Employee Benefits
Your client is going to have to make decisions as to what benefits it wants to offer its employees. Selecting benefits is often looked at as an economic matter, which in part it is, but there are also various other reasons to choose more generous benefits for your employees (and I am talking about non-executive employees). 💡 What are those reasons?
Time Off Policies
Traditionally, employers offered separate sick, vacation, and holiday policies. Now you still see some of that, but you also see a lot of employers who treat time off the same no matter how it is used. Some are using PTO (paid time off) banks that combine sick and vacation time. However, as states and cities create laws requiring paid sick time, these PTO banks may not be usable anymore.
Sick time
Unscheduled absenteeism is a problem for employers. What kind of “calling off sick” policy does your client want to have? There are a few options that are commonly used:
- No pay first day – You get no pay for the first day you are sick. This is designed to deter “shopping” days and such. 💡 What are the problems inherent in this option?
- Well-pay bonus – Paying a bonus if someone does not call off sick over a certain period of time can be incentivizing. 💡 What are the problems inherent in this option?
- Personal time bank – This option allows for accrual of time not taken as sick days. 💡 What are the pros and cons?
- Pooled Emergency Account – This allows for employees to donate sick days to a pooled account with other employees so that if someone gets sick, they have more days available. 💡 What are the pros and cons?
- Sick Days are Days Off – This option mixes all time off together whether it is a sick day or a vacation day. 💡 What are the pros and cons?
Whatever option your client selects, the procedure for calling off should be clearly spelled out in the handbook. In addition, you need to know your jurisdiction’s sick leave laws. Some may require paid sick leave; some may be like Philadelphia in allowing employers to request proof of illness only for absences more than two days. This law raises a good point in that often, young lawyers forget that localities can also have their own laws. Subnational governments are active in the employment space. For example, in Oregon, employers must allow for sick leave that accrues 1 hour for every 30 hours the employee works and it must be paid sick leave if the employer has 10 or more employees.
California, New York, and New Jersey permit remote workers to accrue paid sick time even though the company may be located in a state that does not require paid sick leave.
Vacation
Like sick leave, vacation policies need to be clearly explained in the handbook. Will there be a flat amount of vacation days an employee is entitled to based on years employed? Is there an accrual system or does the new year or an anniversary date start the availability? For instance, an employer could say everyone is entitled to 2 weeks of vacation per year. Now we need to know when that 2 weeks starts and resets. All of this has to be set forth in the handbook.
Some employers prefer to have an accruing system. For instance, perhaps the employee has been at the company for over 10 years and is now entitled to accrue 1 day per month or .25 day per week. Administratively it is certainly different dealing with accruals than it is simply setting everyone’s time to start at the beginning of the year, e.g. starting Jan. 1 each year, all employees are entitled to 2 weeks of vacation.
The next question is what if someone does not take all of the vacation that they are entitled within the year? Does it rollover or expire? Does the employer pay the employee for unused days, and if so, how much? These are important considerations particularly because many people do not take all of their vacation days in a year. Reasons are:
- Saving time for something later
- Too much work
- Don’t have enough money
- Feel guilty
- Discouraged by boss
Notice procedures should also be outlined in the handbook.
Some employers are going even further with time off. Moz Software in Seattle gives its employees 21 days of vacation in addition to sick/safe leave and holidays. Further, Moz gives its employees $3,000 per year to spend on their vacation! Here is a summary of Moz’s employee benefits from the company website:
Note all of the other benefits as well. This company sets a great example for employers. Certainly, these benefits could be a draw to work for the company. 💡 Do you see a theme running through this benefits package – or at least the disclosure of it on their site?
💡 Think: The CEO of Moz comes to you and says they would like to reduce the $3,000 to $2,000 starting next year and reduce vacation time to 18 days per year. What do you advise and what needs to be done?
Some companies offer unlimited PTO (minimum of 3 weeks per year) and unless it changed its policy, FullContact provides $7,500/year to use on vacation so long as you truly unplug – which means no reading emails.
Holidays
Employers generally provide for certain holidays off. The list of holidays must be in the handbook. Employers that are open on holidays sometimes offer that the employee can trade their holiday for a personal day off on another day (floating holidays). According to an SHRM report, 30% of employers offer floating holidays. This is important for flexibility but also to allow diverse workforces to observe the religious holidays that apply to them.
Others pay employees who work on a holiday extra pay (time and a half or double time).
Retirement
A valuable benefit is helping employees save for retirement. In Unit 5, From Employee to Entrepreneur, I provided a debriefing on how a 401(k) works. 401(k) plans get their name from IRC section 401(k) which is the section that provides the requirements for such plans to be tax qualified. The IRS has some valuable 401(k) information on its site. Remember that when an employee contributes to a 401(k) plan, they do so with pre-tax dollars. If/when an employer puts money into the plan on an employee’s behalf, it gets a deduction. When an employee retires and starts taking money out, they will include the money in their ordinary income.
When an employer wants to offer a 401(k) plan it has several options to choose from when building the plan, such as:
- Setting the eligibility parameters (1 year of service requirement or auto enrollment)
- Setting the types of contributions that will be allowed
- Employee contributions (salary deferrals)
- Employer discretionary contributions (can vary from year to year – subject to a vesting schedule)
- Employer mandatory contributions (a set dollar amount or percentage – subject to a vesting schedule)
- Employer matching contributions (match the salary deferrals)(subject to a vesting schedule)
- Setting the vesting schedule for employer contributions (Employee salary deferrals are always 100% vested.)
- Setting the way non-vested forfeited money gets re-allocated across the participants
- Whether to offer the opportunity to borrow from the plan
- Whether to offer the opportunity to take hardship withdrawals from the plan
While 401(k) plan documents are lengthy, there is a shorter, more readable, version that gets disseminated to employees called a Summary Plan Description. The SPD must be provided to employees within 90 days after becoming covered by the plan. The SPD covers:
- Name and type of plan
- Eligibility requirements
- Description of benefits and when participants have a right to those benefits
- Statement about whether the plan is covered by termination insurance from the Pension Benefit Guaranty Corporation
- Source of contributions to the plan and the methods used to calculate the amount of contributions
- Provisions governing termination of the plan
- Procedures regarding claims for benefits and remedies for disputing denied claims
- Statement of rights available to plan participants under ERISA.
There are other types of retirement plans that employers can offer such as SIMPLE plans or pension plans. Regardless of the type of retirement plan that is used, a description should be in the employee handbook.
Tax-Preferred Employee Fringe Benefits
In addition to 401(k) plans, there are numerous other fringe benefits that your client can offer to its employees. Technically, fringe benefits are compensation and should be taxed, however there are some that the IRS permits employers to provide employees on a tax-free basis. Examples are:
- Group term life insurance (IRC §79)
- Medical insurance benefits (IRC §§ 105, 106)
- Uninsured medical expense reimbursement plans (IRC § 105)
- Dependent expense reimbursement plans (IRC §129)
- Educational assistance programs (IRC §127)
- Cafeteria or flex plans (IRC §125)
- Transportation benefits (IRC §132)
It is important to note here that partners are not employees and that you must consult the IRS rules with regard to S-corp shareholders when considering them for such benefits. Some benefits will apply to 2% S-corp shareholders but many do not.