Inherent in any new legislation is the potential for unintended or unforeseen consequences. The Patient Protection and Affordable Care Act (ACA), designed to expand healthcare benefits to all Americans, may inadvertently compel businesses to consider new strategies for compensating valuable employees.
While the ACA requires individuals, not businesses, to obtain healthcare coverage or pay penalties, the law also includes a “large-employer mandate,” which requires employers with at least 50 full-time workers to provide affordable health coverage or face a $2,000 fine per worker after the first 30 employees.
A number of large companies, particularly chain retailers and franchises, have a high percentage of part-time employees (defined by the ACA as those who work less than 30 hours a week). These part-time employees often had the option of obtaining health insurance through plans sponsored by their employer. But after reviewing the new standards for coverage set by the ACA, many of these employers are no longer offering health insurance for part-timers. Some companies, such as Trader Joe’s grocery stores, will pay each part-time employee $500 to help with the costs of obtaining individual health insurance, but, as Sean Williams noted in a Motley Fool article, part-time workers “fall into a gray area in the ACA…Businesses are under no obligation to offer healthcare benefits to part-time employees, nor will they be penalized by the federal government for not doing so. What this has done is create the impetus for a dramatic shift from full-time to part-time workforces.”
A shift to a part-time workforce is probably not what lawmakers had in mind when they passed the ACA. But when the costs and benefits of new legislation don’t align with economic realities, these are the unintended consequences. Instead of following the new guidelines and absorbing the higher costs, history repeatedly shows that individuals and businesses look for alternatives to obtain the same benefits at acceptable prices.
In fact, the prevalence of employer-sponsored health insurance today began as a “work-around” response to a legislative mandate during World War II. Because a large number of working-age men were called into military service, competition for labor was fierce. Greater demand usually leads to higher prices, so the US government, in an attempt to manage the wartime economy, imposed wage freezes. Unable to attract talent with higher pay, companies began offering other employee benefits, including health insurance.
Since then, non-wage benefits have become a key component in employee compensation. Their exact monetary value may be hard to quantify, but benefits are a powerful “extra” to attract and retain good employees. It is not uncommon to hear “The pay isn’t the highest, but I can’t afford to give up the benefits.”
Navigating Between “Fair and Equal”
In any organizational structure—a family, a business, a government—there is often a tension between fair treatment and equal treatment; sometimes fair is not equal, and sometimes equal is not fair. In businesses, this tension is reflected in the challenge to reward employees commensurate with their value to the company.
Productive employees legitimately merit higher compensation. But if the rewards to one worker diminish the benefits or opportunities of others in the organization, the business may suffer. If the company is perceived as treating its employees unequally, it may not be able to retain or attract the talent needed to sustain or grow the business. Additionally, unequal treatment can lead to legal action, adding additional costs and negative publicity.
When the only measure of compensation is salary or hourly wage, evaluations of “fair” and “equal” are easy. But when compensation expands to include other benefits (such as health insurance or a pension), the determination becomes less clear. There are subjective values to these benefits that make it harder to represent fairness or equality with just a number.
Since many of these employee-benefit programs include tax advantages (for both employers and employees), the government has also established qualifying standards, most of which are understandably tilted toward equal treatment. If businesses want the tax breaks, they must provide these benefits in a consistent manner for all who qualify. For example, ERISA law mandates that employer-sponsored retirement plans, such as 401(k)s, cannot be “top-heavy,” where the majority of deposits come from a few highly compensated employees.
The new ACA regulations reflect this inclination toward equal treatment. And employers are responding in kind. Discontinuing employer-sponsored health plans and giving every part-time employee, regardless of position or wage, an extra $500 to buy individual insurance is definitely equal treatment.
Given these conditions, how can employers provide “fair” benefits that reward and motivate key employees? This is where innovation comes in.
Individual Benefits for Key Employees
Businesses large and small have a long history of developing creative ways to provide unique benefits to key employees. Often these key employee benefit plans aren’t “plans” at all, but specially designed employment agreements between the company and one employee. These agreements may be as simple as an annual performance bonus, a profit-sharing agreement, or an option to receive company stock. They can be sophisticated deferred compensation agreements where the benefit is earned today, but received at a later date, perhaps as a supplemental retirement benefit. It could include insurance, such as personal life or disability policies.
These agreements can not only offer attractive individualized benefits, but also be structured to protect the company’s personnel investment by including vesting schedules or other incentives that encourage a key employee to remain with the company. These conditions are sometimes referred to as “golden handcuffs,” in that the employee is compensated for his/her willingness to continue with the company. In the financial services industry, these plans may be classified by generic designations, such as a Supplemental Executive Retirement Plan (SERP) or Non-qualified Deferred Compensation (NQDC), but while these formats describe similar features, the design possibilities are nearly infinite.
These plans offer freedom for both employee and employer to construct unique compensation packages. But these personalized employee benefit agreements are still subject to regulatory scrutiny; if compensation is involved, so is the IRS. There are financial firms that specialize in plan design, usually integrating the expertise of tax, legal, insurance, and investment professionals. Most private employment agreements are not do-it-yourself projects.
A Good Time to Consider Individual Employee Benefits?
It is logical to believe the higher standards for equal benefits in the ACA will prompt employers to seek other ways to fairly reward key employees, and spur innovative financial minds to invent new ways to meet this demand. Business owners who embrace these changes (and the subsequent innovations in employee benefits) may realize a distinct advantage in attracting and retaining talented and productive employees.
Elozor Preil, RICP®, CLTC is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected].
See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor M. Preil
