The year is winding to a close, and you know what that means. Most businesses are seeing employees taking a lot of vacation time. After all, it’s the holiday season, and workers want to enjoy it. Some businesses, however, face staffing issues in December. This is due to businesses preventing the paid time off (PTO) from rolling over to the new year, or limiting the rollovers they allow within their PTO accrual policy.
There are good business reasons to limit rollovers in the PTO accrual policy. Fortunately, there’s a way to reduce the year-end PTO vortex without having to allow unlimited rollovers: a PTO contribution arrangement.
A PTO contribution arrangement allows employees with any remaining vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit. This is similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.
This can be appealing to any employees who end up with a lot of PTO left at the end of the year and don’t want to lose it. But it can be especially valued by employees who are concerned about their level of retirement saving or who simply value money more than time off of work.
Of course the biggest benefit to your business may simply be that it’s easier to ensure you have sufficient staffing at the end of the year. But you could reap that same benefit by allowing PTO rollovers (or, if you allow some rollover, increasing the rollover limit).
A contribution arrangement in your PTO accrual policy can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.
Also, a PTO contribution arrangement might help you improve recruiting and retention, because of its appeal to employees who prefer company retirement benefits or don’t care about having a lot of PTO.
To offer a contribution arrangement within you PTO accrual policy, simply amend your retirement plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.
Have questions about PTO contribution arrangements? Contact us. We can help you assess whether such an arrangement would make sense for your business.