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The Process for Terminating Employee Benefits

Sean Peek
Sean Peek

If you have to let an employee go or they quit, you should provide them with a termination of benefits letter. Here's what to include in your letter and a sample template.

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.

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 have layoffs: 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 set 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.

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 the Consolidated Omnibus Budget Reconciliation Act (COBRA) or pension benefits.

Severance pay and other benefits aren't usually given to employees who quit, as they have severed their employment voluntarily.

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, director of human resources for Fracture. "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 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 it is required or not, 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 it should include their contact info (mailing address, etc.) In addition, you will want to include 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 continuation coverage, severance pay or unemployment options. Not all of these may be applicable if the employee is being fired due to severe offenses.

  • 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 it is expected.

  • 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?

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 on their part to receive this benefit.

2. Assistance with their job search

Employees may gain valuable assistance in finding their job 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 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 chose to continue health care coverage via COBRA pay higher premiums, but this coverage assists them in providing needed insurance while they search for a new job.

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 these benefits. 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."

Image Credit: Pheelings Media / Getty Images
Sean Peek
Sean Peek
business.com Contributing Writer
Sean Peek has written more than 100 B2B-focused articles on various subjects including business technology, marketing and business finance. In addition to researching trends, reviewing products and writing articles that help small business owners, Sean runs a content marketing agency that creates high-quality editorial content for both B2B and B2C businesses.