When Executives Step Away: Planning Through the Transition

For senior executives, stepping away from a role comes in various forms. It may come through a planned retirement, an unexpected layoff or restructuring, or a deliberate move toward consulting, board services, or a different pace of work. While the circumstances may differ, and an exit is rarely a single, clean event, there are similar questions that tend to arise.

Upon exit, part of an executive’s compensation and benefits unwind on various schedules. Employer benefits may end on one schedule. Deferred compensation may begin on another. Equity awards can carry separate vesting, exercise, and tax deadlines. Decisions in one area can affect cash flow, health coverage, taxes, and portfolio risk elsewhere. 

Two areas are consistently top of mind for executives we work with: 1) maintaining health insurance through the gap before Medicare at age 65, and 2) how to coordinate deferred compensation and equity payouts that are set to begin.

Health Insurance

Employer coverage usually ends on the last day of the month in which separation occurs. For an executive retiring before 65, that can leave a gap of several years before Medicare. The realistic options each carry trade-offs:

1. COBRA continuation. This keeps the existing plan and provider network in place, generally for up to 18 months. The drawback is cost: the former executive/employee pays the full unsubsidized premium. COBRA works well as a short bridge but is an expensive long-term solution.
   
   For involuntary or negotiated exits, health coverage is one of the more negotiable line items in a separation agreement. The employer can continue to cover or partially cover the COBRA premium for a defined stretch. 
   
2. ACA marketplace coverage. Also referred to as “the exchange,” marketplace coverage can be secured. Many have enjoyed premium subsidies via premium tax credits that are income-based. The enhanced premium tax credits that had been in place since 2021 expired at the start of 2026, and the rules reverted to their pre-2021 form. These current rules now only allow households within 400% of the federal poverty level (FPL) and below to receive a subsidy to cap the cost compared to your household’s income. So a single large deferred compensation payout or income from other sources can eliminate a subsidy entirely. 
   
   As an alternative to securing coverage on the exchange, some have turned to Healthshare programs. While technically not insurance in the traditional sense, these programs often offer significantly lower monthly costs, the freedom to enroll year-round, and alignment with faith-based or ethical values. There are trade-offs to consider with these programs, but they can be worth considering.
   
3. A spouse’s employer plan. A job separation is typically a qualifying life event that opens a special enrollment window. When a spouse has access to group coverage, this is often the most economical bridge available.
   
   Remember to utilize your Health Savings Account (“HSA”). While not allowed to be used for marketplace premiums or HealthShare programs, funds can be used for COBRA as qualified medical expenses. HSAs can and should also be utilized for out-of-pocket medical, dental, and vision expenses not covered by insurance. 

Deferred Compensation / Equity Payouts

Many executives carry a nonqualified deferred compensation (NQDC) plan. Separation often triggers a distribution schedule that was elected years earlier and largely forgotten since.

It helps to understand why these arrangements work the way they do. The appeal of deferred compensation is that the executive avoids “constructive receipt” of the income, which allows the related income taxation to be deferred. As long as the arrangement remains unfunded and the executive is merely an unsecured general creditor of the employer (whether backed by an informal rabbi trust or a bare contractual promise), the compensation is not currently taxable. The deferral is, in effect, the executive accepting the employer’s promise to pay later in exchange for postponing the tax.

That structure creates the planning challenge that surfaces at separation. Section 409A sharply restricts changes to payout timing after the fact. The lump sum versus installment choice made at the time of deferral is generally what now governs the tax outcome. A lump sum can push a single year’s income deep into the top brackets. Installments spread that income across multiple years but extend the period over which the executive remains an unsecured creditor of the former employer because a rabbi trust does not protect against the employer’s insolvency. 

Equity comp and company stock are frequently part of the same picture. The wind-down of unvested awards, the timing of option exercises, and their interaction with the alternative minimum tax all interact with the same year-by-year income decisions. Incentive Stock Options (“ISOs”) have a 90-day post-termination exercise window, after which they lose their favorable tax treatment if not exercised in time. Restricted Stock Units (“RSUs”) may have acceleration or forfeiture clauses buried in the grant agreement. And if company stock sits inside the 401(k), there’s a one-time Net Unrealized Appreciation (“NUA”) election that can save serious tax dollars, but only if you do the rollover correctly. We want to help minimize regret that could stem from walking away from money because nobody flagged various deadlines and considerations.

Beyond the planning around the various income realization and tax consequences that come with deferred compensation and equity compensation, Executives should also factor in concentration risk from holding a large slug of employer stock. There may be a need to diversify, using the hedging toolkit (collars, 351 exchange funds, synthetic indexes, equity long/short strategies) with constructive-sale rules in mind. 

The Planning Window Some People Miss

The “gap years” between an executive’s exit and the onset of required minimum distributions and Social Security income are some of the most valuable planning windows available, because income, and therefore the marginal tax rate, may be relatively low.

Several strategies become more attractive in these years:

• Roth conversions. Converting traditional retirement assets to Roth during low-income years can reshape future required minimum distributions, reduce the tax drag on later withdrawals, and improve the longevity of your overall assets. The trade-off is that the conversion is income itself, so it competes for the same headroom as a deferred comp payout and can affect ACA and IRMAA (Income-Related Monthly Adjustment Amount) thresholds.
• Capital gains harvesting. In years when taxable income is low enough, long-term capital gains may fall into lower brackets like 0% or 15%, allowing appreciated positions to be reset at little or no tax cost.
• State residency and payout sourcing. If a relocation is in the cards, the timing of a deferred comp payout relative to the move matters. Federal law shields certain retirement income from a former state’s reach, but deferred comp paid out over fewer than ten years can still be sourced back to the state where it was earned, so the sequence of “move, then take the payout” isn’t automatically clean.
• Charitable timing. When a high-income payout year is unavoidable, concentrating several years of charitable giving into that year, often through a donor-advised fund, can offset the spike rather than spreading deductions thinly across lower-income years.

None of these moves work in isolation. They depend on first mapping the health insurance and equity/deferred compensation cash flows, because those flows determine how much room is actually available in any given year.

Coordinated Planning Through the Transition

The recurring theme across each of these areas is that they are not separate decisions. Health insurance, equity/deferred compensation, and the gap-year planning window all run through the same underlying tax and cash-flow picture. Rather than reacting to each in isolation, value comes from mapping the transition as a single, cohesive plan.

Every Executive’s transition looks different, and coordinating health insurance, deferred compensation, and tax timing is easier with an experienced team at the table. If you’re approaching a transition of your own, we welcome the opportunity to talk it through; and invite you to reach out and schedule a conversation.

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