IRS Guidance on Employer Health Care for Children under Age 27

Friday, April 30, 2010

On April 27, 2010, in a 12 page notice, the IRS released employer guidance (IRS Notice 2010-38) on taxation of employer-provided health care for employee’s children under age 27 as provided for under The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, (Public Law No. 111-149). Furthermore, in addition to changing the various tax rules, The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act mandates health care plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described in IRS Notice 2010-38 applies to that extended coverage.

Effective March 30, 2010 employers with IRS § 125 cafeteria plans may now generally cover children under age 27 using pre-tax contributions to pay for this benefit. Nevertheless, employers with IRS § 125 cafeteria plans will need to amend those plans within the required time periods as permitted under IRS Code and ERISA, but no later than December, 31, 2010. IRS § 125 cafeteria plans includes cafeteria plans, Flexible Spending Arrangements (FSA), and Health Reimbursement Arrangements (HRA).

Expansion of coverage to children under age 27 applies to active and retiree health care plans, Voluntary Employee Benefit Associations (VEBA), as well as to self-employed taxpayers who may otherwise qualify for a self-employed health care insurance deduction under their Federal income tax.

Current Treasury Regulations do not permit IRS § 125 plan participants from making mid-year election changes expect under certain and limited circumstances. However, the IRS plans to amend retroactively current regulations to March 30, 2010, allowing for changes in status events affecting children under age 27.

The release further clarifies that for purposes of FICA, FUTA, RRTA, and income tax withholding treatment, income associated with IRS § 125 plans for children under age 27 is excludable from Federal taxation. However, employers should consult with their tax advisors and/or attorneys on issues of local and/or state taxation. The IRS has not issued any age limit, residency, support, or other test for these purposes other than the employee’s child must be under age 27 and the individual must meet the IRS definition of a legal child of the employee. Generally, this includes natural born children of the employee, adopted children, stepchildren, foster children, and children for whom the employee has court ordered and legal custody.

Employers should consider communicating with current employees as soon as it is administratively feasible in an effort to streamline the enrollment process through their websites or outsourced benefit vendors or plan carriers. Such communications should include documentation requirements including, birth certificates, adoption papers, and court orders. Since coverage is effective March 30, 2010, employers will need to consult with their carriers on retroactive enrollment options as well as retroactive payroll deductions if changes in premium amounts result. Employee new hire communications materials, handbooks, benefits websites, and Summary Plan Descriptions will require updating. Employers should consult with their legal advisors on issues related to plan amendments, Summary Plan Descriptions, Summary Material Modifications, and related plan compliance issues.

Recessionary Impact on Total Rewards

Thursday, April 29, 2010

Many organizations are being cautious about reverting to pre-recession total rewards practices.

In a report covering 193 organizations compiled by Buck Consultants titled, “Retirement Plan Changes in a Period of Economic Uncertainty”, three quarters of respondents with defined benefit and over half of survey participants with defined contribution plans are uncertain if plan recessionary changes will be reversed. Commonly reported changes included freezing defined benefit participants' benefits at 2009 levels and reducing employer contributions to defined contribution plans. (https://www.bucksurveys.com/BuckSurveys/)

A biannual national survey of 496 U.S. CFOs and senior comptrollers conducted from March 22 through April 5, 2009, by Grant Thornton LLP found that over half of the survey’s respondents plan no change in salary levels, while almost one third plan decease and only 15% plan to increase salaries over the next six months.

In a related survey, the “6th annual Retirement Plan Survey”, by Grant Thornton LLP, Drinker Biddle & Reath LLP, and Plan Sponsor Advisors, one fourth of survey participants reported reduced contributions or elimination of the employer’s defined contribution plan match to reduce costs. A full half are uncertain if they will return to prior contribution levels in 2010 and one-third plan to remain at the lowered levels.  (http://www.grantthornton.com/)

A Michigan State University’s report on 2009-2010 college graduate hiring practices found a decline of 40 percent within the last 12 months. The survey of more than 2,500 companies indicated that new hires are at their lowest level in decades. One bright spot is smaller companies under 500 employees are expected to increase college graduate hires 15 percent in the coming year. Regionally, the East Coast continues to experience job reductions. The Southwest from Texas west to California and northward along the West Coast is reporting an uptick in college graduate hiring, while the college job market is down in the mid-section of the country. (http://news.msu.edu/story/7116/)

The National Association for Business Economics (NABE) January Industry Survey reported that job reductions continue to decline, but slowly. A quarter of organizations reported cut-backs compared to 31% in the October 2009 survey, while those firms planning to add employees in the first half of 2010 rose to 29% from a prior 24%. William Strauss, at the Federal Reserve Bank of Chicago was quoted as saying, "NABE's January 2010 Industry Survey provides new evidence that the U.S. recovery from the Great Recession continues, albeit at a slow pace,". (http://www.nabe.com/publib/indsum.html)

With a slow and possibly prolonged recovery underway, it is expected that downward pressure on total rewards will continue. Exceptions can be expected in select and isolated regions, industries, and occupations as the recovery progresses. However, one possible outcome of the current downturn-recovery cycle is that a “jobless recovery” could occur, primarily in mid level white collar and professional jobs. This outcome would further decrease any demand for a return to pre-recessionary salary and benefit levels.

(http://www.frbsf.org/publications/economics/letter/2009/el2009-18.html)

Rewarding Star Performers at the Expense of Others

Friday, April 29, 2011

It is very difficult to make the argument that organizations should NOT pay for performance and with almost microscopic merit budgets, only pay the absolute top performers. For many years as a compensation analyst, planner, and manager it often fell to me to construct a typical merit matrix which allocated increases based on the employee’s performance and their position in range. And to that end, my designs generally reflected the common thinking that the higher the performance, the higher the increase. Even if that meant that low performers would receive nothing and a “Meets” employee would warrant a very small increase.

One organization I worked for prided itself on hiring “Race Horses”. These were highly talented individuals recruited away from large metropolitan areas to work in a long-standing regional billion-dollar bank. They often came from the large banking centers in Texas, Louisiana, Tennessee, and Georgia. We saw them as rising stars who were going to reshape our lending, trust, consumer or personal banking departments. They were enticed away from their current billion dollar banks with recruiting bonuses, large salaries, and promises of great growth opportunities. Initially all seemed well; they impressed our current customers, they brought in new customers, maybe even developed large business opportunities and integrated into what was really a one family owned bank.

However, after a respectful period of time, they left, they moved on to Chicago, New York, St Louis, and other banking centers. Once they moved on, it was quickly realized that they contributions were far less than once perceived, in the light of their departure. In the post analysis, we often found that the Race Horse had lots of show and very little go. The new business they developed was on referrals from and existing employees who were merely “Plow Horses”, who had worked their way up from Item Processing or some other department. The organizational reshaping we had hoped for was the initiatives of other Plow Horses whose ideas had been appropriated by our star employee. Eventually, we concluded that what passed for performance and talent was superficial and that much of the talent we needed to succeed we already had, they just needed to be managed differently.

Once we came to recognize the difference between the appearance of performance and real performance we were able reshape our organization with the talent we had in place and do so through the relationships those Plow Horses had built and maintained for many years. Not that new blood is never warranted, it just has to be the right blood type, compatible with the organization and with a desire to do what it takes to succeed. A Race Horse that is only good for one race is not going to be able to sustain the organization for a full ten furlongs.

Is there a moral to this story? When rewarding and recognizing talent and performance, organizations need to make sure they are in fact paying for performance and not window dressing. True talent runs deep and is best demonstrated under pressure. When the faint of heart fold, organizations need to look for those left standing.

Employer Role in Retirement Planning

Wednesday, April 28, 2010

Should employers have a role in employee retirement planning? If the answer is “yes”, what should that role be?

Employers have invested billions of dollars in funding and administering defined benefit and defined contribution pension and retirement plans based on attracting, retaining, motivating, and rewarding millions of plan participants. Is it not the prudent thing to do to make sure that participants have access to some form of financial and retirement planning? In a prior role, I often met with employees to process their defined benefit and defined contribution payout elections at the time of their retirement. Most elected a lump sum amount, this amount was the largest single amount of money that virtually all had ever handled. The sad commentary was that many were back in my office 2, 3, 4 or 5 years later asking for their old job back. They had spent both their defined benefit and defined contribution within a few years. Sure, their expenditures were valid, a new roof on the house, a new car, a down payment on a house for a child, ... etc.

Had they had access to retirement or financial planners and tools would they have elected an option other than lump sum? It is hard to say, but they would have been armed with knowledge. Certainly, it is not the role of the employer to provide retirement or financial advice, legislation clearly prevents that. However many employers provide access to retirement or financial planning tools via their defined contribution plan administrators and recordkeepers. At several prior employers, employees were given onsite access to financial planners during employee appreciation days and health fairs. Most defined contribution plan administrators and recordkeepers are willing to come onsite and meet with groups of employees to provide basic retirement and financial information. Some defined contribution plan administrators and recordkeepers provide personalized retirement and financial advice on a fee for service basis. Of course, employees are free to seek out independent advisors on their own. Unfortunately, many employees fail to recognize that retirement and financial planning, advice, and information they actually need.

A quick review of several websites for defined contribution plan administrators, recordkeepers, banks, web portals yields a wide range of replacement income planning tools, savings rate estimators, and “what if” tools. The problem is that such tools do not exist; the problem is that most employees lack awareness that at age 20, 30 or 40 they should be thinking about retirement.

As with health and life style issues with health care, the issue with retirement and financial planning is raising the level of employee awareness to seek out help. What health risk assessments have done for employee health awareness, retirement and financial planning can do for the future retiree. Thus, the role for employers is the raise that awareness level and allow the find their own path.

Status of Employee Retirement 2010

Tuesday, April 27, 2010

It is clear, over the last 3 decades employee retirement has changed significantly in America. Beginning in the 1980’s and 1990’s, employers implemented defined contribution plans in large numbers. In the 1990’s many of those same employers began to change or eliminate older, more traditional defined benefit plans. Much of this change came about due to changes in the nation’s tax code, workplace demographic, and industrial make-up as government encouraged defined contribution plan growth, more workers sought self-control over their retirement options, and as manufacturing industries gave way to informational industries. The upside to this change has lead to employee’s holding 4.1 trillion dollars as of 2009 in market based defined contribution plans under their own self-investment direction. The downside is that those same account balances are subject to the same risks as any other market based investment.

 

Are Americans preparing for retirement? There appears to be some confusion on the subject. In one report released by the Investment Company Institute and T. Rowe Price Group in conjunction with Employee Benefit Research Institute, American workers remain committed to preparing for retirement by continuing to contribute to their define contribution plans. The report covered some 24 million define contribution plan participants from January to December 2009. The report found that 3.4 percent of define contribution plan participants suspended their contributions during 2009. Furthermore, the report indicates that at the peak of the market downturn only 2 percent of participants changed their asset allocations and only 4 percent made any changes to their plans.

 

Investment Company Institute (http://www.ici.org/),  T. Rowe Price Group (http://www.troweprice.com/), Employee Benefit Research Institute (http://www.ebri.org/research/dc_project/) Participant-Directed Retirement Plan Data Collection Project (1996-2008), (January-December 2009)

 

In a report sponsored by the Employee Benefit Research Institute and Mathew Greenwald & Associates, the assertions of the Investment Company Institute/T. Rowe Price Group report appear to be contradicted. The 2010 Retirement Confidence Survey reports that for all age categories, except age 55 and above, American workers are less likely to be saving for retirement in 2010 than in 2000. The 20th annual Retirement Confidence Survey compared retirement savings rates and other factors for workers between surveys conducted in 2000 and 2010. The results showed a decline in respondents who were saving for retirement except for workers 55 and above who reported a 15-percentage point increase from 2000 to 2010. The survey also queried respondents on their confidence in their ability to save for retirement and the stability of Social Security and Medicare. All surveyed age categories reported a decline in their confidence to meet their retirement needs.

 

The survey’s finding may be summarized as, retirement planning continues to erode from prior surveys, increasing numbers of workers have no retirement savings, many workers have little to no understanding of their retirement needs, more workers plan to work longer, and most have little confidence in private and public institutions’ abilities to help them meet their retirement needs.

 

Employee Benefit Research Institute (http://www.ebri.org/) and Mathew Greenwald & Associates (http://www.greenwaldresearch.com/). The 2010 Retirement Confidence Survey: Confidence Stabilizing, But Preparations Continue to Erode, Ruth Helman, Craig Copeland, and Jack VanDerhei, “The 2010 Retirement Confidence Survey: Confidence Stabilizing, But Preparations Continue to Erode,” EBRI Issue Brief, no. 340, March 2010. (http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4488)  

Social Media and Employee Communications

Thursday, April 22, 2010

Social Media such as YouTube, Google Blogs, Myspace, Facebook, Flickr, Digg, and Twitter are revolutionizing the way employers communicate with their employees on a host of issues and topics. Employers wanting to increase the effectiveness of their recruiting efforts turn to YouTube and Facebook. Employers wanting to communicate the latest product information, changes in benefit plans or promote employee affiliation add Myspace or Facebook links to their intra-net sites. Cannot afford large-scale mass employee meetings, considered about the high cost of video distribution consider positing to YouTube. Want to have a running dialog with employees, start writing a blog.

The official web site for the US government has links for YouTube, Facebook, Flickr, and Twitter. General Motors has links for YouTube, Facebook, and Twitter. Ford has links for YouTube, Facebook, Flickr, and Twitter. Organizations are reaching out and connecting with customers, clients, and suppliers; so shouldn’t they reach out to their employees? They are! In the current “Attention Age”, employers are looking for every opportunity to engage, inform, and communicate with their job applicants, current and former employees. Monarch Airlines, a U.K. airline specializing in low-cost flights uses “social media” to communicate with hundreds of flight and cabin crews, as well as ground employees stationed at multiple airport locations and branch offices. Monarch plans to use these new channels of communications to coordinate a wide range of team meetings, training sessions, and executive-employee interactions.

 

It would be expected that large, high-tech progressive organizations would employ the latest communications methods. However, with the media technology available on Youtube, anyone with a basic video camera, even a cell phone camera, and inexpensive editing software can produce, edit and distribute a video within a few minutes. Forget the editing, post it raw. In a professional video production world were cost are in the thousands of dollars per finished production minute, Youtube presents an attractive alternative. In a world were employee are working remotely, on the move 24/7; social media is cable of delivering up to date training, product roll out information, and corporate messages over numerous devices from desk-tops to cell phones. Concerned about company proprietary property? Software applications exist to secure access to those with the authority to access it either on the internet or a corporate intranet.

 

As with any communications, identifying and addressing the audiences and constructing the messages are far more important than the channel used to deliver the message. We have all seen glossy four-color print media that had very little substance to them. Or, the high cost video production that was little more than stilted taking corporate heads. The same developmental efforts and planning that would be required for a print or video production is required for YouTube, Google Blogs, Myspace, Facebook, Flickr, Digg, and Twitter, just scaled down by a factor of 10.

The Role of Broadbanding

Wednesday, April 21, 2010

 

Broadbands are salary ranges which have been collapsed into a fewer number of ranges with those ranges typically being as much as 100% or more from minimum and maximum and often representing job clusters rather than an individual job. As organizations began to flatten their reporting structures, deal with shrinking salary budgets, HR staff reductions, and simplify their process, a method was sought out to compensate employees for this new order of reporting. Broadbanding was an attempt to address many of the issues related to the changing business world of the 1980’s and the 1990’s. By dramatically increasing the width of ranges and having fewer ranges, organizations could still offer vertical advancement without “promoting” an employee into a completely new grade or worry with “re-classification”. Organizations could grant supervisors a degree of independence to move employees into higher pay brackets within the same grade with limited oversight by the corporate compensation function.

 

Consider a traditional job family with levels for jobs from the entry level all the way to manager. Typically, each job occupied a separate salary range, separate job descriptions, and were evaluated individually. To move from one level to another required a promotion or re-classification of the incumbent’s current position into a higher grade. The former process often required a one over one level of approval. The later often required a request to the HR function to have the job re-evaluated. Depending on the organization, promotions might have to be reviewed, approved, and budgeted. To have a position re-evaluated might require the request to be scheduled for a time in the future, be reviewed by the “Job Evaluation Committee, etc.

Therefore, for an organization short on HR staff, time, experiencing exponential growth, and faced with increased completion for the skilled labor needed, enter broadbanding. Broadbanding even has a role in attracting and recruiting college and MBA graduates by use of ranges specifically associated with a given university, graduate school or specialized area of academic study. For rapidly growing organization, broadbanding offers the ability to fast track employees through what would have been several organizational levels. Thus a 3 to 5 year employee on a fast track could move from enter level to manager without ever change salary grades, and still see a significant increase in roles and responsibilities and correspondingly, compensation.

As with most things, communications is key to the success or failure of many organizational programs. Employees raised in a culture that defines “promotion” as moving from grade “A” to grade “B” may see broadbands as just one more “take-away”. While broadbands have the ability to hide many pay administration sins, failure to maintain current market alignment will eventually erode their relationship to competitive rates. Broadbanding does simply many aspects of salary administration, nevertheless, they still require skilled staff to proper evaluate and classify jobs into the various sub-divisions of the range. Managers often will require consultations as to when and how employees may move through the ranges.

Competency Models and Retention

Monday, March 29, 2010

 

One feature of a competency model is to assist with the selection of incumbents to fill vacant positions. Whether we are attempting to select a candidate from outside or from within the organization, a competency model will identify those attributes, which increase the likelihood of success. Since candidates who are more likely to be successful are also more likely to remain with the organization, it seems intuitive that a competency model based selection process is likely to increase retention. Richard Finnegan points out in his Rethinking Retention In Good Times and Bad that by narrowing the front door, organizations can effectively narrow the back door by selecting the most appropriate candidate for the role. Clearly then, competency modeling has a role to play in retention by providing a framework for the selection process.

 

Once while employed by a large health insurance company I was responsible for reporting a number of various “metrics”, including turnover. By the mid 1990’s a trend was developing which indicated that our Customer Service Representatives (CSR) for Level 1 inbound calls were leaving at increasingly higher rates. Periodically the organization would hold job fairs and hire a hundred or more candidates, put them through extensive training, and closely monitor their performance. Nevertheless, large numbers of newly selected candidates failed to show for the first day of work, more failed to complete the training process, and even more failed to complete their first 30, 60, 90 days on the job. The organization came to realize that most newly selected candidates had no clue as to what was involved in being a CSR for Level 1 calls. Part of the solution was to provide job candidates with realistic video tapes (as recommended in Richard Finnegan’s Rethinking Retention In Good Times and Bad) of the daily life of a Level 1 CSR. These “Realistic Job Previews demonstrated the training and work environment, including details on the number of inbound calls per hour, performance expectations for daily attendance and answering calls, break times, and promotional opportunities. While these and other actions helped many candidates de-select themselves and thus helped to “narrow the front door”, it was only a partial solution to the demands of a roaring economy and a changing workforce demographic.

 

Anntoinette Lucia and Richard Lepsinger, co-authors of The Art and Science of Competency Models, point out that to be effective, competency modeling must integrate into an organization’s human resource and talent management systems. While it is possible to apply competency modeling to individual business units and even individual jobs, the focus is on improving the cycle of selection, training, evaluation, and succession planning. The act of integrating competency modeling into the organization removes the antidotal notion of many current decision-making schemes and replaces it with a factual based process directed at the success of both the organization and the individual.

 

As such, competency modeling provides for selecting those candidates most likely to succeed, thus priming the organizational pump with a flow of individuals who in turn hire and promote the most appropriate candidates. This process feeds back on itself with each hire-promotion cycle, providing the organization with a stream of talent with high performance individuals. Therefore, organizational managers should consider each hire or promotion opportunity as a means to increase the quality of the talent pool. Working in an integrated fashion, competency modeling and retention management construct the potential for staffing the organization with long-term high performing candidates.

Competency Model Construction, Preliminary Design

Friday, March 26, 2010

Regardless of whether the organization adopts a custom built or readymade competency model, at some point you will develop a tentative or preliminary design. The organization may wish to have a design that is testable on a small group of employees, a specific unit, product or geographic location. A preliminary model provides the organization with a working tool, which is still under development yet one that, will permit testing and updating based on small-scale outcomes. To test the preliminary design there are several qualitative and quantitative methods available, including subject matter expert focus groups, surveys, as well as various statistical techniques. The degree and sophistication of the testing will depend, on large part on the organization’s unique needs, its resources, and comfort level with statistical analysis.

Using the example of the long distance truck driver, we may have already used questionnaires, surveys, and focus groups to capture performance related information from drivers, managers, mechanics, and others. With the performance information collected from these subject matter experts, we can develop job descriptions, interview questions, performance statements, and training programs permitting us to manage top performers. We also have a means to take the “meets” employee to the next step and reach an outstanding level of performance through the training and development tools built into the model. Finally, we have a tool that can differentiate the poor performer from others and work towards “re-potting” or releasing those individuals.

Now that we have a preliminary model, we can take that design, return to these same subject matter experts, and determine if they believe we have captured the attributes of the drivers’ performance. On a qualitative level, we could ask subject matter experts to indicate that our preliminary model of knowledge, skills, abilities, and behaviors does or does not point to outstanding, average or poor performance. Using a quantitative process, we could take those same individuals and ask them to “rate” each factor of our model on a scale of 1 to 3, with 1 indicating the factor measures the performance, 2 somewhat measures the factor, and 3 does not measure the factor. We could expand this scale to a 5 step rating factor of from 1=Completely Measure to 5 Does Not Completely Measure. Several statistical tests exist to measure the degree of fit between the model and the ratings givens by the subject matter experts.

Over time, the deployed model, if valid, should track the employee’s individual job performance. Using the design to select a new driver or promote a forklift operator to driver should increase the likelihood they will be successful as a driver. Rejecting an applicant to be a driver using the competency model should also confirm the individual would be less likely to have been successful in the organization as a driver. The model should also provide a road map of what it would take to develop an average driver into an outstanding driver. It then becomes an organizational decision whether the investment in the effort would yield the desired results.

Wtether we use qualitative or quantitative methods to test the design, at some point we will learn that our model will require updateing to bring it into alignment with the “perceptions” of the subject matter experts in order to achieve the degree of desired results, increased performance. This could occur during our pre-implementation testing or after the model has been in use for some time. During the early days of a new model’s implementation, the organization should watch for a signs the design fails to live up to its expectations. Should the organization have gotten the model wrong, continued use without corrections could harm the creditability of the organization and the designers. Remember, the goal of a competency model is to assist the organization in the selection, development, management, reward and recognition of those knowledge, skills, abilities, and behaviors that will lead to success for both the business and the individual.