Employers need to closely monitor labor costs
(Editor’s note: This is the final installment of a two-part series. It begins with a continuation of the discussion of workers’ compensation costs.)
How each workers’ compensation claim is managed is critical to reducing costs. Often claims develop into problems when close scrutiny in the beginning could prevent them from becoming an issue. Employers should:
1. Daily monitor lost time costs. Paying specific attention to the "seven-day” and “14-day" waiting period provisions of the Michigan law can have immediate and long-term impact.
2. Assure timely payment of lost time benefits and medical bills. If benefits are not paid in the same cycle as wages, employees’ income suffers. If medical bills are not paid promptly, the employee may receive bills and collection notices that are the insurance carrier’s responsibility. This reflects negatively on the employer and may result in employees seeking attorneys for help.
3. Become familiar with local medical providers. The employer should develop close working relationships with doctors, which allows timely communications and removes misunderstandings.
4. Request detailed management reports from the insurance carrier. Reports that summarize losses are not specific enough to see where costs can be reduced.
5. Analyze reserves on loss runs. Many times reserves are significantly greater than what has been paid. A comprehensive knowledge of how reserves are established by the insurance carrier has a direct impact on premiums and funding arrangements.
Health care costs. Many employers wishing to reduce labor costs should consider going back to the original intent of medical insurance: protection from catastrophic financial loss. In the 1950s, patients’ out-of-pocket spending represented 50 percent of total health spending; in 2006, it was 13 percent (Newsweek, Jan. 14, 2009).
Several areas for companies to consider:
- Drop spouse coverage, if the spouse is eligible for coverage elsewhere.
- Reduce the company’s contributions for dependent and employee coverage.
- Increase upfront deductibles, resulting in coverage for catastrophic events.
- Drop dental, vision and hearing coverage.
- Consider a Health Reimbursement Arrangement (HRA) and reimburse employees for individual policy premiums.
Life insurance. The amount of insurance should be at a level that allows the beneficiary to live reasonably following the loss of the deceased employee’s income until they can regroup and determine their future. Excessive amounts provide wealth accumulation beyond the intent of company-provided life insurance.
Retirement. When company-provided retirement plans became popular 50 years ago, they were intended to supplement Social Security benefits. Most were “Defined Benefit” arrangements, commonly know as pension plans. The plans were funded by companies after annual actuarial evaluations determined the contribution necessary to keep them “fully funded.” Full benefits were generally paid for retirement at age 65 and some allowed reduced benefits for earlier retirements.
As companies are faced with more retirees living longer and a decline in the investments of the DB plans, they are required to increase contributions to meet “fully funded” requirements. Companies may want to consider alternatives such as “cash balance plans” for DB plans and a “capped allowance” format to provide retiree medical coverage.
Thirty years ago, “Defined Contribution” arrangements became popular; most commonly are known as 401(k) plans. These provide contributions from the employee and employer to be invested in a fund on a pre-tax basis. Employees’ contributions reduce gross wages for both the employee and the company, eliminating federal taxes (including Social Security) and some state and local taxes. Invested contributions earnings are allowed to accumulate tax-free until withdrawn. Companies with DC plans may want to reduce matching contributions, or, if a match is in place, look into “safe harbor” provisions to eliminate costly annual non-discrimination testing. It’s also good to analyze the investment vehicles themselves and the fees associated with their management.
Unemployment insurance. These costs can be minimized with diligence to the details of claim processing and funding. Some employers are not aware this is not a welfare benefit, but one employees have to qualify for based on wages and reasons for being unemployed. An employee who “quits without good cause” or is “discharged for misconduct” is not entitled to benefits. The employer’s answer to an initial claim will be a determining factor of whether benefits are charged against their account and impact costs for years to come.
Assuring that employees discharged for misconduct or who quit without good cause do not impact unemployment insurance costs begins with how the employer records communications and documents before the employee leaves. If a claim is filed, the employer has the burden of proof to establish why the employee is no longer working. Employers should respond timely with all documented records available in response to the initial claim filing. Failing to do so may result in benefits being charged to an employer’s account based solely on statements by the employee.
Additionally, employers should pay attention to “determinations” from the state and file timely appeals if they believe them to be incorrect. These are opportunities for employers to appear in person with relevant witnesses, and an attorney is not required.
The current maximum UI tax rate an employer may pay in Michigan is 10.3 percent of the first $9,000 of wages to each employee. The rate is based on several factors, including the employers “experience” of benefits paid out versus taxable payroll. The effects of one employee receiving benefits can impact an employer’s tax rate for many years.
Tom Cole is a principal with P3HR Consulting & Services LLC of Grand Rapids.