severance runs out, while others let you collect both. File your claim immediately either way and report the severance exactly as your state agency requires.
Should I take severance as a lump sum or salary continuation?
A lump sum gives you control and a clean break, but it is taxed at once and ends your benefits immediately. Salary continuation keeps health coverage and payroll deductions running longer, but it can delay unemployment in some states. Compare both against your coverage gap and tax situation before choosing.