Are Affordable Benefits a Thing of the Past?

Company sponsored healthcare is costing the federal government an estimated $250 billion per year in tax subsidies from premiums alone, and the Affordable Care Act is out to change that in a big way.

By imposing a so-called “Cadillac Tax” on high value health insurance plans, beginning in 2018, the Affordable Care Act expects to bring in approximately $87 billion over the next ten years.

Any plan that costs more than $10,200 for single coverage or $27,500 for family coverage will be subject to a 40% tax on any value above the set threshold, which will be adjusted annually for inflation. The Obama Administration claims that this tax is only meant to affect those with platinum-level healthcare, however there is some economic trickery at play here: Medical care prices have historically risen significantly faster than all other prices, so by linking the inflation adjustments of the Cadillac Tax threshold to the Consumer Price Index (CPI), the administration has ensured that the threshold will increase at a much slower rate than the cost of healthcare.

Over time, employers will be unable to continue to provide a standard level of care that is below the Cadillac tax threshold, which will eventually hang average plans over the edge. According to the American Health Policy Institute, the cost of the average family health care plan is expected to hit the Cadillac tax threshold by 2031.

While there is still a lot to be figured out in terms of the implementation of the tax, we do know a few things for sure: The cost of healthcare will continue to rise, the pressure on benefit spending will continue to increase, and companies need to be prepared.

Staying Competitive

Studies overwhelmingly report that healthcare is the number one consideration for a prospective employee evaluating a job’s compensation and benefits package – something that is unlikely to change with the entrance of the Cadillac tax. Cutting back on healthcare will not be an option for companies committed to attracting and retaining top talent.

In light of these healthcare sanctions, business and financial strategists are being compelled to evaluate alternative approaches to employee benefits that are more affordable and sustainable in the long-term. Some companies are incorporating free and inexpensive benefits such as flex hours, nap rooms, and casual dress days, but these fringe benefits are insignificant recruiting tools compared to a robust healthcare plan.

 When one door closes…

Business and financial strategists are being compelled to find sustainable cost efficiencies to support the huge impending healthcare expenditures, and many are finding solutions within the very context of their existing corporate tax outlay.

Employers in all fifty states are already required to foot the bill for Unemployment Insurance for their workforce as part of payroll tax obligations. Unlike health insurance however, the premiums for Unemployment Insurance virtually never increase from use, and most companies are unknowingly already paying the maximum rates. By creatively incorporating the benefits of Unemployment Insurance, companies are saving millions.

How it’s Being Done

Severance is being replaced.

Until lately, the Supplemental Unemployment Benefits Plan (SUB Plan) has been the best kept secret of the IRS. Like healthcare, the IRS recognizes separation payments made under a SUB Plan as “benefits” rather than “wages” making these payments exempt from payroll taxes for both the employer and employee. Additionally, SUB Payments make use of the aforementioned Unemployment Insurance and are made in conjunction with State Unemployment Benefits. Employees maintain 100% of their pre-displacement income, while the company funded portion is reduced dollar-for-dollar by the State benefit collected by displaced employee.  

“Many of our clients see it as an opportunity to offset their healthcare plans by making use of government program that works in their favor rather than against them,” says Elizabeth Corley, a senior executive at Transition Services Inc., a major provider of SUB-Plan administration. “Over the past year the popularity (of SUB Plans) has really taken off. It’s a no-brainer when you see the savings available to the company.”

In Conclusion

Keeping a competitive recruiting and financial edge amidst the changing economic and political landscape will require innovation and flexibility. Corporate America is fast embracing the “what got you here won’t get you there” mentality and we’re likely to continue to see antiquated programs, like severance, being replaced with leaner, more efficient programs to counteract the Cadillac tax. If the Affordable Care Act is indeed here to stay, it’s our job as business leaders and thinkers to invent and implement sustainable solutions going forward.

When Employee Attrition is Inevitable

When Employee Attrition is Inevitable:

Studies predict that replacing a salaried employee costs 6 to 9 months’ pay on average. For a manager making $40,000 a year, that’s $20,000 - $30,000 in recruiting and training expenses. Other studies have predicted even higher costs for high-earning employees - as much as double their annual salary!

According to the Bureau of Labor Statistics, turnover is highest in industries such as trade and utilities construction, retail, customer service, hospitality and service – industries that are often plagued with volatile business cycles. Weather, retail cycles, manufacturing down-time, plant-retooling, and maintenance outages in these industries can often bring about a temporary shut-down, resulting in a temporary work stoppage and in many cases, pause of payroll processing.

Retaining a workforce can be challenging enough during regular operations, but when paychecks are routinely replaced with unemployment, a workforce starts becoming unsustainable – leaving the company to re-start operations on a slimmed-down workforce while simultaneously re-recruiting, re-interviewing and re-training.

The solution:

Transition Services Inc., offers a fully managed Retention Pay Program which helps prevent the loss of valued employees (Union or Non-Union) by protecting their income during temporary work stoppages.

Our solution to providing affordable employee retention uses a decades-old, IRS-approved structure, the Supplemental Unemployment Benefits Plan (SUB). Using this structure, employees may maintain their weekly income during down-time while the employer saves 30% - 40% compared to traditional programs. This is accomplished by the integration of State Unemployment and re-classing payments from wages to benefits, thereby saving employment taxes.

A SUB Plan bridges the gap between employee and company needs during downtimes. For organizations with existing retainer-pay programs, converting to a SUB Plan can free up significant dollars for other key benefits. Or, if you don’t have a current retainer program, imagine if you could guarantee resource repeatability for your company and your customers rather than losing resources during downtimes because a retention program was too expensive. Whichever category your organizations falls in, a SUB Plan has the potential to dramatically enhance your employment offering and deliver a competitive advantage.

What's the Point in Having Insurance?

A few years ago I decided it was time to trade in my four story walk-up in the East Village for something a little more stylish (and by stylish I mean something with an elevator and working AC.)

As you might guess for a newer building, there were a few extra conditions as part of the lease agreement. Besides needing several cosigners to satisfy the exorbitant Manhattan rental contingencies, the building required that I take out a $150,000 renter’s insurance policy to cover catastrophic events such as burglar intrusions, fire, flooding, etc. Thankfully none of these events took place and I enjoyed a peaceful year in my new place.

Skip ahead to the present – living in a new apartment and recently engaged. The only dark cloud in those happy first weeks of blissful wedding planning was the constant paranoia I experienced about dropping my new ring down the sink drain, knocking the stone loose at the gym, or leaving it at the nail salon. The solution – get good insurance on that sucker.

Doing my due diligence to find the proper policy, I decided the best solution would be to take out the familiar rental insurance policy and add a rider for the jewelry. Chatting with Kathy, my friendly insurance agent, I was informed that in addition to fires, floods and burglary, a renter’s insurance policy also covers things like accidental damage and accidental loss. This set off an alarm – during my aforementioned policy term I had “totaled” a brand new Macbook in a tragic water spill. The purchase of a second laptop in a three month period was painful to say the least. I asked Kathy what she thought of this.

 “Of course it would be covered! That’s what the accidental damage clause is for, did you not file a claim?”

No, Kathy, I did not know…

This was rather frustrating for me and it stayed with me a while after our conversation. I had essentially paid for insurance, and not used it; like totaling a car and paying for a new one out of pocket, or insisting to pay the whole bill at the doctor when insurance would cover the visit in full. I was so annoyed with the senselessness of the whole thing.

Which brings me to my next point – there’s a good chance that your company is doing a version of this on a regular basis. Are you starting to feel my frustration? 

All fifty states require employers to pay for Unemployment Insurance for their employees as part of payroll tax obligations, and unlike car insurance, making use of these benefits virtually never increases due to use, not to mention that most companies are already paying the maximum rates. Why is it then, that the most commonly used severance strategy is for a company to pay former employees their full wage during their unemployment - including the very tax that pays for the Unemployment Insurance that they are not using!

Do your business a favor and be informed about your rights to claims. Don’t fall prey to senseless spending like I did.

By integrating the benefits of state UI, a company can free up significant employee benefits dollars to reallocate where they are most needed. At a time when employee benefits dollars are already stretched, integrating State UI into your severance plan has the potential to dramatically enhance your employment offering and deliver a competitive advantage in the area of attracting and retaining talent.

To learn more about how to utilize this type of strategy, visit www.transitionservices.com

This Year's HR Challenge: Attract and Retain Talent... On a Stretched and Finite Budget

According to the Bureau of Labor Statistics Employment Projections, Millennials are expected to make up the majority of the workforce this year. It may be shocking then, to hear that a recent study by Aon Hewitt indicated that nearly one half of this vast generation expects to switch jobs in the next year, along with more than one third of the entire employee population.

The study did a thorough job of uncovering the motivators behind taking new employment. Although employee motivation and engagement has increasingly been correlated with things like better work/life balance and development opportunities, when asked what characteristic first attracted them to their employers, 52% of employees cited good pay and benefits. A flexible work environment came in at 35%, a far second.

Whether your organization’s benefits are up to snuff is likely up for some debate. Across the board when employees were asked whether their total rewards supported their organization’s ability to attract and retain employees, only half of respondents agreed, leaving much to be wanted in that area. Underlining the significance of this was the finding that employees who view their total rewards as competitive are 2.5 times more engaged than other employees.

It is not surprising then, that when employees were asked what qualities they would most like to see improved to increase their overall engagement or satisfaction, the top response was overwhelmingly good pay and benefits.

So then the question is: How do you improve compensation and benefits given that you have finite resources? Where do you find the incremental dollars to improve compensation and benefits packages? The answer could be right under your nose. Often times benefits plans and HR strategies go largely unexamined, wastefully leaving money on the table. Perhaps it is time to examine your existing programs and vendors and consider less traditional alternatives to employee benefits. Severance is a prime example. You might be surprised to discover that updating a severance program can still provide a generous benefit to terminated employees, yet free up significant dollar to put towards retention.

For insight and strategies to put more HR dollars back into employee benefits to maintain your organizations competitive edge, visit TSI on the web.

Aon Hewitt’s Inside the Employee Mindset study comes from a survey administered by The Futures Company online within the U.S. in August 2014. A diverse group of 2,539 employees working in companies with at least 1,000 people completed the comprehensive survey.

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Waiting for the Next Recession

According to the latest jobs report, the economy is on the up and up. Hiring is booming, competition is fierce and the future looks bright. We’ve made it out of the dark, are busy tackling the new challenges that come with growth, and are no longer plighted with recession-era problems. HR is consumed with enhancing benefits, retaining current employees, and competing for top talent to bring on board. As businesses bulk up on staff, memories of mass layoffs quickly fade, giving way to an optimistic future.

Lately, when I’ve spoken to organizations about updating their employee transition strategy, they ask whether it makes sense to wait until the next economic downturn to implement cost-saving changes. The answer is quite simply, no. For several reasons, but mainly that it is impossible to predict when that time will be, and once it is time to for action, it is entirely too late to implement an organization-wide program change.  The reality is that what goes up will always come back down, but there is no reliable way of knowing when or why it will happen. Roles may be condensed, business might decline, reorganizations may be necessary, and new technology could disrupt the status quo - even during times of general economic prosperity.

According to a Bloomberg report, Viacom, owner of the MTV cable TV networks and Comedy Central, is preparing for a large-scale layoff following declines in ratings and advertisement sales due to a significant loss of viewers to Internet media such as YouTube, Facebook and Hulu.

In the oil industry, falling commodity prices are affecting even the biggest players. Marathon Oil Corp. announced it would it cut its budget for a second time, to $3.5 billion this year, from their 2014 spending budget of about $5.9 billion, along with laying off about 10 percent of their workforce. Additionally, Apache Corp plans to cut about 5% of their 5,000 employees and ConocoPhillips told employees to expect a pay freeze and layoffs in the future.

These examples only begin to scratch the surface; many organizations will face challenges and downsizing unrelated to the economy at large. If your motivation behind updating your employee transition strategy is protection from future downturns, delaying implementation could be detrimental. The only time you have to prepare for tomorrow is today. To learn more about implementing cost-saving transition strategies, visit http://slidesha.re/1LIEOWf

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An Overview of SUB Pay

Supplemental Unemployment Benefits (SUB) by TSI  

Supplemental Unemployment Benefits (SUB) Plans are quickly gaining popularity across industries as a less costly alternative to severance. The IRS approved Plan structure works to simultaneously maintain the income of displaced employees while also generating significant savings for the organization compared to traditional severance, typically 30-45%. This presentation gives a general overview of how a SUB Plan is structured and administered, and demonstrates two examples of real savings achieved by organizations that switched from traditional severance to SUB.

Employee Engagement and Offboarding

With an abundance of jobs and a shortage of qualified professionals, high churn this year will be inevitable. In fact, according to Robert Half UK, 80% of business executives are concerned about losing their top performers to other job opportunities in 2015.

What is the solution to this?... Employee Engagement! The fix-all solution to retention, widely encouraged by HR leaders and consultants. But what about when employees still decide to leave? This is typically when we politely say goodbye and stop wasting our time and resources on a “lost cause.”

While it makes sense to direct employee engagement efforts to current employees, research give us deeper insight. A recent study by the Aberdeen Group concluded that organizations with a formal approach to off-boarding were more likely to improve both retention (71% vs 57%) and engagement (44% vs. 33%) compared to organizations with no formal process for off-boarding employees.  

Saying goodbye properly through successful off-boarding can have a real impact on organizational performance and workforce engagement and therefore should be treated as a critical component of the employee lifecycle. Currently only 29% of organizations have a formal off-boarding process in place, implying a large-scale opportunity for improvement across the board.

For more tips on employee engagement, visit Aberdeen's website at http://www.aberdeen.com/research/8494/ai-offboarding-talent-management/content.aspx

Juno's Lesson on Being Prepared

If we learned anything from our recent scare with Juno, it’s that it is always better to be prepared. Last Monday night in New York City, as the blizzard was predicted to rip through my neighborhood, I slept soundly, confident that preparations were in place for whatever might happen. My stockpile was supplied with gallon jugs of water and enough granola bars to last a month, and the mayor had put every precaution in place to make sure people were safe. Waking up in my warm apartment on Tuesday to find a layer of shimmering white powder on the surrounding buildings – and no major catastrophe to speak of – quite literally looked like icing on a cake.

That day on the news, officials were challenged on whether they had gone overboard with preparations. In response to the criticism, Mayor de Blasio asked, "Would you rather be ahead of the action or behind? Would you rather be prepared or unprepared? Would you rather be safe or unsafe? To me it was a no-brainer: we had to take precautions to keep people safe."

 Putting preparations in place cost the city of New York $200M, but what if preparations had not been made, and the blizzard did not so narrowly miss? What would it cost in dollars, time, and human lives if we did not bring in the proper equipment, did not get cars off the street, and did not have work crews ready to assist? Is a 50 mile margin worth the gamble?

Working in the business of employee transition, I couldn’t help but compare this scenario to the economy and HR planning. For events like natural disasters, there is no shortage of contingency plans, which are undoubtedly updated and reexamined regularly to ensure absolute effectiveness. It goes without saying that being prepared for the next storm is just as important as it was to be prepared for the last one.

In contrast, organizations have the tendency to focus on the problems that are directly in front of them and deal with disasters as they happen – especially when it comes to downsizing. As we surface from the recent financial crisis, it seems the last thing on our minds is preparing for the next one. Maybe your organization made it through the crisis without laying people off; maybe you were laid off yourself. Regardless of what happened, there is no way to know when the next crisis may come, when new technology will challenge your business, or when downsizing might really be the best option to increase your efficiency. 

Much of the time, companies resist addressing their layoff and off-boarding strategies until they are forced to take action. Having put off creating an efficient strategy, executives find themselves backed into a corner, forced to follow an outdated severance policy during a time in which this is tough to afford.

 Consider taking the time now to put contingency plans in place – before the state of emergency occurs. Become educated on what your options are, and implement strategies that align with your business needs. Modernize your severance policy and your offboarding processes. It’s a smaller effort to development a plan. It’s a MUCH larger effort to respond to a crisis as it is happening.

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The HR Role in Flux

According to Deloitte’s most recent Global Human Capital Trends Report, 77% of business executives believe that re-skilling the HR function is a top global issue. As technology and automation advance and outsourcing becomes more available, the traditional HR function of “people administration” is quickly becoming obsolete. To keep up with today’s business world, it is essential that HR embraces a strong focus on “people performance” and aligns its initiatives with business leaders and issues.

Making that transition sounds easy enough in theory, but it got us thinking: what would that actually look like? How might your HR team operate as a business unit aligned with your organization’s overall goals? How would your focus change?

Following is a list of questions that may give you insight into how you can implement this new perspective:

• What are my organization’s 2015 objectives and how can HR support and contribute to the business initiatives?
• Where has our HR organization been accepting the status quo? In what areas are we stagnant?
• When was the last time we evaluated our vendors? Are they the most efficient and effective?
• Are we using current technology? 
• Where are we spending unnecessarily?
• How could our department contribute to the company’s bottom line?
• What are we doing to ensure we have a high performance team and culture?

United States vs. Quality Stores, Inc.

On March 25, 2014, the Supreme Court of the United States ruled in United States v. Quality Stores, Inc., No. 12-1408, that severance payments, which were made pursuant to plans that did not tie payments to receipt of state unemployment benefits, are taxable under the Federal Insurance Contributions Act (FICA) when made to employees whose employment is involuntarily terminated. The Court reasoned that the definition of wages for FICA purposes encompasses severance payments and that the severance at issue in this case was not exempt from FICA tax. 

Background

Quality Stores, Inc., a specialty retailer, discharged a large number of employees in 2001 during bankruptcy proceedings and paid these employees severance payments according to a company severance plan.  Quality Stores reported the severance payments as wages on W–2 tax forms, paid any required FICA taxes, and also withheld from employees’ severance payments the required FICA taxes. The company later asked those former employees to allow it to file FICA tax refund claims for them.  Quality Stores filed a FICA-tax refund claim on behalf of the former employees and itself, which the Internal Revenue Service (IRS) neither allowed nor denied, and then initiated proceedings in the Bankruptcy Court seeking a refund of the amount of taxes paid.  The Court granted judgment in the company’s favor.  On appeal, both the Federal District Court and the Sixth Circuit Court of Appeals ruled in favor of Quality Stores.  The Sixth Circuit held that the severance payments were not subject to FICA taxes because they qualified as supplemental unemployment benefits compensation (SUB) as defined by Internal Revenue Code (IRC) section 3402(o)(2)(A).  The Supreme Court agreed to hear the case to decide whether severance payments made to involuntarily-terminated employees are FICA-taxable.

Considerations

In its March 25 ruling, the Supreme Court noted that FICA’s definition of wages includes the severance payments Quality Stores made to its employees.  Under both FICA’s definition of “wages” and the plain meaning of the terms, severance payments are wages.  Further, the Court noted that the fact that FICA exempts some termination-related payments from the definition of wages shows that the severance payments at issue were purposely not exempted.

Quality Stores’ argument and the Sixth Circuit’s decision were incorrect, the Supreme Court ruled, in using IRC section 3402(o) to conclude that severance payments are not included in the definition of wages for the purposes of income tax withholding and thus, are not included in the definition of wages for FICA taxation purposes.  Because IRC section 3402(o) covers more than just severance payments that were excluded from income-tax withholding, the Sixth Circuit’s and Quality Stores’ broad interpretation of the section failed.  The Court therefore concluded that IRC section 3402(o) “does not narrow the term ‘wages’ under FICA to exempt all severance payments” from FICA tax.

The Court also noted that the severance payments at issue in the case were not linked to the receipt of state unemployment benefits.  Based on these considerations, the Court reversed the decision of the Sixth Circuit and held that the severance payments which had been made to involuntarily discharged employees, varied based on job grade and seniority, and had not been linked to the receipt of state unemployment benefits, constituted taxable wages.

Impact on Employers

Employers across the United States utilizing a SUB plan linking separation benefit pay to the receipt of state unemployment benefits, in accordance with IRS SUB Plan guidelines, will be unaffected by this ruling, as the Supreme Court left the IRS rulings intact.  Separation pay made under a SUB plan to involuntarily separated employees that is: 1) not paid in a lump sum; and 2) linked to the receipt of state unemployment benefits, remains FICA-exempt.

This month, five years ago, began the greatest financial crisis in modern times.  Events following the September 15 collapse of the Lehman Brothers investment bank, including massive and country-wide layoffs and a housing crisis that essentially destroyed the U.S. market, have left many questioning the strength of our economy and wondering if the labor market will ever recover.

The Labor Department’s most recent jobs report suggests that yes, recovery is in the works, although at a staggeringly slow pace.  The September 6 reported decrease in the unemployment rate to its current 7.3% should mean that the economy must be getting better.  However, it has been suggested that decline is due not to a growth in the number of people working, but rather to a decrease in the size of the labor force.  In other words, the number of people working, those comprising the labor force, continues to shrink.  In fact, the number of people working is now at a 25-year low.  And as the 6.1 million unemployed workers continue to file for unemployment, it is interesting to consider what might actually be the most telling measure of the number of unemployed throughout the country.

Regardless of that measure, there are fewer Americans working.  This low  is due in part to the demographics of our workers…the aging U.S. population means more workers than in past years are either retiring, or choosing to no longer seek work after becoming unemployed.  It is important to understand, however, that this 25-year low is also due in part to both discouraged workers abandoning the job search, and to individuals choosing to be selective about returning to work.

Unemployed workers today are savvier than those of times past.  Although past trends indicate companies are less willing to hire a long-term unemployed individual over another with a shorter unemployment duration [link to article here], the modern unemployed worker is reportedly holding off for a job offer that meets his or her requirements.  While this is seemingly counter-intuitive at a time of high unemployment, with large severance packages offered to the unemployed, and relatively long State Unemployment award grants, many laid-off workers have the ability to be selective.  To recruit and retain the highest caliber talent, might it be time for employers to improve their benefit offerings to “fit the need” of the selective worker?

Recent survey research indicates the key Human Resource issues upcoming for 2014 include retention and recruitment.  With the changing health benefits landscape and the ongoing recession, two key issues for individuals going back to work are quality health insurance and excellent separation benefits; both can be structured in a way that strengthens recruitment efforts.  While not government-mandated, separation benefits are more often than not awarded to employees upon an involuntary termination.  Many organizations have recently reexamined their separation benefit offerings in the wake of huge recession spending.  And a key theme is central to that examination…how to save money and still provide financial support to a departing worker.

A SUB Plan gives an organization the ability to offer competitive separation benefits to employees without spending a fortune.  Government benefits awarded (in most cases) to laid-off workers, integrated with monetary separation benefits provided by a company, allow a SUB Plan to significantly reduce the cost of a layoff for a company in distress.  The SUB Plan vehicle can allow a company to offer, for example, twelve weeks of separation benefits rather than eight, or eight weeks of benefit instead of six.  Having a SUB Plan in place can also allow a company to strategically implement other attractive employee benefits, such as a more comprehensive health insurance package.

Workers, even in a tough employment market, have a leg up on hiring organizations.  It is necessary now for organizations to be not only competitive within the industry, but also competitive within the labor market.  Employee benefits are often a deciding factor in an individual’s choice to return to work or stay unemployed.  Employers have the ability to do this, it is only a matter of implementing the right tools and utilizing the right resources to get the best people while saving significant long-term costs.

Back to Basics

Recent headlines announce such things as, “Employers Adjust Health Benefit Strategies in Reform’s Wake,” and, “Employers Get Leeway on Health Incentives,” as the benefits landscape continues to change to meet the country’s ever-changing employment regulations.  As the benefits landscape rapidly changes, so does the unemployment situation in the United States, with nearly 75% of its metropolitan areas reporting a continuing decrease in jobless rates.  With more workers returning to the workplace, lasting financial security has become of greater concern to many, as the recession has taken a significant financial toll on the millions of workers displaced in the past several years.

Individuals returning to work and the organizations hiring them face several challenges over the next several years.  Recent survey data indicates that retaining and awarding quality employees presents the biggest challenge moving forward out of the recession.  At the same time, employees returning to work seek benefits beyond just reasonable salaries; employees want flexibility, career development, and financial security, especially with the ever-present threat of a double-dip recession.  Combined with the evolution of health benefit strategies as the federal government requires, one might ask, isn’t it time to reexamine employment benefits as a whole, and take a step back to basics?

What is the point of an employment benefit?  Theoretically, a benefit meets both the goals of an employer and those of an employee.  Most employment benefits are offered to improve employee engagement and retention throughout an organization, while supporting, in some way, the financial security of an employee.  Among others, employee benefits often include health insurance, retirement benefits, paid vacation leave, and separation benefits, all variable between organizations and between employees within the same organization.  A quick look at these four specific types of benefits shows these benefits are becoming more employee-driven and more employee-centric.  Back to basics…what does the employee need? 

Healthcare is currently under high scrutiny from its many stakeholders, with increasing costs and changing requirements.  Wellness programs are more popular as employee health behavior is a consideration for many health insurance costs.  Retirement benefits are an ever-evolving benefit structure, as more and more organizations shift from offering pensions to differently structured and employee-financed 401(k) retirement plans.  Vacation leave is an increasingly important benefit as workers seek a good work/life balance in a ever more demanding employment environment.  Separation benefits?  Rarely discussed at the time of hire, yet always expected at the time of departure.  It is the rare individual who expects to remain employed with one company for life.  As re-structuring has become part of normal business operations, why not have a separation benefits component to an overall benefits plan?  One that balances the needs of the employer and the employees, communicated as clearly as any other benefit, and updated as other basic benefits and organizational goals grow and change? 

Going back to basics means reexamining the fundamental point of a benefit.  Separation benefits were fundamentally designed to offer financial support at the time of involuntary separation to maintain an income stream during the time of unemployment.  Separation benefits now are so far beyond basic, often providing months of pay to individuals with no regard for that individual's needs.  Separation benefits costing employers millions without clarity of purpose or result for the company.  Separation benefits have veered so far away from the basic, and from the point of a benefit, that it seems time to reexamine the benefit itself.  Step back and form the benefit around the employee and the employer, meeting goals of both in a modern and changing world.

Corporate Tax Reductions Revisited

Embroiled in the 2012 election is a battle over the economy.  Whomever of the presidential candidates wins office will be faced with unemployment numbers exceeding 12,500,000, with 40% of those individuals having been unemployed for greater than 27 weeks.  Polls show the economy being one of the most important issues on deck for voters, with unemployment and jobs creation clearly weighing heavily on the minds of Americans.  As the candidates debate the funding of unemployment benefits and how to get people back to work, companies continue to pay tax dollars to every state where they employ workers to fund state unemployment benefits.  And although the jobless rate did slightly decrease in August, the Bureau of Labor Statistics continually reports very large numbers of mass layoff actions, giving evidence that companies continue to let employees go.  Based on the reported numbers of initial filings for Unemployment Benefits following these layoffs, these companies presumably direct their former employees to seek support from State Unemployment agencies.

Also on the docket is saving corporations from paying taxes.  Slash corporate taxes, give corporations tax breaks for hiring people out of work, revamp the funding of Unemployment Benefits...just a few of the suggestions put out there.  What about, however, suggesting that corporations stop paying the same tax twice for the same person.  SUI and FUTA taxes, paid respectively to the state and federal governments by a company for each of its employees, are the taxes that fund Unemployment Benefits.  Theoretically, these taxes will act to fund Unemployment Benefits paid to a person if that company eliminates their job and lays them off.  If a company terminates an employee and pays severance to that person, SUI and FUTA are also charged by state and federal governments on all severance monies paid.

While several suggestions have been put forth arguing that the federal government stop funding unemployment benefits, what is not addressed in this argument is that states fund the initial 26 weeks of an individual's Unemployment Benefit.  States fund these initial weeks with taxes collected from the corporation who once employed the individual now collecting the benefits.  Federal funding of Unemployment Benefits comes into play when states exhibit high rates of unemployment.  These Emergency Unemployment Compensation (EUC) benefits can last up to 99 weeks in some cases.  While EUC is 100% federally funded, FUTA taxes paid by corporations to the federal government fund these emergency benefits used only in times of high unemployment.   

The Internal Revenue Service, a branch of the federal government, put into place 60 years ago a program to help organizations save money on severance through tax breaks.  This program, called a Supplemental Unemployment Benefits program, allows organizations to save money in SUI and FUTA taxes by paying separation benefits to an employee under an alternative tax structure.  When paying separation benefits under a Supplemental Unemployment Benefits program, an employee takes advantage, in the form of either State or EUC Unemployment Benefits, of funds paid to the government as SUI and FUTA, and the company can first deduct that amount of money from the separation benefits paid to employees.  Second, the former employer does not have to pay SUI and FUTA taxes on separation benefits, as it would by law on a severance payment.  By doing this, a company pays taxes for an employee’s separation benefits one time, when that person was employed, in the form of one-time taxes.  Choosing to pay severance effectively forces an employer to pay these taxes twice, as well as increasing an employer’s overall financial burden to a terminated employee.

Arguably, what should be petitioned for is a revamping of separation benefits programming in all corporations.  Perhaps call it regulation, or perhaps merely revisiting what is too often considered a “golden parachute” to well-paid employees  But at the same time, recognize that it provides a corporate tax break.  A bipartisan solution that doesn't require reinventing the wheel.

Evolving Benefits and the Lack Thereof

A new report by CNN discusses the shift in company-paid employee benefits over the past five years, as employees have been confronted with the growing need to take on the cost of some portion of their own benefits.  Medical insurance has been cited as the most commonly and most often updated benefit, as has a reduced or, in some cases, completely eliminated, 401(K) employer match.  Such changes have been forced upon employers in the face of tough economic times, and some forecasts indicate that more than 50% of large organizations may drop health care coverage altogether in the next five years if economic conditions and medical costs do not improve.  Considering the new IRS ruling increasing the personal out-of-pocket contribution limit for Health Savings Accounts for 2013, this forecast may very well be accurate.

Notwithstanding, benefits continue to cost organizations huge amounts of money, and managing these in a cost-demanding environment is a substantial investment in itself.  Using a recent announcement by Hewlett Packard that the organization's restructuring efforts will cost 27,000 employees their jobs, consider the team responsible for that layoff.  This team will presumably include many human resource professionals, employment counsel, payroll representation, and a dedicated group of individuals tasked with designing and managing the ongoing benefits for this group of 27,000.  Further, as noted in an opinion piece about the HP layoff, those HP-ers who survive the massive force reduction will be faced with increasing job demands and greater overtime requirements.  

Severance benefits, while not as drastically affected over the past five years as have been medical benefits, are often on the chopping block as organizations strive to reduce costs.  However, because severance benefits are too often viewed as an entitlement rather than a benefit, few companies are swift to update severance benefit plans even in the times of struggle.  Growing healthcare costs have forced the burden of the costs partially onto the beneficiary.  Why has the business world been so reluctant to update a benefit so costly and outdated?

Modernized severance plans don't have to cost employees a dime, unlike modern medical benefit plans.  Modern severance plans can, however, restructure the IRS tax burden of a separation benefit and be less costly to both an organization and an individual.  Modern severance plans can also integrate sources of funding such as state and federal unemployment benefits provided to involuntarily-separated individuals, allowing a company to perhaps save costs and terminate fewer employees, or perhaps even enhance a separation benefit awarded to a terminated individual to provide financial support for a longer amount of time.  Further, modern severance plans can be administered by an outside party, eliminating the need for a (costly) internal "layoff team" and leaving the administration and legal regulation of the plan to an outside vendor.

Thinking again about the HP restructure, what could potentially amount to a billion-dollar total severance payout could be reduced exponentially by simply adopting a modern and cost-effective separation benefits plan.  And just a though, perhaps severance benefit savings may allow those leftover employees, still with greater workloads and more overtime, to have reduced out-of-pocket healthcare costs.  Benefits that are actually beneficial!

How to Make Severance Equitable

The 2012 election has, for a good number of reasons, many economic undertones. Tax cuts, welfare spending, healthcare, unemployment benefits...all are on the table. Should all people throughout the country have rights to all benefits and services, such as healthcare and ongoing unemployment support, due to the mere virtue of living in the United States? Some voters believe every person should be given unrestricted access to all benefits. Others say only the specifically qualified should have rights to certain of these. An unanswerable question, as dissatisfaction is inevitable under any solution.

What about a benefit, however, whose regulations governing its availability to people throughout the country vary drastically between states? When a person living in California is allowed to collect a benefit yet an identical person living one mile east in Nevada cannot? Or two identical people in New York and its neighboring Massachusetts? Such is the case with Unemployment Benefits.

Massachusetts and Nevada, as is the case in all states, allow persons involuntarily separated from their jobs to collect Unemployment Benefits. As is often the case in an involuntary termination, separated persons receive severance benefits of some sort. In Massachusetts and Nevada, a person may not collect State Unemployment Benefits at the same time as any company-paid severance benefits. Assuming a severance benefit is paid as a lump sum, in Massachusetts, a separated individual may not collect State Unemployment during the week in which this lump sum is paid. In Nevada, the individual may not collect State Unemployment for the entire period of time for which the severance benefit is designed to support the newly unemployed person. If an individual is given a lump-sum payment equal to eight weeks of pay, this means a Nevada resident may not collect unemployment for the first eight weeks of unemployment.

Take New York and California, however. Both of these states allow individuals to collect company-paid severance and State Unemployment Benefits at the same time. For an organization who has employees in multiple states, this creates an inequity when terminated people receive identical benefits yet are located in different states, and some may collect what often amounts to a few hundred more dollars each week than others.

One way to solve this problem is the institution of a Supplemental Unemployment Benefit (SUB) Plan, a plan designed to support unemployed persons during their period of unemployment. Under such a plan, severance benefits become FICA non-taxable, and covered individuals in all states are required to file for and be eligible for State Unemployment Benefits to be collected at the same time as company-paid separation benefits. An IRS-approved benefits structure, a SUB Plan allows employers to provide equitable access to benefits to all employees while saving significant amounts of money.

Prominent economists are again predicting a double-dip recession. If this does in fact occur, large organizations will be forced to perform even more layoffs and again spend money on severance. In ongoing layoffs, organizations often concern themselves with employee backlash in the face of a change to the severance package. However, those with employees is multiple states should begin to realize the imbalance that exists between states, allowing some former employees to essentially take home more money.

Unemployment Law and a SUB Plan

According to CNN, "Jobless Americans have collected $434 billion in unemployment benefits over the past four years." Furthermore, 17.6 million Americans have reportedly utilized some facet of the Unemployment Benefit system since 2008.

Separation benefits are one form of company-provided benefits not regulated by U.S. government. However, could, or should, for that matter, a SUB [Supplemental Unemployment Benefit] Plan become an employment law? Think of how beneficial having such a system in place would be to our current economy. Two issues currently on the political financial table are either continuing or ending income tax breaks and either continuing or ending federal unemployment benefit extensions. A SUB Plan....income tax savings? Check. Efficient use of unemployment benefits? Check. While providing unemployed Americans with money to support their periods of unemployment? Seems an excellent idea.

Another hotspot right now is the myriad of grievances presented by the many "Occupy Wall Street" movements, including are recent corporate bailouts by the government followed by ongoing, seemingly endless layoffs, growing the proverbial 99%.

Consider the 434 billion dollars distributed by both State of Federal governments to those people who lost jobs during the Great Recession. Logically, under a SUB Plan structure, every dollar of that 434 billion paid to the unemployed would have been spent by the governments regardless. However, that 434 billion dollars would at the same time have been saved by whichever organizations were laying off those people collecting these exorbitant amounts of money. Because a SUB Plan allows a company to offset weekly Unemployment benefits from the weekly separation benefit payments, allowing terminated employees to receive amounts equal to the pre-displaced wage during the unemployment period, there is the probability that this $434 billion would have been saved by companies in this country over the past four years and the economy would be in a far better place and the unemployment rate far lower.

Stimulating the economy requires spending by the people in that economy. This includes getting some of the unemployed back to work. Hiring people requires a company have money to spend on headcount. Imagine if more companies in this country had utilized a SUB Plan. Funds delivered in the form of unemployment benefits would not only go to the people who needed them, but also save money for the companies doing the layoffs. Logically this would provide a company a greater cash flow, more money, fewer required layoffs, and faster recovery.

Putting Workers Back on The Job

The new jobs bill.

Preceding the announcement by Wall Street of the impending layoffs of nearly 50,000 workers, the jobs bill seems to have come at just the right time. The unemployment rate in the United States continues to hover between nine and ten percent. Coupled with the nonexistent job growth in August, this indicates the urgency of the new jobs initiative. Our stalled economy will continue to force companies into more headcount reductions. And consequentially into spending huge sums on severance packages - a mistake from which too many organizations, including the Wall Street firms again reducing headcounts, did not learn after significant initial layoffs in 2008 and 2009.

For fear of employee backlash, Human Resource professionals in many major corporations are loathe to revisit, much less modify, severance plans despite significant overspending when separating employees. Although there exist no federal mandates in the United States requiring severance be given to departing employees, companies feel obligated to hand out money to employees whose jobs disappear. The role of severance, once meant to bridge the financial gap between job loss and reemployment, is now to appease potentially angry people by giving them money.

Getting back to basics. Putting workers back on the job. Requiring accountability not only from workers but also from the unemployed seeking reemployment. Reversing the idea that severance is an entitlement and reminding human resource professionals that severance is a benefit, something that should change and evolve with an organization's evolving culture. Our constantly changing economic and employment landscape demand organizations examine what it means to provide a benefit to an employee. Employee backlash over a changed separation benefits package rarely occurs because it is not the law that an employer give out severance awards. Employers must understand that failure to examine and modify separation benefit packages does little to help support the goal of cost cutting at a time when it matters the most.

The jobs bill is only the first step in fixing how businesses spend money on employees. Putting in place benefits programs that streamline spending while supporting the goals of the employers and the employee comes next. Utilizing funding sources from the government to support separation benefit payments and tailoring each benefit to the employee’s needs while out of work. Alternate separation benefits plans are designed to allow companies to get this done. Now if Congress can agree for five minutes and pass the jobs bill, businesses may well be on the way to recovery.

Debt Ceiling: No Strings Attached?

The ongoing debt ceiling debates shed light on our country’s severely overstretched Unemployment Benefits programs. The number of initial unemployment claims filed weekly continues to rise, proving payrolls are headed in the opposite way than economists predict and hope. Where is this so-called economic recovery?

Raising the debt ceiling will most certainly come with strings attached. If those strings don’t include raising taxes, it’s highly probable one of those strings lists a handful of spending cuts to Federal programs such as education or health programs, another targeting loans to businesses around the country. With American businesses already offshoring the country's jobs to nations where labor is cheap, if they are forced to operate on even less cash, the effect on the unemployment rate may be, to quote Federal Reserve Chairman Ben Bernanke, “catastrophic.”

The unemployment rate has been hovering slightly above or below 9% for months now. Nearly half of the states in the country have been forced to borrow money from the Federal Government to continue to pay their unemployment assistance “payrolls.” With the worsening financial crisis, companies must either stop the layoffs, or incent laid-off workers to seek new employment quickly rather than expecting the government to bankroll their lifestyles. With more Americans working, fewer depend on State Unemployment payrolls and more dollars are paid in income taxes to the Fed, contributing to the government’s liquidity.

Keeping Americans working is simply a matter of spending less on certain programs to save money. If a company is forced to displace five workers, if that company funds severance for those five workers using available State Unemployment Benefits, that company may save enough money to maintain the jobs of two other workers on the chopping block. On a grander scale, as we see now that most major corporations around the country have and are once again facing layoffs, using such a program could equal significant dollars saved by States and taken in by the Feds. More importantly, fewer Americans out of work.

Once the government reaches a decision on the debt ceiling, getting Americans back to work should be its primary concentration. There is no way to predict how the strings attached to the debt ceiling decision will affect nationwide corporations. Until the government can come to a spending and revenue decision (and to think that if the NFL can do it, so might our country’s elected officials…), organizations must take a role in controlling the unemployment rate to support the country and avoid further “catastrophe.”

A More Efficient Separation Benefit

May’s jobs report indicates employers are still not looking to hire. Dire news for an economy hoped to be on its way toward recovery. The May BLS paper also reports there are 4.6 unemployed workers for every job opening in the country. That’s a pretty radical number. And it means only about 25% of the unemployed persons in the country can even get jobs in the current market. Layoffs are reportedly slowing, but is this because the workforce been so trimmed that there are not many people left to lay off? With such a microscopic number of jobs available to the unemployed public, does the BLS think a slowing number of layoffs is a good measure?

In an excruciatingly slow job market such as ours today, a laid off worker faces several challenges. In addition to the simple lack of open jobs and the endless black hole of the internet job search, a laid off worker has financial challenges to anticipate. Those who are lucky get laid off with a generous severance package and job search support. The unlucky and sometimes more in need, however, are those laid off with scant or no separation benefits. Workers in lower job tiers whose only guaranteed income comes in the form of a few weeks of severance are forced to support themselves using these meager amounts during what is, on average, a long period of unemployment. While State Unemployment Benefits do typically last a considerable while longer than severance funds, State UI is hardly a replacement for a full weekly salary.

Consider a terminated employee given eight weeks of severance located in a state that does not allow this employee to collect severance and State Unemployment Benefits at the same time. This employee exhausts his eight weeks of severance and while he remains unemployed and continues to look for a job, he will apply for and collect State Unemployment, an amount usually equal to a bit more than half of his former weekly wage, for several more weeks until he becomes reemployed.

Consider another terminated employee in the same state, this employee terminated from a company who pays Separation Benefits through a SUB Plan rather than as severance wages. Because this company utilizes a SUB Plan and integrates State UI Benefits into its separation benefit, the company can save upwards of 25% of its benefit costs. As is often seen, this company may take advantage of these savings to initially offer the employee some additional weeks of benefit. While these additional weeks of might not be enough to carry this particular employee through the entire period of unemployment, it could be a full month’s worth of living expenses, mortgage, gasoline and car insurance. For those employees with less tenure or seniority whose benefits are typically smaller numbers of weeks than high-tenured employees, these extra weeks could become a lifeline.

The uncertainties related to unemployment in a job market where only 25% of job searchers can be successful are many. Paying a separation benefit using a SUB Plan vehicle lessens those uncertainties by providing a few more weeks of income, at the same or even reduced cost to the employer, as a shorter severance benefit. The staggering unemployment numbers leave it to the imagination to comprehend how a huge chunk of our population must be feeling without income. A more efficient SUB Plan can ease these uncertainties for those with lesser incomes and support the transition through the unemployment period with more weeks of benefit at no extra employer cost.

$72,600,000

The release of the Bureau of Labor Statistics' monthly Job report on Friday did little to ease the minds of the Unemployed, as the growth of the Unemployment rate to 9% served as a reminder that the economy has a long way to go before it's healthy again.

One of the more interesting statistics in a seemingly contradictory report is the growth in the number of short-term unemployed. Those reporting being unemployed in April for between one and five weeks grew by 242,0000. Assuming each of these 242,000 unemployed persons collected State Unemployment Benefits for each of these five weeks, 1,210,000 State Unemployment Benefit payments were made for the period of time discussed in this report by the BLS.

Companies looking to save money by performing force reductions are likely successful in the short-term. With productivity and employee morale often decreasing in parallel during large force reductions, one might wonder if there is a better approach to achieving immediate cost savings?

For argument's sake, assume the average State Unemployment Payment is $300 per week, about $1500 for an individual over the course of five weeks of unemployment. In April, 242,000 people collectively collected $72,600,000. Presumably more, as these people were laid off and, as is typical, collected severance.

72 million dollars. 72 million dollars of money freely available for companies to integrate into their separation benefit programs. 72 millions dollars companies could have used as an offset to the traditional severance awards. If businesses in the United States had paid separation benefits through a SUB Plan vehicle, in the first five weeks of the unemployment periods of the 242,000 people reported about in April, they could have saved 72 million dollars.

The use of a SUB Plan allows immediate cost savings. As our economy recovers, saving money is what companies need to do. Implementation of a SUB Plan program to save such vast amounts of money is the simple answer.