Are You Applying for the Voluntary Separation Allowance Plan at UPS?

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Are You Applying for the Voluntary Separation Allowance Plan at UPS?

Now is the time to get your finances in order. 

Here are the most common questions we hear from clients after learning they can or will receive a separation package:

  • Will I be financially secure for the rest of my life, or do I have to find another job?
  • What strategies will help minimize the tax impact of receiving a lump sum severance? What about a lump sum Deferred Compensation Plan payment?
  • Do I get to keep my RPUs?
  • Should I rollover my 401(k) to an IRA, or leave it where it is?
  • Do I have the ability to postpone my Deferred Compensation Plan payments?
  • Should I elect to begin my pension benefits now, or wait? What type of monthly payment should I elect?
  • What is the best plan for my life, disability, and health insurance needs?
  • Are there other areas of my finances that will be positively or negatively impacted by this transition?
  • If you are considering applying for the Voluntary Separation Allowance Plan (VSAP), you probably have financial questions that need timely answers. This paper will address eight key areas that you’ll need to be prepared for during a job transition period.

#1: Severance Pay

The VSAP calls for a lump sum, one-time payment to be made shortly after your Separation Date. The lump sum payment is equal to 3 months of base pay, plus one week of base pay per Year of Service, up to 30 Years of Service. In addition, you will receive the cash value of all accrued, but unused vacation days as of your VSAP Separation Date. The lump sum payment is subject to ordinary income tax, and you cannot defer any of this payment into your 401(k) plan or Deferred Compensation Plan as it is paid following your termination date. In many cases this large payment can bump you into a higher tax bracket, so even though income taxes will be withheld from your severance paycheck, it may not be enough to cover your personal tax liability on that lump sum. 

Naturally, one question to consider is: What can be done to minimize the income tax impact of receiving this large cash payment? Depending upon how far in advance you can prepare, there are several strategies that should be considered. We will discuss these income tax reduction strategies throughout this paper. 

While a lump sum payment may feel like a “windfall,” it’s important to have a plan for this cash. You may be in a position to save and invest it for your future, or you may want to hold it in cash until your future cash flow needs are clearer. It may also be an opportunity to enhance your children’s college savings accounts, pay down debt, or build a nice cash reserve as part of your investment and withdrawal strategy during retirement. If you don’t have a plan for this cash, the “windfall” could quickly disappear.

#2: UPS 401(k) Savings Plan

Once you decide to apply for the VSAP, one of the first items to address is to ensure you save the maximum into your UPS 401(k) Savings Plan prior to your actual termination date. The 401(k) deferrals are made on a pre-tax basis, and this tax savings will be valuable in your final year of employment, especially given the lump sum severance payment. 

You may need to adjust your 401(k) Savings Plan contribution percentage so that the IRS maximum of $19,500 is deferred into your 401(k) plan prior to your termination date. If you are age 50 or older in the year of termination, you should also fund the “catch-up contribution” of $6,500 before you terminate employment. Even if you do secure another job later in the year, you’ll at least know you already took full advantage of this pre-tax deferral opportunity.

Upon termination you have a few options with your UPS 401(k) Savings Plan. First, you can leave your account where it is. Your balance will continue to be invested as you’ve directed from the list of available investment options, and it will continue to grow on a tax-deferred basis. You can still access your account balance on the 401(k) website. Withdrawals are not required until you are age 72 when the IRS required minimum distribution rules apply. 

If you are between the ages of 55 and 59½ when you terminate employment with UPS, and you think you may need to take a withdrawal from your 401(k) plan before you are 60 years old, you may want to leave all or a portion of your balance in the 401(k) plan. There is a special rule that applies to 401(k) withdrawals where you can avoid the 10% early withdrawal penalty (that generally applies to distributions from retirement accounts prior to age 59½) if you are at least 55 years old in the year you separate from service. We have advised some clients over the years to leave a portion of their 401(k) balance in the company’s 401(k) plan until they are age 59½, when the 10% early withdrawal penalty would no longer apply to any retirement account. 

Next, you also have the option to rollover your 401(k) balance to another employer’s plan or to an IRA in a tax-free transaction. Upon instructing Voya that you would like to commence a rollover of your 401(k) account to an IRA, Voya will liquidate your holdings and process your distribution request. You can transfer the shares of your company stock from your 401(k) account directly into an IRA. The first distribution payment represents your “pre-tax” balance. You will want this money transferred to your IRA custodian. This distribution should absolutely not be deposited into your personal bank account. If applicable, a second distribution may be made which represents any “after-tax contributions” in your 401(k). The “after-tax contributions” are the dollars you already paid taxes on over the years, and then deposited into your 401(k) from your paycheck. Typically, clients directly deposit this after-tax amount into their Roth IRA but you can also receive it in cash and deposit it into your personal bank account. At Brightworth we provide our clients with investment and planning advice on their 401(k) based on their unique situation.

For someone who has been investing in UPS stock inside their 401(k) plan for a very long time and has low “cost basis” shares, a tax strategy known as Net Unrealized Appreciation (NUA) may be beneficial. If it’s the right scenario, NUA could save you thousands of dollars in income tax. With this strategy you are able to transfer some or all of your company stock in your 401(k) plan to a brokerage account at termination, and then sell the shares in the brokerage account, paying long-term capital gain tax rates. Ordinary income taxes will be due on the cost basis of the shares distributed out of the 401(k) plan, not the fair market value of those shares. Plus, if you are charitably inclined and incorporate a gift of shares to charity in the year of this transaction, you could greatly minimize the overall tax impact. It is important to consult an expert before proceeding as there are many requirements for this to work properly. NUA should be evaluated before diversifying large amounts of UPS stock inside your 401(k) plan, or before initiating a rollover to another retirement account. 

Finally, a beneficiary should be named on your 401(k) account, which is an important part of everyone’s estate planning. If you rollover your 401(k) plan to another retirement account following termination, you will need to make sure your new beneficiary designations are properly coordinated and integrated with your overall estate plan. 

#3: UPS Deferred Compensation Plan

If you met the eligibility requirements to participate in this non-qualified plan, you were able to defer up to 35% of your annual base salary and 100% of the cash portion of Management Incentive Program (MIP) awards each year. This account may represent a significant number on your balance sheet. Distributions from this plan will begin once you separate from UPS.  Each year when you elected an amount to defer to the plan, you also selected a distribution schedule to be used upon separation from UPS.  The selections you made at this time will dictate the timing of the distributions you will begin receiving. The value of this account is subject to ordinary income tax the year the proceeds are distributed to you, and some income tax will be withheld from this distribution. Again, it may not be enough to cover your personal tax liability on the payout of this plan. 

There are a number of investment options to choose from in the Deferred Compensation Plan. This asset allocation should be coordinated with your overall cash flow and investment plan. If a balance will remain in the plan for several years, it should be rebalanced periodically. We provide our clients with specific investment recommendations based upon their unique financial situation.

#4: UPS Management Incentive Program (MIP) and Long-Term Incentive Performance (LTIP)

If you are eligible for the Management Incentive Program (MIP) and your Separation Date is prior to December 31, 2020 you will not be eligible for an MIP award for 2020 (a Separation Date of December 31 does qualify for a 2020 MIP award).

All previously granted Restricted Performance Units (RPUs) from MIP awards prior to 2020 will immediately vest following your VSAP Separation Date. However, the restrictions on the RPUs will remain in place until they lapse according to the schedule defined by the program terms.  Typically, this means approximately 20% of the RPUs granted for the 2017 and prior performance year awards have the restrictions lapse each January until the award has fully converted to UPS shares. For awards granted for performance years after 2017, restrictions on all granted RPUs lapse one year after they are granted. At the time of lapse, RPUs will be converted to shares of UPS common stock and deposited to your Computershare account.

Upon lapse, the fair market value of the RPU award is taxed as ordinary income. Some shares are held back to cover the tax liability, but the 22% federal tax withholding may not be enough for your particular situation. So, you may need to set extra cash aside to prepare for the additional taxes due. 

If you are eligible for Long-Term Incentive Performance Awards (LTIP), your LTIP RPUs are prorated through the month of your VSAP Separation Date. The proration is based on the number of months worked over the 36-month performance period.  For example, if your VSAP Separation Date is August 1, 2021 your 2019 LTIP award is prorated 32/36 and paid out in the first quarter of 2022.

Remember, your holding period for capital gains tax purposes on your UPS stock starts the day the shares are released to you and your cost basis is the fair market value when the shares are released. If you sell the shares right away, essentially no additional capital gain taxes would be due. If you sell the shares within 12 months of release, any post-release date gain will be taxed as a short-term capital gain at your top marginal tax bracket (as high as 40.8% for federal tax including the current 3.8% Medicare surtax). 

#5: UPS Retirement (Pension) Plan

If you are eligible for retirement and your application for VSAP is approved, you will need to decide when to begin receiving your UPS Retirement Plan benefits.  You should access the Retirement Calculator on to run estimates of your benefit for different start dates in order to determine what is best for your situation.

For many individuals separating from service, “What pension option should I elect?” is often the primary question they ask us regarding the pension plan. While the answer does depend upon each person’s particular situation, there are a number of factors to consider such as: 1) your age and health at termination, 2) whether you are married, 3) whether you have any other pensions or stable monthly income streams, 4) if you plan to go back to work, and 5) how soon you will need to start living off of your retirement assets. Finally, figure out what percentage of your future retirement income is coming from “you” (i.e. your portfolio, consulting income), versus Social Security, versus a company pension plan, as this can help you decide.

Inflation is a major consideration when planning for your retirement, and it’s likely that your purchasing power will decline over the years with the monthly pension since it will not increase with inflation. Keep in mind that you will need more growth on your investment portfolio during retirement so you can withdraw larger amounts each year and preserve your inflation-adjusted standard of living. 

#6 Debt

Now is the time to look at your outstanding debts. If you currently have a mortgage, it might make sense for you to look into refinancing while you still have a paycheck. Interest rates are currently low, and your cash flow may be changing after you leave UPS. Also, consider whether it makes sense to pay off your mortgage, credit cards or any other debts when you receive your severance payment. This can lower your fixed monthly expenses which gives more financial flexibility to your years ahead.

#7 Insurance

As a fee-only firm, Brightworth does not sell insurance products. However, insurance planning is an important component of our clients’ overall financial strategy. We have found over the years many UPSers have the bulk of their health, life, and disability insurance through their group plans. When you are no longer actively employed, these benefits change. For our clients, we look at whether they are eligible for retiree medical coverage following their termination of employment and if not, whether going on COBRA is the best short-term solution. 

For those not eligible for retiree healthcare (under age 55 with 10 years of service, or under age 65 with 5 years of service), under the VSAP, UPS will pay for 60 days of additional UPS Flexible Benefits Plan medical, dental and vision coverage beyond the date that coverage would otherwise have ended. Flexible Benefits coverage normally ends on the last day of the pay period in which the separation date occurred.  For example, if your VSAP Separation Date is March 12, 2021, normal Flexible Benefits coverage would end on March 31, 2021, but under the VSAP coverage would end on May 30, 2021.  Beyond this period, you would be eligible for COBRA coverage for 18 months at full cost.  Note that if you are not eligible for retiree healthcare as of your termination date, you will not be eligible for future access to the Retired Employees’ Health Care Plan (REHCP).

If you are eligible for Retiree Health Care Plan  coverage at your Separation Date, your existing medical, dental, and vision coverage continues for 60 days at no cost to you. In addition, you will receive an additional 30 days plus coverage to the end of that month due to your retirement.  This is also provided at no cost to you.  For example, if your VSAP Separation Date is March 12, 2021, your initial VSAP 60-day extension continues coverage to May 11, 2021 at which point your Retirement Flexible Benefits coverage continues to cover you until June 30, 2021 (30 days and to the end of the month).

It is very important to make a prompt decision about your enrollment in the REHCP plan once you separate from service.  Enrollment can be done on the UPS Benefits Resource Center on  If, as of your REHCP eligibility date, you do not enroll, you will not be eligible for future access to the REHCP plan.

Coverage for life, disability, and supplemental benefits ends on your VSAP Separation Date. For life insurance, you need to evaluate how much coverage you should maintain, for how long, and what the cost is to convert your group coverage to an individual policy versus getting a new policy elsewhere. In general, having some of your life insurance coverage outside of your employer is beneficial should a life event such as job elimination occur, as this is one less obstacle to face. Also, keeping group life insurance policies can become cost prohibitive over time. Make sure your beneficiary designation is updated for any new life insurance policies you secure following termination, and if you do plan to apply for outside coverage, make sure you are insurable before canceling any existing coverage. 

Your disability insurance ends once you are no longer employed by UPS. Individual coverage is typically expensive and may be hard to qualify for, so if you need to keep working, finding a job with good disability insurance benefits has its advantages.

#8: Investment strategy

Finally, a sound investment strategy is the cornerstone to building and preserving wealth. Your strategy should be designed to meet your specific cash flow needs, time horizon, growth requirements, tax objectives, and risk tolerance. Successful investing requires a long-term perspective and discipline to avoid making short-term emotional mistakes. Having a coordinated and comprehensive strategic asset allocation is the foundation for your entire portfolio. 

As an active UPSer, it could be that your entire investment strategy has been determined based upon the available funds in the 401(k) plan and Deferred Compensation Plan. Once employment ends, your investment strategy could transition into a portfolio 100% outside of the company’s offerings. Having flexibility with your investment options is good, but can be overwhelming at first given all of the other questions you’re needing to answer once you decide to leave UPS. You may suddenly be in a position where you are in “withdrawal mode” after spending 20 or 30 years in “accumulation mode.” This requires a different investment strategy, perhaps one with more bonds, cash, or alternatives. Or you may need to live off your investments for a short period of time until you secure another job. Determining how to adjust your investment mix, what account to draw from first, and how to minimize the tax implications of each withdrawal is critical during this transition period.

Brightworth provides investment management services to our clients using sound investment disciplines with customized, innovative planning. The core of this system, our Global Investment Solution, is a portfolio of carefully selected investments designed to enhance wealth while protecting capital over the long term. Through ongoing monitoring and evaluation, periodic tactical shifts, and flexible managers, we are able to take advantage of opportunities and manage risks for our clients.


Understanding the “ins and outs” of UPS’s compensation and benefits plans, including separation provisions, is important to making wise decisions with the options presented to you. Our team has helped professionals and executives through the separation process. We understand all of these details can be overwhelming at first, but rest assured, you do not need to figure this all out by yourself. Brightworth will develop a personal strategy for you to help ensure you are prepared to take full advantage of your separation package, and most importantly, have a clear understanding of the impact on your overall financial

If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

Who Is Brightworth?

Brightworth is a nationally recognized, fee-only wealth management firm with offices in Atlanta, GA and Charlotte, NC. The wealth advisors at Brightworth have deep expertise across the financial disciplines, allowing us to provide ongoing, comprehensive financial advice to families across the country.

This information is provided as a guide to assist you in your financial planning. The examples are provided for illustrative purposes only and are not intended to be specific financial planning recommendations or tax advice. Please consult with a professional for specific questions regarding your particular situation.
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