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The end of the year often results in employees taking a lot of vacation time. Employees want to enjoy the holidays, but often they are taking extra time off because they have leftover paid time off (PTO). Companies that don’t allow unused PTO to be rolled over to the next year, or limit the rollover strictly, have employees taking off all of the days they have left before they expire at years end. This rush for employees to use all their PTO leads to businesses being short staffed at the end of the year.
Limiting PTO rollover is often the right business decision, which is why using an alternative to unlimited rollover might be a good idea. A PTO contribution arrangement monetizes unused days off into retirement plan contributions, which encourages employees to continue to work at the end of the year, and looks better on the books than unlimited rollovers.
A PTO contribution arrangement allows employees to convert unused days off into retirement plan contributions. If the retirement plan has a 401(k) feature, PTO contributions can be treated as pre-tax benefits, similar to regular employee deferrals. The plan can instead handle the amounts as employer profit sharing, which converts excess PTO amounts to employee contributions.
Contribution arrangements are appealing to any employee who has leftover time off at the end of the year. It is also especially beneficial for employees who value money more than time off work or are concerned about their level of retirement savings.
The most obvious advantage of a PTO contribution arrangement is that your business won’t be short staffed at the end of the year. However, the same benefits could be gained from just allowing significant PTO rollovers. A PTO contribution arrangement avoids the significant liability on your books from employees building up large balances that occur from rollover.
PTO contribution arrangements can also help with employee retention and recruiting. It appeals to employees who want to save for retirement, or who don’t care to have much PTO.
Setting it up
Setting up a PTO arrangement simply requires amending your current retirement plan. Just be sure that you still follow the plan document’s eligibility, vesting, rollover, distribution, and loan terms. Pay attention to any additional policies that could apply as well.
If you have questions about PTO contribution arrangements or want help assessing the best PTO policy for your business we can help. Contact us at 818-334-8623 or click here, and we will contact you.