Be Creative With Your Benefits Package
Squeezing more from benefit packages and a tight budget
The sick day bank benefit at the International Fund for Animal Welfare (IFAW) in Hyannis, Mass., wasn't working. Most of the staff used the benefit for maternity leave. But, one maternity could wipe out the entire fund.
Answer, the IFAW added short-term disability as a benefit. Now people buy maternity on their own, but they have an employer-sponsored disability plan.
"Between what they buy and what we cover, people can be fully covered," said Melanie Powers, CFO for the IFAW. "We wrestled with paid maternity. But we opted to cover maternity with short-term disability this year and continue to evaluate the response."
Such an example reflects the ways management is fine tuning benefits to legally squeeze more from benefit packages and a tight budget.
The IFAW has 130 workers in U.S. offices but it also faces obstacles as an international employer. Individual nations pass regulations to govern benefits, like maternity care, which could not be provided across all its offices. The present change simply replaces the sick bank with short-term coverage.
"Now employees don't drain valuable funds when they need surgery," Powers said.
Nonprofits seek more from pension plans. The IFAW matches up to 3 percent of the 401(k) retirement plan contributions. That's on top of another 3 percent. "That possible total of 6 percent is good even in the corporate sector I came from," Powers said. The organization has not done modeling to know the impact, but anecdotally think people find the plan attractive.
"We think of it as solid planing for employers rather than raising salaries each year," she said. "We incentivize them with the added 3 percent -- to add dollars for themselves."
Powers uses a Section 457 plan, a tax-exempt deferred compensation made available to employees of state and federal agencies. A 457 plan is similar to a 401(k) plan, except lacks employer matching contributions. The IRS does not consider it a qualified retirement plan.
"The 457 plan is unique because you can double up your elected deferral amounts," said John Matsouka, principal, of the Employee Benefits Practice Group at Armanino McKenna, LLP, an accounting firm in San Ramon California. Matsouka once served as a consulting agent at Deloitte & Touche. "An employee can do $12,000 into a 401(k) and put another $12,000 into this plan."
However, such a plan hasn't been adopted by a throng of organizations. According to Matsouka, many nonprofits fear segmenting upper management with specialized perks. Also the Section 457 plan faces tricky rules when used by nonprofits, according to Ken Stanger, founder of Longfellow Financial in Boston.
"The theory is great," he said. "You use a non-qualified plan to selectively carve out these high management people for supplemental retirement -- you stop them from switching to another company."
But IRS rules for nonprofits are different. They can only fund a benefit for up to five years. The government steps in to limit how much is placed in the account.
On the other hand, the 403(b) is a broad-based program meant to substitute for a 401(k).
This helps many nonprofits that can't have a 401(k) because of the details in testing. Using a 403(b), an employer that doesn't contribute can avoid filing a Form 5500. The process makes the nonprofit's Form 990 filing easier and cheaper, he explained.
The past days of nonprofits flocking to defined benefit plans are over. At one time the guaranteed pay out level attracted employees. But as costs for benefit packages rose, the constant contribution became more expensive to the employer.
Counter those obstacles another way. Think about how a broad-based benefit helps. David McDaniel, senior manager of the Employee Benefits Practice Group at Armanino McKenna, also a former veteran of accounting giant Deloitte & Touche, pointed to innovations started by universities.
"They are ahead of some others by offering tuition reimbursement and child care," he said. "They are trying to seek the top professors. While they offer more of the same items, they embellish the benefit by having unlimited access."
Can you break down the entire benefit package to a formula for X percent for health, pensions and so on? That depends on the workforce population and union requirements, according to John McFadden, a professor of tax and pensions at The American College in Bryn Mawr, Pa.
Instead of seeking to fit into a percent, think of the trends. Medical increases of 15 to 17 percent are hitting each year. During the past 10 years, compensation for top nonprofit executives has risen almost to for-profit levels. Pay is contingent on a method of performance. Incentives are even designed for stock options in other corporations.
Some organizations are using the special 401(b) to double-dip an annual limit. This applies to public schools where participants can put away twice the usual amount. However, many workers in the plan fail to have the discretionary income.
Another difficulty is that "nonprofits don't have favorable rules for designing non-qualifying parachute payments," McFadden said. "Instead of unlimited benefits without strings attached, nonprofits are limited because the tax law is less favorable."
How does an employer know what to offer? No guideline exists except seeing what other employers offer.
One employer is thinking simple, but offers an attractive strategy. The United Way of Massachusetts Bay has been providing its 130-person workforce with an MBTA-pass for public transportation for the past couple of years.
"If a person commutes either by the rail or MBTA, we provide a $10 subsidy a month," said Jane L. Grady, senior director of human resources. Grady seeks opportunities for low cost or no cost benefits. IRS Regulations changed two years ago so transportation expenses allow employers to offer a parking plan. Workers can pay on a pre-tax basis for a monthly plan. The support helps both employer and employee.
"Even though we're subsidizing $10 a month, an offset of tax expenses exists," she said. "The remainder of the cost of an example of $100 is paid on a pre-tax basis, both employer and employee have a pre-tax benefit."
Grady sees flexible spending plans as a low cost and also pre-tax boon. Flexible plans can support dependent care and over-the-counter drugs. This has just recently been put in place and it might expand to medical items.
The organization uses a personal insurance package that gives group discounts. These benefits can fit into place without cost. Companies such as Liberty Mutual have Group Discount Plans for auto insurance, home owners, and renters insurance that give extras to the worker.
Employers offering such opportunities really help the worker, according to Stanger at Longfellow Financial. "Employees going to the open market can find a discount of 25 to 30 percent of the premium with employer group rates," he said. "Also, an item like long-term care can be discounted up to 10 percent."
He explained that the flexible spending accounts (FSAs) exist as a portion the employee pays out-of-pocket for deductible and co-pays. These are pre-tax dollars that allow people to save money.
The FSAs have been expanded. The problem is that it's a use it or lose it situation with deductions. "But since we have extra items like education and over-the-counter drugs, organizations plan how to use the account," Stanger said.
Many employers now give a number of paid days off. Employees are the decision makers on when to use vacation or sick days and these can be carried over.
In the West, the YMCA of Metropolitan Los Angeles aims to tackle healthcare for its 3200 employees. Besides 800 fulltime, the employer has 2400 part time people. Last year it shifted its strategy and now covers health, life and disability. Then the employee chooses to use flex dollars for supplemental items like dental and vision.
"We wanted to insure workers received a full comprehensive plan and health is the number one issue they want," said Ed Stapleton, senior vice president for human resources. "But this only covers employees not their dependents."
With flex dollars, employees can opt to cover dependents or it gives them a chance to shop for another health plan.
The YMCA's carrier now offers three levels of coverage. Each gives a greater dollar coverage for hospital stays. For example, one level could be $15,000 while another gives $25,000.
"We felt our package was not competitive with other nonprofits and YMCAs," he said. "We're seeing problems of health coverage across the board beyond the younger workforce Ñ it will be a hot topic for years to come."
What does the future hold? "We're going to see major universities ratchet back in healthcare," said Armanino McKenna's Matsouka. "Rising costs especially in freebies are happening, so it will be interesting to see how those broad-based plans cope."
For Grady at the United Way, the future means determining what is valued by employees. Which adjustments does that mean?
One example of a benefit not catching on is Grady's 529 college savings plan she started 18 months ago. Unfortunately she is not seeing a lot of usage. The plan exists without administrative expenses to encourage staff to put money away for education expenses. Dollars grow in a tax-deferred vehicle even though the funds aren't pre-taxed like a 401(k).
"I think the low usage comes because it's only taxed-advantage not pre-taxed," she said. "People don't have a lot of money to put away for children even though we have a significant portion with very young children."
That's why Grady tries to find low cost or no cost ways to keep the staff happy. "You have to think creatively," she said. "There are some low cost strategies -- just ask your employees how you can help."
At the IFAW, Powers sees the future as a continuation of always tweaking the package. "Obviously there is an expense when an organization gives funds as benefits," she said. "We're balancing how we spend donor funds and a pension contribution helps to retain staff and prevent turnovers -- attracting staff to avoid recruitment means good stewardship of the money."
Benefits are the way to judge a good employer. "It's your currency as a nonprofit," she said. "We don't pay high salaries or give away perks like flying first class -- the value comes from the quality of the benefit package."
Copyright © 2004 The NonProfit Times.
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