Manufacturing & Distribution Advisor: Compensation Packages: Finding the Right Fit

December 5, 2016

Are you struggling to pay rising health care costs, attract and retain skilled workers and comply with government regulations, such as the Department of Labor’s new overtime rule, (which is pending review in court, see our alert issued on December 1, 2016), and the shared-responsibility provisions of the Affordable Care Act (ACA)? These issues were among the top concerns reported by U.S. manufacturers, according to the third quarter 2016 Manufacturers’ Outlook Survey published by the National Association of Manufacturers.

To manage these issues, manufacturers may need to review their compensation packages and make some tough cuts. Here’s a closer look at some of today’s human resource challenges.

Trends in Health Care Benefits

The Employee Benefit Research Institute (EBRI) is a nonprofit research institute that focuses on health, savings, retirement and economic security issues. EBRI recently compared health insurance benefits before and after the shared-responsibility provisions of the ACA went into effect.

The study revealed that larger employers continue to offer health insurance benefits to their workers. In fact, about 99% of employers with 1,000 or more employees provide health insurance benefits. The coverage rate among employers with 100 to 999 employees ranges between 93% and 95%.

But coverage among smaller employers has fallen dramatically since 2009. The coverage rate for employers with 25 to 99 employees fell from 81% in 2008 to 74% in 2015. For employers with 10 to 24 employees, the rate went from 66% in 2008 to 49% in 2015. And the coverage rate for employers with fewer than 10 employees decreased from 36% in 2008 to only 23% in 2015.

Reasons to Provide Coverage

There are many compelling reasons to offer health care benefits. The most obvious is that employers care about workers and want them to be healthy. Moreover, by offering affordable health care insurance coverage, your company may have an advantage over competitors in a tight labor market.

On the flip side, failure to comply with the shared-responsibility provisions of the ACA can lead to steep penalties. In 2016, “large” employers that don’t offer affordable coverage or offer coverage that doesn’t provide minimum value face a penalty equal to the lesser of: 1) $3,240 per full-time employee who receives a premium tax credit, or 2) $2,160 per full-time employee in excess of 30. In 2016, the full-time-employee (or equivalent) threshold for large employers is 50. Previously, the threshold was 100 full-time employees (or the equivalent).

Alternative Cutbacks

To help pay for medical care benefits, which are valued by most employees, there may be other offerings that you can eliminate — or scale back. How do you know which benefits and perks your staff want the most? Compile a list of your current benefits, such as retirement savings plans, dependent-care and educational assistance, life and disability insurance, health club memberships, company picnics and holiday parties, summer hours, and free coffee and snacks. Then ask employees to rate their favorites.

Small changes, based on the needs and preferences of your workers, can save money without lowering morale. For example, a plastics manufacturer reduced benefit costs by 20% with three simple changes: It increased health insurance policy deductibles, decreased the number of retirement plan options and eliminated company-provided disability insurance coverage.

You can also substitute less conventional offerings if you need to eliminate a popular item from your benefits package. One idea is employee stock options, which preserve cash flow while giving employees the opportunity to purchase shares of the company’s stock at a predetermined exercise price.

Another way to control labor costs is to monitor overtime hours. Under the new overtime rule, (which is pending review in court, see our alert issued on December 1, 2016), more employees are likely to qualify for overtime pay. Limit nonexempt workers to 40 hours per week. If there’s a rush order that requires overtime, require the plant manager to obtain preapproval from the company’s CFO or owner. Whenever possible, consider using independent contractors or part-timers during seasonal peaks.

Make an Informed Decision

Many small businesses have gotten out of the health care game since the ACA passed in 2010. But doing so can lower morale, make it harder to attract and retain skilled workers and lead to steep penalties. Before taking such a radical step, consider alternatives that can save money while continuing to offer health insurance coverage to employees.

Sidebar: Help Wanted? Consider Hiring a Veteran

Small business owners often struggle to find qualified workers. Some manufacturers are finding a good fit with veterans, who generally possess technical skills, a strong work ethic and resilience. Veterans also may have strong team-building and problem-solving abilities, because the military provides contingency and scenario-based training.

As an added bonus, hiring certain qualified veterans that meet the requirements as outlined in the Internal Revenue Code may qualify your company for the Work Opportunity credit (WOC). The maximum wage that can be used to calculate the credit for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000 or $24,000, depending on whether the veteran is disabled, whether he or she has been unemployed, and the length of time he or she has been unemployed relative to the credit-eligible hiring date.

There’s no limit on the number of qualifying new hires that you can take this tax break on. But time is limited: The WOC applies to qualified veterans (and other eligible individuals) who begin work for the employer before January 1, 2020.