Converting unused vacation day cash into 401(k)
American workers have a reputation of all work and no play. We get less vacation time than our peers in other countries, and even then we don’t always use it all.
But what if you could put the cash equivalent of those unused vacation days into your 401(k)?
This option has been available for many years, but never caught on with employers. But lately there’s been a renewed interest, says Lisa Van Fleet, a lawyer and benefits expert with Bryan Cave LLP in St. Louis.
Last year’s Pension Protection Act focused on 401(k) design features, such as automatic enrollment, to encourage participation, Van Fleet says. That got employers thinking. “Employers started saying, `What else can we do?’ ” Van Fleet says.
Some benefits experts suggest that this might appeal to highly paid employees whose vacation days are worth more.
But Van Fleet says that’s not the case. Those raking in the big bucks already max out on their annual 401 (k) contribution, which is $15,500 this year for workers under age 50. “They don’t need to look to vacation time to find more ways to put cash in,” Van Fleet says.
“The rank-in-file may not feel they have $15,500,” although they may have accrued vacation they can contribute, she says.
Employers can set up the system in a couple of ways.
One way is to allow employees to elect to cash-out unused vacation time at the end of the year or put those dollars in the 401(k). The money goes into the plan on a pre-tax basis as a contribution by the worker.
Or, a company with a use-it or lose-it vacation policy can contribute unused days as part of its contribution to the 401(k), Van Fleet says.
To avoid favoring highly paid workers, the company could set limits on the number of days it contributes for them, she says. It can also restrict highly compensated employees from participating in the vacation-401(k) program.
Again, there’s no groundswell of employers offering this now. Van Fleet says a few of her clients have set up this system and more are considering it. These employers often are in healthcare and professional services, such as law and architecture, she says.
Healthcare employers, for instance, use it as a way to attract employees. “They have a number of highly skilled professional nurses and tech people. Some (workers) want straight cash and don’t care about benefits,” she says.
And employers can reduce the buildup of unused vacation days on their books without taking something away from workers.
Even so, there is extra administrative work. And some employers may not want to give workers another excuse to not take time off.
“The real reason you give vacation time is so people have time to recharge their batteries, get stuff done and watch Jerry Springer in their underwear,” says Peter Ronza, director of compensation and benefits at the University of St. Thomas in Minnesota. “You run a danger of somebody just burning out.”
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