The statements can easily backfire – or contain inaccuracies. Here’s how to find and fix two common trouble spots:

1. Avoiding incorrect info

Accidental math errors are the most common – and damaging – problem with total comp statements.
They’re also the toughest for you to spot and correct before the firm sends out the statements, since you aren’t the one who crunches the numbers.

But there are two ways to minimize the risk:

• Make a list of the data sources you use, such as Payroll, your 401(k) provider and health plan carrier, and
• Ask each source to pull and review a few random samples. If they’re OK, chances are the rest will also be fine. But if they contain errors, you can be pretty sure others will have mistakes.

A related problem: Some statements are arranged as a single list of costs, one line after another. To cut the risk of putting something on the wrong line, break the statement down into small sections (e.g., salary, healthcare and retirement). Bonus: This helps make statements easier for employees to follow.

2. ‘Just increase my salary’ syndrome

Sometimes, total compensation statements can actually decrease salary satisfaction, rather than boost morale. A handful of employees may gripe, “Why can’t you just increase my salary instead?” That’s especially true for legally required benefits (like workers’ compensation) and low-profile benefits such as term life insurance. Two fixes that work:

• List “government-required benefits” as a section of the statement. Avoid the term “mandated,” since many employees are unfamiliar with it, and
• Consider adding a section that shows employees how much it’d cost them to line up their own coverage instead.

Answer: Both groups worry equally about their out-of-pocket health costs, according to a PNC Services Group survey of 1,485 employees. Nearly 52% of all respondents — regardless of income –cited the unpredictability of medical expenses as their No. 1 financial-planning concern.

Other common financial-planning fears that affect employees of all salary levels:

• eldercare. Over half the respondents with children were afraid their offspring could be forced to pay for the parents’ long-term care, and
• financial stability. 47% of mid- to high-salary employees said they were concerned about sustaining or increasing wealth.

Examples of HRA designs that don’t qualify for tax breaks:

• plans that cover only health care, but reimburse employees all or a portion of their unused money at the end of the year
• plans that provide a death benefit to employees’ dependents from unused funds, if the money isn’t limited to reimbursing their medical expenses, and
• plans that permit unused account dollars to count as “credit” toward other company benefits (example: a 401(k) contribution).

Note: These rules don’t apply to flexible spending accounts (FSAs) in Section 125 cafeteria plans, as long as unused flex account money is not applied from one plan year to the next.

With an HRA, an employer can’t reimburse employees for non-medical expenses. If you do, even payments for otherwise eligible medical expenses can become taxable as a form of deferred comp.

In a recent issue of What’s New in Benefits & Compensation, we made reference to a private letter ruling in which the feds gave a thumbs up to a rather creative strategy for boosting retirement savings. The ruling itself isn’t recent — it was from 2005 — but the plan design the ruling dealt with remains rather cutting edge in my opinion.

An employer asked about whether it was OK to offer an incentive plan that allowed employees to put their unused vacation pay into the 401(k) plan.

The firm had a use-it-or-lose-it paid-vacation policy. As a way to reduce absenteeism,  increase 401(k) participation and cut some of the firms’ payroll tax burden, Benefits suggested giving employees three options:

• put the value of remaining unused days into the retirement plan at the end of the year
• trade in days earlier in the year in exchange for increased 401(k) contributions, or
• use all vacation days in lieu of the added contributions.

Senior management liked the idea. But they were concerned the money could be considered a form of “compensation,” especially because people would earn compounding interest off the contributions.

Taking taxes out of the contributions would create hassles for Payroll, and likely annoy employees who choose that option over the vacation time.

To be on the safe side, the firm asked for the private letter ruling.

In its decision, the IRS said the plan wasn’t taxable.

But the agency also noted it’s very easy to cross the line of what it calls “constructive receipt” of income. In plain English, that means it’s taxable if employees have the option to receive cash or another taxable benefits in place of unused vacation.

In this case, a cash buy-back for unused days wasn’t one of employees’ choices. The plan in no way affected employees’ monetary compensation.

And there were no changes made to the monetary value of the vacation benefits themselves. People simply had a little more flexibility to their existing benefits.

While private letter rulings aren’t legal documents – and only apply to one case – they usually provide helpful suggestions for how the IRS would view similar policies.

Cite: IRS Private Letter Ruling No. 200511043.

A Pennsylvania branch of United Cerebral Palsy did just that, and the caregiver ended up with a big payroll crisis on its hands.

Due to a glitch in the system,  more than 100 caregivers employed by the company either had mistakes on their paychecks or didn’t get paid at all until after they brought the issue to Payroll’s attention.

It’s not just employees who were affected. Because the computer system has failed to track caregivers’ work hours, United Cerebral Palsy was unable to bill clients.

Moral of the story: It pays to have a backup method of tracking hours. Going totally paperless isn’t always more efficient in the long run.

One statement that should never be in a handbook is “authorized overtime
is paid at 1.5 the hourly rate.”

Legally, that’s the same as saying “Our organization violates FLSA.”

Under FLSA, if a non-exempt employee works overtime – whether authorized or not – you must pay the overtime rate. What is legal is to head off unwanted OT before it happens.

It’s fine to say, “All overtime must be authorized by your supervisor.”

Next, describe the authorization process, and the disciplinary steps (if any) for breaking the rules.

It isn’t for substance abuse or depression. Actually, it’s financial in nature. Over the last five years, there’s been a reported 69% jump in employee EAP use related to personal financial concerns. The trend is not all that surprising in this era of salary freezes, high deductibles and cost-sharing of benefits premiums.

Statistics show that, for the first time since the Great Depression, the average American has negative savings — in other words, debt exceeds income — in a typical month. Many employees are racking up high credit card debt, make the problem worse.

Troubling trends

Here are some ominous numbers from a recent employee survey:

• 27% of respondents said they were “one major setback away from financial disaster”
• 22% say they were “worse off than last year, with less take-home income and more debt”
• 40% say their employer is “insensitive to their employees’ financial needs,” and
• only 6% said they felt comfortable with their current financial situation and ability to manage their debts.

The majority of personal-finance related EAP use arises from concerns over debt management, household refinancing and/or failed investments.

Tax season is right around the corner.  Which fringe benefits are considered taxable compensation and which are de minimus?

Here are key areas to check to keep both your company and employees protected:

Employee discounts

The rule of thumb: Employee discounts are generally tax-free if they’re for the products or services your own firm offers.  But there are limits.

For merchandise, the discount’s tax exclusion is limited to the gross profit margin the firm makes off it.

Example: If your firm typically sells an item for $75 and it costs $50 to make, the gross profit margin is $25. A discount more than $25 is taxable.

For services, the limit is a 20% discount on the value of the service your firm offers.

Quantity and/or volume discounts may also be offered tax-free to employees, as long as they’re the same as those offered to the public.  Example: If your company offers customers a discount for buying 10 tickets, employees can get it, too.

What about external discounts on other companies’ products?  Officially, these are taxable fringe benefits, unless the perks have little or no monetary value. For example, some are available free to the public,  like supermarket “savers club” cards.

In reality, few firms withhold taxes on things like discounted gym memberships or entertainment books. Unless it’s for big bucks or you offer people numerous external discounts, you’re usually OK lumping them in as a de minimus benefit.

When is it de minimus?

The de minimus exclusion protects you from having to account for occasional small perks. Basic rules:

• it should be tied to a legit business purpose. Even cash is considered
  de minimus if it’s for occasional transportation fares or meal money.
• personal gain is limited. It’s fine  if folks get occasional personal use of the office copier, but unlimited use isn’t OK. The law says 85% of use must be related to your business.
• limited monetary value. In the case of group-term life insurance payable on the death of a spouse or dependent, it’s de minimus if the policy value is under $2,000.

Best bet: Check your state labor department Web site for current regs.

If your organization is like many that aren’t facing layoffs, hiring people on a temp-to-full time basis could be one ticket to better cost control.

Bringing in employees on a temporary or contract basis brings about short-term and long-term cost control if it’s done properly.

In the short-term, these  employees aren’t eligible for your health or retirement plans. Long term, the arrangement gives your firm time to evaluate (based on the hire’s performance) whether  the employee would represent  well-spent money in terms of benefits, salary and incentives.

It’s often worth paying the new person a higher hourly wage – even overtime – for a short time to see if you should invest your firm’s benefits dollars in this employee. Consultant Erica Delaney recommends capping the evaluation period at 60 to 90 days.

The new law essentially scuttles a 2007 Supreme Court ruling that a person must file a claim of discrimination within 180 days of a company’s initial decision to pay a worker (usually female) less than another worker doing the same job.

Under the Fair Pay Act, each paycheck extends by an additional 180 days the statute of limitations for filing a discrimination lawsuit. Contrary to some reports, the new law will not change the current law that limits claimaints’ rights to back pay to two years.  

Nevertheless, some employers are concerned about the impact of the bill, especially in a down economy. Opponents of the bill argued that it’d encourage more lawsuits and that crafty employees would wait as long as possible to file claims in hopes of reaping larger damage awards.