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The Process for Terminating Employee Benefits

Updated Nov 06, 2023

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As a business leader, when you make the difficult decision to fire or lay off an employee – or if they decide to quit – you must end their employee benefits. While most benefits are immediately terminated, employees often have the right to continue with some benefits. Terminating employee benefits is a delicate process, and you want to make sure you follow all of the proper steps.

What is the process of terminating employee benefits?

All employers are required to offer certain benefits upon employment; however, when an employee is terminated, that requirement ceases and the employer must take steps to end those benefits.

Properly following the employee benefits termination process is crucial for businesses; improperly terminating – or outright forgetting to terminate – benefits will require extra effort to rectify and could wind up costing your business more than necessary.

Here is a step-by-step guide to terminating employee benefits.

What is employment termination?

Just as the name describes, employment termination is when an employee’s time working with a company comes to an end. A relationship between an employee and their employer can end in one of two ways – voluntarily or involuntarily – depending on the situation.

  • Voluntary termination: In the event of voluntary termination, an employee chooses to leave their current employer at their own will. This kind of termination is typical in instances of an employee finding a new job, retiring or abandoning their job. 
  • Involuntary termination: On the other hand, involuntary termination occurs when an employer ends the employment relationship. Typically, this happens when an employee isn’t pulling their weight – causing them to be fired – or when a company needs to downsize or eliminate a position. 

How to terminate employment

Employee termination is a delicate situation that must be handled with respect and understanding. To make the process easier for all, create a standardized offboarding process with a checklist of essential steps, such as writing a termination letter, conducting exit interviews, retrieving company property, updating HR records and delivering the final paycheck.

Have all documentation in order – such as information on the Consolidated Omnibus Budget Reconciliation Act (COBRA), unemployment and rights regarding equity – and make ex-employees aware of any resources or programs that may benefit them. 

Expenditures after termination

Businesses will incur certain costs when terminating employees, as outlined by state and federal laws. For example, businesses owe terminated employees their final wages; however, the timing in which they must be delivered varies. Contractually obligated businesses – and those in certain states – must also pay out any unused vacation or sick time, and they may be required to pay for severance or garden leave.

FYIDid you know

Understanding your responsibilities as a business is crucial, as failure to provide mandated expenditures could lead to legal recourse.

When do you terminate an employee’s benefits?

Here are some specific situations that warrant terminating an employee’s benefits:

  • When you fire an employee: Firing an employee is stressful for both the employer and employee. 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. Benefits are normally cut off as soon as the firing happens or shortly thereafter.
  • 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 immediately terminated, or they may continue for a specific period of time, such as three months, via a severance agreement.
  • When you furlough a worker: Furloughed workers take a leave of absence for a certain amount of time, sometimes without benefits. This is usually based on the terms of your company’s benefits plan.
  • When an employee quits: It can be jarring for employers when an employee puts in their notice or quits on the spot. Benefits are usually terminated on their last day. Severance pay and other benefits aren’t usually given to employees who quit, as they have severed their employment voluntarily.

While you must terminate an employee’s existing benefits after one of the above situations, employers have the option to terminate other types of benefits, such as severance packages, health coverage continuation through COBRA and pension benefits.

It’s important to develop and implement a process for terminating those benefits rather than scrambling to put a process in place once an employee has given their notice or has left your company.

“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, 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.” [Read more about the six signs it’s time to terminate an employee.]

What is a termination letter?

A termination letter is a formal document that officially informs an employee that their employment with your organization is ending. This letter isn’t a mandatory document for privately owned companies. However, it is for labor unions, and some state laws and business policies require it.

Regardless of whether or not it is required, it is a best practice to write a termination letter and keep a copy in the employee’s permanent file. The document can be kept handy for future reference if the ex-employee files a complaint or wrongful termination lawsuit. Having documentation that cites the reasons for termination can assist your company’s case if a legal situation arises.

What should be included in a termination letter?

  • Contact info: Your letter should contain your employee’s full name and their contact info (mailing address, etc.) In addition, you will want to include the names of the head of your HR department and the manager to whom the employee reports.
  • Dates: Ensure the letter includes the last day the employee worked for your company, as well as any dates that are applicable as to why the employee was terminated. This includes dates of documented offenses and dates when corrective action was taken.
  • Reason for termination: In the letter, clearly list the reason for termination and make it known that it is permanent. Be sure to include any documented criteria, such as patterns, warnings, offenses and suspensions before termination.
  • Payment information: List when the employee will receive their final paycheck. Note whether it will be sent by mail, through direct deposit or delivered in person on the day of termination.
  • Benefits and rights: This section includes all the benefits the employee has a right to after termination, including COBRA coverage, severance pay and unemployment. Not all of these may be applicable if the employee is being fired for cause.
  • Next steps: Write about any next steps you need from the employee once they are officially let go, such as returning company property, badges and keys. Include in the letter whom they need to be returned to and when.
  • Legal obligations: Remind the employee in the letter of any written or verbal agreements they have with the company, including nondisclosure agreements, noncompete agreements or confidentiality forms.
Bottom LineBottom line

A termination letter formally informs an employee their ties with the company are being severed. The letter should provide the reasons for their termination as well as the benefits they have a right to receive following their employment.

Example of a termination of benefits letter

To help you get started, here is a basic example of a termination of benefits letter:

[Date of letter] 

[Employee’s full name]

[Employee’s address]

[Employee’s full name], 

This letter is to inform you that your employment with [Company name] will be terminated as of [Date of termination]. 

The reasons for your termination are as follows: 

[List all reasons for termination, including dates of attempted corrective action and details or consequences from these interactions. If the termination is without cause, explain the reason behind the termination, such as layoffs or budget cuts.] 

Your final paycheck will be mailed to you by [Date] and will include compensation for your unused personal time and paid time off. You will also receive any offers for the continuation of employee benefits in the mail, including [COBRA benefits, any severance packages or resources to find another job, if applicable]. 

Please return your company property [Company badge, keys, company laptop or phone] to [Contact] by the end of the day on [Date]. 

[Insert any information the employee needs to abide by, such as a nondisclosure agreement or noncompete agreement, and inform them they must continue following these obligations after employment ends]. 

If there are any questions or concerns regarding this letter, please contact [Name] at [Contact information]. 

Sincerely, 

[Manager]

[Contact information for manager] 

I acknowledge that I have received a copy of the above letter. 

Name: ____________________________________

Signature: _________________________________

[Date]

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. These 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 to 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. This can be a huge financial relief for many employees who are being laid off due to budget cuts. It also allows your company to not burn any bridges and protect its reputation. Ensure your employee knows how much severance they will receive and when, including any steps they must take to receive this benefit.

2. Job search assistance

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

3. COBRA

Some employers may continue an employee’s health coverage with COBRA. This federal program allows employees (and their dependents) to keep the health benefits they’ve received for a limited amount of time at the employee’s cost.

Did You Know?Did you know

Employees who choose to continue health care coverage via COBRA will pay a higher premium.

4. Unemployment insurance

If the employee is terminated through no fault of their own (e.g., a layoff), it’s important to make them aware of their rights regarding unemployment insurance benefits. Give your employee all of the information they need to apply for these benefits in your state, and let them know how long they’re able to keep them. These payments can assist them while they’re searching for a new job.

It’s also recommended that you create and keep a letter or document on file that informs ex-employees of the benefits that are still available to them even though they are no longer employed at 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.”

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

MIranda Fraraccio
Miranda Fraraccio
Contributing Writer
Miranda Fraraccio is a writer with bylines on several B2B publications. She got her start working in different sectors of the music industry, before transitioning to focus on other creative projects, including writing, audio production, and creating visual content.
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