The Process for Terminating Employee Benefits

What is the process of terminating employee benefits?

Many employers provide robust employee benefits, such as health insurance, retirement plans and other perks. Part of employee benefits management, however, involves ceasing the perks when a team member leaves their role due to layoffs, termination or quitting.

Properly executing the employee benefits termination process is crucial for businesses. Failing to properly terminate benefits can expose your business to legal penalties, fines or compliance issues under state regulations or laws such as COBRA, the Employee Retirement Income Security Act (ERISA).

For the best possible results, follow this step-by-step guide to terminating employee benefits.

1. Notify the exiting employee that their benefits will be terminated. 

Whether an employee is leaving voluntarily or involuntarily, verbal and written notice of their termination of benefits is necessary. 

• Firing or laying off employees: When you fire an employee or conduct a layoff, you’ll apprise the outgoing employee of the situation and the reason for their exit (e.g., poor performance, workforce reductions, etc.) both verbally and in writing. (This is part of a standardized offboarding process.) It’s also essential to provide verbal and written notice that their benefits are being terminated, including details on when coverage ends and if continuation options exist.
• Employees who quit: If an employee voluntarily resigns, use the exit interview to review their benefits termination timeline and provide a written notice that outlines important details, such as final paycheck information, COBRA eligibility and 401(k) retirement plan rollover options.  

In either case, make it clear which benefits are ending and explain any potential continuing coverage options. 

2. Ensure you have your employee’s correct contact information.

To avoid headaches down the road, ensure you have the outgoing employee’s correct mailing address, personal email and phone number so you can send any required follow-up notices. You’ll no longer be able to contact them via their employee email address or internal communication apps once their employment is terminated.

Provide the employee with the name and contact details of the HR representative or benefits administrator who will handle their benefits termination and continuation inquiries. If applicable, include any external benefits provider they may need to contact directly, such as COBRA administrators or 401(k) plan providers.

Advise the employee to update their contact information with HR if it changes, especially if they anticipate receiving important notices such as COBRA enrollment details or tax documents (e.g., W-2s and 1099s).

3. Contact your insurance companies.

You’ll need to contact each insurance company for which your employee has a policy under your company to request termination of benefits. Most insurance providers require written notice specifying the reason for termination (e.g., layoff, firing or voluntary resignation) and the employee’s last date of coverage. Some may also request supporting documentation, such as a termination letter or COBRA election notice.

Your insurance provider will confirm the termination date of benefits and inform you of any continuation options. That may include COBRA health insurance, the option to convert group life insurance to an individual policy or state-specific continuation plans. Ensure you communicate these options to the employee, because some have strict enrollment deadlines.

4. Provide all written notices required by state and federal law.

Under the federal COBRA law, private-sector employers with at least 20 employees must give departing employees written notice if they’re eligible for continuing health benefits. Some states have “mini-COBRA” laws that extend similar continuation rights to employees of smaller businesses, sometimes requiring additional written notices. COBRA notices must be provided within 14 days of the qualifying event, and some states impose stricter deadlines. 

Ensure outgoing employees understand if any resources or programs are available that may benefit them under federal or state law, such as eligibility for unemployment assistance.

If you need guidance, consult an employment attorney or HR professional.

5. Remind the outgoing employee of important dates, details and deadlines.

Your written correspondence with your ex-employee should include important dates and information, including: 

• When their final paycheck and any accrued vacation time will be paid out.
• The date their medical coverage ceases.
• Details about any negotiated severance package.
• The deadline to exercise their outstanding stock options. 
• The deadline to elect COBRA coverage (typically 60 days from the date of notice). 
• The deadline to submit claims for eligible expenses under their flexible spending account (FSA), including any dependent care FSA, as most FSAs follow a use-it-or-lose-it policy.

6. Maintain thorough records.

Keep copies of all correspondence sent to the departing employee regarding benefits termination, COBRA or state continuation coverage, final pay, and any severance agreements. These records will be essential if a former employee disputes their termination, files a business lawsuit or alleges noncompliance with federal or state laws.

When do you terminate an employee’s benefits?

Below are some specific situations that warrant terminating an employee’s benefits.

• When you fire an employee: Benefits are typically cut off as soon as the firing happens or shortly thereafter. There are many reasons you may have to fire an employee. It’s important to ensure your reasons for firing the individual are valid to avoid being sued for wrongful termination.
• When you lay off an employee: Sometimes a role just isn’t needed in a company anymore, or budget cuts cause multiple employees to be laid off. Depending on the situation, benefits may be terminated immediately or extended for a specific period under a severance agreement or company policy.
• When you furlough a worker: Furloughed workers take a leave of absence for a specific amount of time, sometimes without benefits. It’s usually based on the terms of your company’s benefits plan.
• When an employee’s hours are reduced: Some benefits, such as health insurance, require employees to work a minimum number of hours per week. If an employee’s hours drop below that threshold — whether due to a company decision or an employee request — you may need to terminate their benefits.
• When an employee voluntarily resigns: When an employee quits, benefits typically end on their last day. Severance pay and other benefits are generally not offered unless company policy states otherwise.

Although you must terminate an employee’s existing benefits in the situations above, certain benefits, such as COBRA coverage, vested pension benefits or severance packages, may continue depending on company policy and legal requirements.

It’s important to develop and implement a clear termination process rather than scrambling to handle benefits when an employee leaves.

“The first step in building out the [employee termination] process is the clear understanding of benefits offered, billing cycles, who is eligible for COBRA and those that are portable to individual policies,” said Karen Oakey, a human resources industry leader and former head of people operations for Soda Health. “To make this process efficient, using tech platforms that can process the post-employment benefit process will save company hours and money by automation.” 

What termination benefits can you offer to employees?

Termination benefits are a settlement or compensation package owed by an employer to an employee upon their departure from the company. The benefits vary depending on the employee’s former role and status, company policy, and the reason for the departure.

Here are four termination benefits you can offer your employees:

1. Severance

Some employers, depending on the reason behind the termination, may offer severance packages to employees based on their years of service to the company. It can be a huge financial relief for many employees who are being laid off due to budget cuts. It also allows your company to avoid burning bridges and protect its brand reputation. Ensure your employee knows how much severance they will receive and when, including any steps they must take to receive the benefit.

2. Job search assistance

Employees may gain valuable assistance in finding new jobs through free job-seeking classes or workshops. The workshops can provide departing employees with the resources they need to start the job search, including refining interview skills, mastering cold calling and perfecting their resume.

3. COBRA

Some employers may allow employees to continue their health coverage through COBRA, a federal program that enables employees (and their dependents) to retain their health benefits for a limited period — at their own expense.

4. Unemployment insurance

If an employee is terminated through no fault of their own (e.g., a layoff), it’s important to inform them of their eligibility for unemployment insurance benefits. Provide your outgoing employee with all the necessary information on how to apply for unemployment benefits in your state, including how long they may receive payments. The benefits can offer financial assistance while they search for a new job.

It’s also recommended that you create and keep on file a clear, organized document informing ex-employees of the benefits available to them after leaving your company.

“Have an easy-to-read document that’s broken down by benefit and includes contact information, should the separating employee have further questions,” Oakey said. “This should highlight which platforms they’ll still have access to and ensure that the company has the most recent contact information on file for important documents like COBRA and W-2s.”

Erin Donaghue and Sean Peek contributed to this article. Source interviews were conducted for a previous version of this article.