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Changing Jobs: Potential Gaps in Coverage

Jan 17, 2018 5 min read Sheila Olson

Key Takeaways

  • A gap in health insurance coverage risks more than just catastrophic medical bills; you could also face sizable tax penalties.
  • Take steps now to pay off any 401(k) loans to avoid early withdrawal penalties and income tax burdens.
  • Don't ignore the tax implications of your job switch; take advantage of available deductions to mitigate your tax liability.


As a new year begins, thoughts naturally turn to fulfilling those New Year's resolutions and making much-needed changes to improve your general happiness and quality of life. For many of us, these changes include pursuing a new career or professional opportunity.

But before you throw caution to the wind and leap into something new, it's a good idea to consider — and plan for — all the financial implications a job switch brings. Don't send that resume until you know whether any of these potential pitfalls applies to you (and what you can do about them), so your budget doesn't take an unnecessary beating.



Will I have a health insurance coverage gap?

If you're lucky, you'll be able to go right from one job to the next without a significant delay in coverage. But if you're out of work for more than a few weeks, or your new employer has a 90-day waiting period before benefits kick in, you may find yourself with a gap in coverage. Some states have even passed laws limiting the waiting period to 60 days or less for health insurance benefits, specifically to protect residents from these heavy fines.

Fortunately, you do have options if you think you might have a coverage gap. You can continue your health coverage from your previous employer under COBRA until your new insurance takes over, or you can purchase a health plan from the state exchanges to cover you in the interim. As a last resort, you can buy a short-term plan to cover catastrophic medical expenses.


How will the switch affect my health savings account?

The good news is that your health savings account, or HSA, belongs to you, even if you switch jobs. The bad news is that you may not be able to contribute to it anymore if your new employer's plan isn't HSA-eligible.

Here's how it works:

  • If your new plan is eligible, you can continue to contribute the allowable amount every year (up to $6,900 for a family in 2018, or $7,900 if you're age 50 or over).
  • If the plan is not eligible, you can only contribute a percentage of the allowable amount equal to the percentage of the year you were enrolled in an eligible plan. For example, if you were enrolled in an eligible plan from January through September, and then switched to a job without an eligible plan, you could contribute 9/12, or 75%, of the allowable amount for the year.

You can spend your existing HSA balance on any qualifying medical expenses without any restrictions.

What about a flex spending account?

Flexible spending accounts, or FSAs, operate under a different set of rules than HSAs, so your ability to spend your FSA funds ends once you leave your current employer. You do, however, have 90 days to submit a claim for eligible expenses incurred while you were employed during the plan year. Any unused money reverts back to your employer.

What are the tax implications?

If your new job comes with a big raise, you may be bumped into a higher tax bracket.

Don't forget to re-evaluate your withholding allowance(s) when you start a new job. Although it may feel like free money when you get that big tax refund each year, most financial experts think it's a bad idea to overpay your taxes throughout the year. Do you really want to give the IRS an interest-free loan?


Do you have an outstanding loan against your 401(k) account?

Many 401(k) plans allow account holders to borrow against their balance for certain expenses. The wisdom of these loans has been heavily debated, but if you've got one and you're changing jobs, you've also got some serious decisions to make.

Basically, you have two options: Pay the loan off within 60 days — or don't. But if you don't, it will cost you dearly. Here's why: First, if you don't pay it off, the loan will be treated as an early withdrawal and subject right off the bat to a 10% early withdrawal penalty (with some very limited exceptions). Second, the distribution will be treated as ordinary income for tax purposes, so you'll pay regular income tax on it, too. You may ultimately end up paying 30% or more of the total loan amount in taxes and penalties, not to mention the fact that you are forever forfeiting all the tax-deferred returns on your investment.

What should you do? The surprising answer is that most financial advisors recommend taking out a loan to pay off the 401(k) loan. If you're a homeowner, tapping your home equity can be a good option, because interest rates are lower and the interest payments may be tax-deductible.

Another option is a 0% balance transfer credit card, if you can qualify for a large enough credit line to cover your loan. Keep in mind, however, that the 0% introductory rate generally applies only for the first year or so, so if you can't pay off your card within that time period, you could be paying a higher APR on any remaining balance.

Under the Tax Cuts and Jobs Act of 2018, an additional option is now available. You can make a rollover to an IRA or other qualified plan up to your tax filing deadline (including extensions) for the taxable year in which the plan loan offset occurs, that is, the taxable year in which the amount is treated as distributed from the plan. So, for example, if you changed jobs in early 2018 and had income from a plan loan, you could extend your 2018 tax return until October 15, 2019 and would not have taxable income if you roll over the plan loan offset amount by that date.

Failing to fully understand the benefits implications of a career change — or not planning financially for all aspects of a career change — can cost thousands of dollars in fines and lost opportunities.



What you can do next

Get the details about your new employer's benefits plan in advance so you can avoid coverage gaps and make wise decisions about managing the funds in your HSA, FSA and retirement accounts. Always talk with your tax and legal advisors regarding your specific situation.


Sheila Olson is a Charlotte-based freelance writer specializing in investing, personal finance, entrepreneurship, and retirement planning. She is a regular contributor at Investopedia and writes frequently for the banking and consumer credit industry



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