Vacation Pay

[NCGal]

My apologies if this question has specifically been addressed. I plan to FIRE near the end of 2016 and I'm trying to choose the right date. I know I have time, but we have a chalk board next to the refrigerator and we're crossing off months so it's always in our thoughts.

I get paid twice a month. Our pay period ending date is on pay day. So my check on the 31st of December would be through the 31st.  At any given time I have 4-5 weeks of saved vacation. I'll confirm it all gets paid out, but if I give 2 weeks notice, there won't be enough time for those weeks to be reflected in Dec 31 payroll. If I receive the check in 2017 is the money shown as 2017 income? My concern is with ACA.

I'm wondering if it would be better to resign early in December. I'll get the vacation pay before the end of the year and I believe my health insurance would be covered for the entire month.  And Christmas will certainly be merrier!

[LAGuy]

It differs by state; in California they have to pay you within 72 hours of your final day. Most employers will just have a check ready for you on your last day. If you expect that you'll be on good terms with your employer up to your final date (i.e., you don't expect them to escort you to the door the moment you resign) I'd just take it up with them a few weeks beforehand and make sure that you'll get paid your last check on whatever day works best for you. If you think they're going to be dicks about it, just plan to retire a week or so before the end of the year.

[FIRE me]

ACA varies from state to state. In my state I could make $14,000 annually and still qualify for free Medicaid.

In other states, you actually need to earn a sweet spot amount to get the maximum subsidy. In other words, zero income would mean no subsidy.

If you are in North Carolina (from your screen name), that is not a Medicaid expansion state.

I suggest you check out your state law and this thread:

http://forum.mrmoneymustache.com/welcome-to-the-forum/information-on-the-affordable-care-act-with-a-focus-on-early-retirees/

[FIRE me]

My concern is with ACA.

Definitely check out this link:
http://rootofgood.com/affordable-care-act-subsidy/

[patrickza]

Would it be possible to take all of your leave right at the end of your job, ie retire end of February, but have the last 6 weeks of work actually be you on vacation?

[NCGal]

Thank you all for your responses. I will re-examine those links and check up on state law. I like the idea of using my last weeks as vacation which I could do before the end of 2016, but I don't know if my employer would be agreeable. I need to figure out the ramifications of discussing any of this with them more than 2 weeks away from pulling the plug.

[Spork]

The other option is: just don't sweat it too much.  If 5 weeks of pay completely wrecks your FIRE by screwing up the amount of subsidy of the first year... maybe you need to rethink your plan.  I'm not saying "don't optimize."  I'm saying: Optimize what you can... and if it doesn't work out, you should have funds to manage.

I FIRE'd mid year.  Sure, I don't get the same ACA kickback I would have gotten had I FIRE'd in January.  But I get some.  Next year will be here and I can retool my calculations.

As to "when do I talk to my boss"... that's seriously going to depend on your situation.  In mine, I started talking about retirement about a year in advance.  In my review I got the "what are your goals for next year" and I said "My goal is to be retired."  We had a heart-to-heart on how many official weeks/months he'd want (he asked for 6 months).   At the 6 month mark, I gave an official notice.  I will say in my situation: my boss and I were (and still are) good friends, though there were a few oddball jackasses in management that were an unknown.  But I did know he'd have my back and my best interests at heart.

[StetsTerhune]

Obviously a lot depends on your specific circumstances, but generally speaking it makes sense to do the opposite of what you're talking about and working slightly into 2017 to get your vacation pay into 2017. If you get it in 2016, you'll be taxed on that pay on your marginal rate based on the whole year of working. If you get it in 2017, particularly if your work has a 401K, you can frontload, you oughta be able to put ALL your vacation pay into your 401K and IRA. No taxes, and your AGI will still be $0.

[smiller257]

When I retired early, I was shocked when I received my last paycheck with 3 weeks of unused vacation pay included. I did not even expect it. Hopefully your employer would do the same.

[Frs1661]

When I retired early, I was shocked when I received my last paycheck with 3 weeks of unused vacation pay included. I did not even expect it. Hopefully your employer would do the same.

In the US, if you accrue vacation hours every pay period, they must be paid back to you as you have earned them. If your employer just hands everyone 2 weeks of vacation on January 1 there is no requirement for them to pay you for it when you leave (since it isn't considered earned).

Sent from my Nexus 4 using Tapatalk

[NCGal]

Thanks again, all.

Yes, vacation is definitely accrued by a specific number of hours per pay period. I keep close watch on that because occasionally there are mistakes.

I'll try to abide by Spork's attitude and not sweat it too much! Boy it's hard when you feel like one foot is out the door. Suddenly I feel like I'm being tested, to stay.

Stets - interesting idea about front-loading. Who knew? Not me. I need to find out if it's allowed.

[Thegoblinchief]

Obviously a lot depends on your specific circumstances, but generally speaking it makes sense to do the opposite of what you're talking about and working slightly into 2017 to get your vacation pay into 2017. If you get it in 2016, you'll be taxed on that pay on your marginal rate based on the whole year of working. If you get it in 2017, particularly if your work has a 401K, you can frontload, you oughta be able to put ALL your vacation pay into your 401K and IRA. No taxes, and your AGI will still be $0.

Big +1 to this. Even if the terms of your 401(k) are too restrictive to front load much, because of being capped at a percentage of salary or similar, at least work enough to max IRA for another year. HSA if applicable. Etc.

It makes MUCH more sense tax-wise to retire partway through a year than at the end of the year.

[Eric]

Not to make it too complicated, but there might be some other things you'll want to consider, as discussed here:

http://forum.mrmoneymustache.com/welcome-to-the-forum/best-day-to-quit/

[NCGal]

There's certainly more to think about. Thanks for the input. I'm just holding on to make it to the end of 2016. There's a tiny possibility of getting downsized earlier next year. That would make me very happy even if it means less income/savings. Technically we have enough to pull the plug.

[mamagoose]

Thank you all for your responses. I will re-examine those links and check up on state law. I like the idea of using my last weeks as vacation which I could do before the end of 2016, but I don't know if my employer would be agreeable. I need to figure out the ramifications of discussing any of this with them more than 2 weeks away from pulling the plug.

What's the worst they could do, let you go? ;) My husband is in the same spot and we agreed he is going to use up all his vacation time before quitting, because if he just quits on say Dec 31 and takes the cash payout for a month's unused vacation, that might be $5k cash, but if he goes on vacation Nov 15 - Dec 15 for that month and then puts in his 2 weeks to retire Dec 31, then during that month he gets the benefits of healthcare + 401k match covered. Does that make sense? Also it's a good idea to quit the first day of the month so your health insurance carries you through the last day of the month, at least that was how my last job worked. Another upside of using the vacation before you put in your quitting notice is that it gives you kind of a "reason" to quit - I once quit a job after being on my honeymoon for two weeks, as soon as I got back I used the "I had time to reflect on my priorities and decided this job isn't right for me, so here's my 2 week notice" line and everyone understood.

[Trudie]

For tax/IRS purposes your income is always reflected in the year in which it is actually paid, regardless of when "earned."

[Arktinkerer]

I took all my vacation before leaving.  On top of getting the insurance/401K/pension etc, they awarded vacation time on a monthly basis.  Thus, by using the vacation time, I got more vacation time since I worked into another month.  Also, I got the holidays that were in that time period.

[TomTX]

Obviously a lot depends on your specific circumstances, but generally speaking it makes sense to do the opposite of what you're talking about and working slightly into 2017 to get your vacation pay into 2017. If you get it in 2016, you'll be taxed on that pay on your marginal rate based on the whole year of working. If you get it in 2017, particularly if your work has a 401K, you can frontload, you oughta be able to put ALL your vacation pay into your 401K and IRA. No taxes, and your AGI will still be $0.

Big +1 to this. Even if the terms of your 401(k) are too restrictive to front load much, because of being capped at a percentage of salary or similar, at least work enough to max IRA for another year. HSA if applicable. Etc.

It makes MUCH more sense tax-wise to retire partway through a year than at the end of the year.

My employer specifically lets you designate whether you want the "vacation pay" payout at retirement to go directly into the 401k.

[NCGal]

Thanks for the additional replies.  Trudie, you answered my specific question, but all the comments have given me food for thought.  Now I'm going to have a conversation with myself about an attitude adjustment and I also need to find a pair of big girl panties.  I just returned from vacation and by the time I get through email on Tuesday I'm going to feel like quitting.