Looking ahead to 2020, Elliot Dinkin discusses trends in total compensation, potential offerings organizations can offer and what those offerings would require of compliance pros.
As employers plan for the workforce of the future, it is essential to consider alternate approaches for creating and implementing total compensation packages; this typically includes compensation, benefits, retirement, perquisites and ancillary and time-off benefits. Now that multiple generations exist in the workforce, all with varied attributes and differences, a one-size-fits-all total compensation approach should no longer be considered. These new approaches must also be cost-effective, compliant and competitive.
Employers typically believe that as long as they offer a structure where each benefit offering is competitive, they are fine. Consider the following type of typical offering:
- Base compensation targeted at the 50th percentile
- Offering a variety of PPO benefits with required employee premiums and different co-pays and co-insurance levels, depending upon plan selected
- Standard level of life insurance, dental, vision, life and disability
- 401(k) match of 50 percent of the first 6 percent deferred
Any employer would be proud to offer these benefits to their employees. After all, this approach is often effective because it streamlines and simplifies compliance and administration.
So, why are employers still struggling to attract, retain and motivate employees? Why is turnover still so high?
Employers know that the workforce is currently comprised of multiple generations, and the more time they take to learn how to better manage, train and develop this complicated workforce, the more questions arise about how to best suit their needs. In order to satisfy employees across all generations, it’s crucial for employers to develop targeted total compensation packages. To that end, it is practical — and smart – to allow employees to choose from a menu of options.
How to Develop Total Compensation Offerings
The first step in this process is to assemble sufficient demographic data for all current employees. This would include items such as:
- Date of birth
- Family status
- Base compensation
- Incentive compensation
- 401(k) participation rate
This would build the baseline to develop status-quo costs and assist in development of fundamental data needed to assess total compensation migrations. This data can be expressed in total dollars and average cost per employee.
As part of this study, it may be beneficial to create focus groups of employees to discuss the concept and gather information about particular areas of importance from their perspectives. The members of each focus groups should be a cross-section of employees from different age groups, service lengths, locations and genders to allow for diverse and fair sampling.
This data – along with the building blocks of total compensation solutions – would be used to contract this menu of offerings. However, it is important to remember that this approach is not going to offer various options for each benefit — several different packages of choices that offer meaningful differences while still being cost effective and compliant. Please see example offerings below, who they would appeal to and how to make them work.
Utilize more PTO and reduce levels of base compensation, medical/Rx, life, etc.
This package offering could also include a reduced level for retirement benefits and may be attractive to those with young children or a spouse who receives good benefits. It may also be of interest to those with aging parents.
What about compliance?
Any changes to PTO programs must continue to be in compliance with any applicable regulations. The above changes suggested that customized PTO plans tied to an option chosen do not add to any special compliance considerations. The issue relates to tracking and impact on subsequent elections.
Opt-out of medical/RX, dental and vision benefits with lower levels of life insurance disability. In lieu of a 401(k) match, funds would be used to provide for a matching school loan payment.
This package would be attractive to those who are just entering the workforce, who are most likely still on their parents’ health plans and who have student loans to pay. This may also be of interest for employees who are being recruited with a working spouse with student loans.
As an alternate approach, in lieu of a signing bonus, an annual matching loan repayment amount can be created. For example, if an employee pays $1,000, a company can match it. This can be continued throughout several years of employment.
What about compliance?
If a company has a safe harbor 401(k) plan, then this feature can no longer be offered and testing for compliance with nondiscrimination rules must commence.
Accept the “bare minimum” of core benefits and increase pay supplement.
This is well-suited for employees who simply want to maximize cash compensation, which most commonly includes employees who are single, use the employer-provided health reimbursement arrangements, buy coverage on an exchange and want to capitalize on earnings. This plan is also attractive to employees who are more distinguished in their careers and believe that they can better manage their own funds rather than using the 401(k) plan.
As you can imagine, there are a variety of alternative options worthy of consideration rather than just a one-size-fits-all approach. However, when evaluating options, it’s crucial that production, distribution and service cannot be hindered. These factors must also be considered as part of the analysis.
What about compliance?
When offering an opt-out of a majority of benefits, then extra compliance and testing for the 401(k) plan would be required as noted above. Proper communication to vendors regarding eligibility for benefits is key to avoid any unintended consequences.
What About Overall Compliance and Administration?
Companies struggle with this already, and the options outlined above seem to make this even more difficult. The following is a summary of several issues and potential solutions:
Companies have to demonstrate that their pay practices do not discriminate against protected classes. By increasing compensation based upon benefit selection, doesn’t this make meeting this standard more difficult?
Base compensation must be set based upon a particular role, job function, performance and experience. Any additional compensation that is provided via these options will be tracked as an additional cash supplement tied solely to a benefit election. As such, this cash supplement would be excluded from regular base compensation and not included as part of a discrimination analysis.
The difficulty in complying with nondiscrimination standards resulted in the use of safe-harbor plans to avoid testing. This option would then unravel all of that. This is a correct conclusion, and the benefit levels designed would have to be tested to determine if they satisfy the various nondiscrimination tests. It is worth noting that the total compensation offerings are intended to create packages to meet a diverse workforce and not intended to be indicative of pay levels. Depending on the retirement plan options created (for example, a formula for company contributions tied to total points, based upon age and/or service) satisfying discrimination requirements may not be impossible.
Will the total compensation offerings potentially create adverse selection, as employees will be migrating to choices as needs arise? The plan designs today already have built into them design issues that create the largest liability for an employer pertaining to exposure for benefit costs and/or high uses of PTO. These options do not appear to add to or create additional exposure for this issue.
Recordkeeping and Administration
This option clearly creates additional administration, mainly at the time of open enrollment. Once an election is in place, the administrative burden is no greater than current, even when there is a qualified life event.
This option will increase the necessary level of communication. However, this area is due for some updates anyway.
The current one-size-fits-all, status-quo approach to total compensation – including the annual merry-go-round process of altering deductibles, co-pays and employee contributions – will no longer suffice if an employer truly wants to become an employer of choice. Designing total compensation offerings could be an effective solution.