Question

Taking into account the tax considerations to the corporation and the retention value with respect to the employees for whom the benefits are provided, discuss the pros and cons of each type of emplyee benefits in relations to federal taxation. How do these employee benefits affect the company's federal taxes?

Answer 1

1. Employee Benefits Compensation in forms other than cash Types of employees benefits:
   1. • Paid leave for vacations and holidays
   2. • Life and medical insurance
   3. • Retirement plans
   4. • Flexible working hours
   5. • Family friendly benefits
2. Benefits Required by Law BENEFIT EMPLOYER REQUIREMENT Social Security Flat payroll tax on employees and employers Unemployment insurance Payroll tax on employers that depends on state requirements and experience rating Workers’ compensation insurance Provide coverage according to state requirements. Premiums depend on experience rating Family and medical leave Up to 12 weeks of unpaid leave for childbirth, adoption, or serious illness Health care Provisions of 2010 law phased in through 2014
   1. Benefits Required by Law • The law does require employers to offer employees benefits such as: -
      1. Time off to vote
      2. - Comply with all workers’ compensation requirements
      3. - Withhold social security from paychecks
      4. - Contribute to short-term disability programs
      5. - Employers pay federal & state unemployment taxes to provide benefits for unemployed workers
      6. - Comply with Family Medical Leave Absence (FMLA)
3. Benefits Required by Law Health care benefit Hawaii is the first state to require employers to provide health insurance to employees. The law, the Prepaid Health Care Act, was passed in 1974 and requires employers to provide health insurance to all full-time employees, either through an indemnity plan or an HMO Avoid health care reform assessments. The Patient Protection and Affordable Care Act and related legislation requires employers with 50 or more full-time employees (or a combination of full-time and part-time employees that is equivalent to 50 full- time employees) to offer adequate health coverage or be subject to assessment if their employees receive premium tax credits to buy their own insurance. This mandate is in effect beginning in 2015
4. Financial Savings You can offer employees something that increases their compensation package and yet allows you an income tax deduction for the contribution, so that your out-of-pocket cost is less than the value of the benefit to the employee. Self-employed individuals can deduct 100 percent of their health insurance premium costs as a business expense. You can always deduct 100 percent of premiums for your employees. If the business is incorporated, all costs for your own insurance as well as your employees' is deductible. Tax advantage
5. Financial Savings
   1. •Take advantage of the small business health care tax credit:
   2. • Small businesses with fewer than 25 employees may be eligible for a tax credit for purchasing health insurance for their employees. Tax advantage
6. Financial servings Employees often will accept better benefits in lieu of a higher salary, which can be a savings to the business. Benefits in lieu of a higher salary
7. Financial servings Another cost advantage of paying benefits is that employers, especially large ones, often can get a better deal on insurance or other programs than employees can obtain on their own. (group purchasing power) For instance, small businesses (generally, those with 50 or fewer full-time employees) may purchase health care coverage through a government-run insurance marketplace established specifically for them—the Small Business Health Options Program (SHOP) Utilizing economies of scale
8. Increasing a Competitive Edge • Attract and retain the most qualified employees: - Market Dependent, are your competitors offering: • Health, vision and dental insurance • Tuition reimbursement • Wellness programs • Incentive/performance bonuses • Professional development Attract and retain quality employees.
9. Increasing a competitive edge Offering health insurance has been shown to decrease absenteeism and improve employee health and morale. Higher employee motivation
10. Increasing a competitive edge Increase productivity Insurance plans offer preventative care that can keep employees healthy and working. If employees don't get preventative care and yearly physicals (which they might not do if they don't have insurance), you could end up having more employees out for long periods of time with serious illnesses.
11. • Too expensive. • Too much paperwork • Not required by law • Not the company’s responsibility • Little value to this kind of company Cons of Offering Health Insurance as a Benefit:
12. Cons of Offering Health Insurance as a Benefit: • High employee turnover • Policy offerings are too complicated • Not familiar enough with options • Most employees are not interested in coverage • Most employees are covered elsewhere • Most employees would not be eligible
13. Major Drawback of Providing Benefits: Cost $- $20,000 $40,000 $60,000 $80,000$100,000 Employee 1 Employee 2 Employee 3 Base Salary Benefits & Taxes $50,000 $30,000 $70,000 $14,000 $16,000 $18,000
14. Source: Bureau of Labor Statistics (2013) Relative importance of employer costs for employee compensation, December 2013 Compensation component Civilian workers % Private industry % State and local government % Wages and salaries 69 70.1 64.5 Benefits 31 29.9 35.5 Paid leave 7 6.9 7.3 Supplemental pay 2.4 2.9 0.8 Insurance 9 8.3 12 Health benefits 8.5 7.8 11.6 Retirement and savings 4.8 3.7 9.4 Defined benefit 3 1.6 8.6 Defined contribution 1.9 2.1 0.8 Legally required 7.8 8.2 6
15. The Cons of Providing Benefits: • Benefits costs more for small employers than for large ones due to: - Higher prices because of lesser buying power - Higher costs of administration • Administrative costs of designing a retirement plan • Increased benefits = Increased administrative overhead
16. The Cons of Providing Benefits: • The cost of health insurance has steadily risen, making it: - Less affordable to employers, and employees - Difficult to plan financially from year to year • Offering benefits creates legal compliance concerns: - Companies incur legal fees - Mistakes made in benefit plans can lead to lawsuits or regulatory fines
17. Value Proposition • A Value Proposition is the overall perceived value of the organization • Developing a value proposition is based on a review and analysis of the benefits, costs and value that an organization can deliver to its employees • A strong value proposition differentiates great companies from the mediocre ones
18. A Value Proposition Includes: • Corporate Culture and Values: what makes your company unique? • Corporate Citizenship: company’s contribution to the community • Rewards and Retention: A-players wants rewards based on their performances and contributions • Growth and Career Runway: opportunities for growth , both vertically and horizontally?
19. Employee Benefits • The law does not require employers to provide the following benefits to their employees: - Retirement Plans - Vision, Dental Plans - Life insurance plans - Paid sick time, vacation days & holidays
20. Affordable Care Act • Affordable Care Act: Law that requires companies to offer health insurance if company has more than 50 full-time FTE’s: • Full-time FTES defined as >30 hours/week or 130 hours/month • Pay a fine if they do not cover their employees & their families starting in 2014: • 2,000 Per full time employee
21. Impact to Major Stakeholders: Business • Small businesses: - Potential for Small Business Health Care Tax Credit • Increasing from 35% to 50% in 2014 • Businesses with more than 50 full time employees: - If the employer does not offer affordable health insurance options they will be subject to a penalty: • $2000 per FT employees (excluding the first 30 employees) - If the employer offers insurance but it doesn’t meet minimum requirements: • $3000 per FT employee who qualifies for marketplace premium savings
22. Cost Disadvantages • Health Insurance Costs are 17.9% of the GDP ( Gross Domestic Product) in the U.S. • Much Cheaper to pay fine than pay for health insurance Benefits Health Care Cost Statistics Single Coverage Family Coverage Average cost of Healthcare in the U.S. $5,615 $15,745 Average cost to employee with a company plan $1,225 $4,316 Company Contribution to Insurance Costs $ 4390 $ 11,429 Company Fines For Not Supplying Health Insurance ( >50 FTE’s) $2,000 $ 2,000
23. Cost Disadvantages • According to the Bureau of Labor Statistics: - Private companies pay out $9.21 an hour per employees with benefits • 30% of the cost of employee compensation - Local & state government agencies pay out $14.19 per hour per each employee with benefits • 34.8% of the cost of employee compensation
24. Cost Disadvantages • Employees may take advantage of employment benefits & the company may pay unnecessary costs: - Ex) RAME a small roofing company with 70 FTE- would put 5% of every hour worked by employee into their retirement plan (401K) - Employees would quit just to take their retirement out, willingly taking the penalty of 50% since they did not put any of the money in the retirement fund themselves.
25. Disadvantages • The population is aging and health insurance is becoming more expensive - Costs companies more money offer health insurance plans to employees Ex) Company wellness & prevention programs • Requires employees to share health information in order to receive lower monthly premiums & financial incentives • Can be seen as coercive, threatening & intimidating by employees- can actually backfire on employers
26. Disadvantages • Employee benefits are confusing • Many employees do not understand what is being offered to them or do not take advantage of packages offered to them • Small companies do not have human resource support - Disempower employees
27. Conclusion. . . Employees benefits have both advantages and disadvantages to the employer so employers have to do a cost benefits assessment in designing the benefits so that they can make business sense as well as being compliant with the law