What if you could simplify employee recordkeeping and empower your employees, all while helping them (and maybe the company) save some money? Frank Palmieri, an attorney with a vast store of credentials and experience in qualified retirement plans (www.p-ebenefitslaw.com), says there is a way you may be able to accomplish all of these. The idea known as the vacation pour over concept isn’t new, he says, but it has yet to really catch on. Perhaps the time has come.
The concept is simple: instead of allowing employees to roll over accrued vacation from year to year, why not let them roll some of it into your 401(k) plan?
“I think this is an interesting idea in this economy for a few reasons,” he says. “One, a lot of companies have a problem because they have large vacation accruals on their financial statements, and they’d like to get the liability off their books. The longer the vacation time stays there, the more it grows because salaries continue to grow. So you may have budgeted for vacation time this year, but if the employee doesn’t take it for 10 years, the vacation will actually cost the company more.
“Employees find the idea interesting, too. A lot of employees in this economy are not taking vacation as much as they used to, because they’re afraid not to be at work. They’re afraid not to be perceived as invaluable.”
Keep the rules simple
Palmieri says you can lay out a very simple policy that will allow vacation time to roll into your 401(k) plan. “I don’t believe in giving employees a choice, because that adds to the complexity of the concept. If you tell employees at the beginning of the year that that they will have a choice to take their vacation or roll it over into the 401(k) plan, you get into a lot of communication, discussion, explanations, and it debilitates HR departments.
“Simply tell employees they have X amount of vacation, and at the end of the year you can only carry over up to one week of it. Anything over that week, half of it (for example) you’re going to lose and half of it the employer is going to put into the 401(k) plan. That’s a win/win for everybody, because normally employees would lose unused vacation time and now you’re putting it into the 401(k) plan.
“If you want to make things even simpler, you exclude the highly compensated people. Then there are no testing issues associated with the concept.” Palmieri explains that often the highly compensated executives don’t take their vacation time, and so would end up rolling it into their 401(k) account. At the same time, other employees might be more inclined to take all of their vacation, leaving most of the ‘roll over vacation’ time in the accounts of the highly compensated employees. He suggests that by excluding the highly compensated employees from participating in the vacation rollover, an employer can avoid this problem.
Rollovers help employees with varying goals
“This strategy can help achieve some corporate objectives,” Palmieri continues. “In a scenario where there is one week of carryover and everything else gets cashed out employees don’t have to make an election at the beginning of the year. An employee knows that if he or she has 3 weeks of vacation, they can either take them or 1 week will be carried over and 2 weeks will go to the 401(k) plan. That makes employees feel good. They know that if they want to get a little extra in their 401(k), they are not going to take the vacation.
“On the other hand, if they want to spend more time with their family, they can take it. An employer may have some non-highly compensated people who are trying to hit the $16,500 contribution level because they have a spouse who works, but for a company that doesn’t provide retirement benefits. Some employees can’t afford to save for retirement because they have bills or kids in college. They can have a choice too. It may not be a lot of money each year, but over a few years, it can add up.”