Three clocks start the day you are let go, and the one that costs the most money is the health-insurance clock. You have 60 days to elect COBRA, and the same 60 days to buy a Marketplace plan instead. For most people who have just lost their income, the second option is the cheaper one. Often by a lot.
The severance number in your separation agreement is the thing everyone stares at. It is rarely the decision worth the most.
Here is the order to work through it in.
Not advice: This is educational information drawn from IRS, Department of Labor and HealthCare.gov guidance. It is not financial advice, not tax advice and not legal advice. Severance agreements and state unemployment rules vary. Consult a qualified CPA about the tax and an employment attorney before you sign anything.
Your severance is not taxed at the withholding rate
This is the most common misunderstanding of a layoff, and it costs people real money in both directions.
Severance is wages. The IRS treats severance payments as “wages subject to social security and Medicare taxes, federal income tax withholding, and FUTA tax” (IRS Publication 15 (2026)). When an employer pays it separately from your regular paycheck, it may withhold at the flat supplemental rate of 22%, rising to 37% on supplemental wages above one million dollars in a calendar year.
That is a withholding rate. It is not your tax rate. Withholding is a deposit; your actual liability gets settled when you file.
Which way that cuts depends entirely on your year. If you are laid off in August and do not work again until January, your total 2026 income may be low enough that your real marginal rate sits below the flat withholding rate, in which case the over-withheld amount comes back as a refund eight months later, at a moment when you needed it now. If you had a strong first half and the severance lands on top of it, 22% may not cover what you owe, and the shortfall shows up as a bill in April.
Two practical consequences. Do not budget your runway off the gross number on the agreement. And do not assume the withheld amount is the final answer either. Run your actual projected year before you spend it.
The health-insurance decision, which is the expensive one
COBRA is the default because it is the thing your employer hands you. That is the only sense in which it is the obvious choice.
COBRA applies to group health plans sponsored by employers with 20 or more employees in the prior year, and after a termination or a cut in hours it runs for 18 months (U.S. Department of Labor). The plan may charge you up to 102% of the cost of the coverage (U.S. Department of Labor).
Read that last number carefully, because it is where the shock lives. The premium deducted from your paycheck was your share. Your employer was paying most of the rest and you never saw it. COBRA is the entire cost of the plan, plus two percentage points of administration. Same doctors, same card, same coverage, and a bill that can be three or four times what the payroll line used to say.
The alternative is the Marketplace. Losing job-based coverage opens a Special Enrollment Period if you “lost qualifying health coverage in the past 60 days” or “expect to lose coverage in the next 60 days” (HealthCare.gov). And here is the part that matters for a person who has just stopped being paid: Marketplace savings “are based on your household size and your estimated income for the year you need coverage, not by your employment status” (HealthCare.gov).
Your estimated income for 2026 just fell. The subsidy is calculated against the lower number.
You are also not choosing between them under duress. The Department of Labor states plainly that “being offered COBRA continuation coverage doesn’t mean you are ineligible for Marketplace coverage or for a tax credit” (An Employee’s Guide to Health Benefits Under COBRA).
So: get a Marketplace quote with your realistic 2026 income before you sign the COBRA election form. It takes twenty minutes and it is the highest-value twenty minutes of the whole process.
COBRA still wins in specific cases, and they are worth naming. You are mid-treatment and switching plans would interrupt it. You have already met a large deductible this year and starting over in January would cost more than the premium gap. A specialist you need is in your employer network and nowhere else. Those are real, and they are the reason the option exists. They are just not most people.
Two deadlines govern the mechanics. Your plan must give you at least 60 days to decide, and at least 45 days after you elect to make the first premium payment (An Employee’s Guide to Health Benefits Under COBRA).
Unemployment: file this week, not next month
Unemployment insurance is “a joint state-federal program,” and “each state administers a separate unemployment insurance program” under common federal guidelines (U.S. Department of Labor). Eligibility, amounts and how severance interacts with a claim are set by your state, which is why nobody can tell you your number from a national article, including this one.
What is uniform is the timing advice. File as soon as possible after becoming unemployed: it “generally takes two to three weeks after you file your claim to receive your first benefit check” (U.S. Department of Labor). Waiting to see whether you land something first does not preserve anything. It just moves your first payment further away.
Your eligibility is usually calculated on a base period of “the first four out of the last five completed calendar quarters before the time that your claim is filed” (U.S. Department of Labor), so it reflects the job you just lost, not the gap you are now in.
If you got less than 60 days’ notice
The WARN Act requires covered employers to give 60 days of advance written notice before a mass layoff or plant closing. It applies to a business with 100 or more full-time workers, not counting workers with under six months on the job or those working under 20 hours a week (U.S. Department of Labor).
The triggers are specific. A plant closing covers a shutdown affecting 50 or more employees at a single site in any 30-day period; a mass layoff covers job losses for between 50 and 499 full-time workers where that is at least 33% of the site’s full-time workforce, or 500 or more full-time workers regardless of share (U.S. Department of Labor).
If your layoff looks like that and the notice did not, it is worth an hour with an employment attorney before you sign a release. Several states also run their own notice statutes with longer periods or lower thresholds than the federal floor, so the federal answer is not always the whole answer.
What to do this week
In order, and none of it takes long:
- File the unemployment claim. Today if you can. The clock on the first check starts when you file, not when you were let go.
- Get a Marketplace quote using your realistic full-year 2026 income, then compare it against the COBRA figure in your election packet. Decide with two numbers in front of you.
- Recalculate your runway off net severance, not gross, and check whether the withholding is likely to leave you owing or refunded.
- Do not sign the release yet if the notice period looks short or the agreement waives claims you do not understand.
The severance number is fixed the moment you are handed it. The health-insurance number is not, and neither is the date your first unemployment payment arrives. That is where the money still moves.
One more thing to settle in the first week rather than the following April: unemployment benefits are federally taxable and nothing is withheld from them unless you file a specific form asking for it.
Our severance and layoff runway calculator will work the net figure and the months it buys you, so you can put a real number against step three.
