Experience with PTO benefits in a cafeteria plan?

[Guest UpstatePensionBabe]

A survey: Is it common (or uncommon) for an employer of approx. 500 employees to allow employees to "sell" paid time off in a cafeteria plan and use the proceeds to "purchase" other cafteria plan benefits? Any special administrative issues to be aware of?

[Guest Matt J]

I'm not aware of all the issues, but for one is your PTO "rollover" policy. If you are allowing employees to buy or sell PTO on a pre-tax basis, you cannot have the rollover feature. (constructive receipt) If you allow them to buy and sell on a post tax basis, you can still have the "rollover" feature of PTO.

The record keeping is another hurdle.

I have seen this is some plans. It is a nice feature for long term employees to sell some vacation time back to purchase other benefits as well as new employees to buy more than their allotment.

I'm not sure I amswered the question, but thought I would add the rollover info.

[Kirk Maldonado]

Matt J:

What is your authority for the statement "If you are allowing employees to buy or sell PTO on a pre-tax basis, you cannot have the rollover feature. (constructive receipt) If you allow them to buy and sell on a post tax basis, you can still have the "rollover" feature of PTO."

[Guest eafredel]

The treatment of vacation days in a cafeteria plan is addressed in both the temporary and proposed cafeteria plan regulations. The temporary regulations state "Finally, a cafeteria plan may offer paid vacation days if the plan precludes any participant from using, or receiving cash for, in a subsequent plan year, any of such paid vacation days remaining unused as of the end of the plan year. For purposes of the preceding sentence, elective vacation days provided under a cafeteria plan are not considered to be used until all nonelective paid vacation days have been used." Treas. Reg. 1.125-2T Q & A 1. The proposed regulations provide more detail regarding this ordering rule and some good examples. Prop. Reg. 1.125-1 Q & A 7. If employees are permitted to carry over vacation days from one year to the next (and the cafeteria plan permits them to sell vacation days), these ordering rules must be met.

The issue of PTO in a cafeteria plan also may raise issues under state law, particularly in California, which limits an employer's ability to apply a "use it or lose it" policy to vacation days.

[Kirk Maldonado]

eafredel:

I agree with, and am very familiar with, the points you raised. Especially the California vacation pay rules, having practiced in California for over 20 years.

But those authorities do not support an absolute ban on the sale of accumulated vaation time that was posited by Matt J.

[Guest eafredel]

I agree that there is not an absolute ban on buying or selling vacation days. The important point-- in the context of someone who is thinking of implementing a program that will permit the purchase or sale of vacation days (or PTO)-- is that ordering rules exist under the cafeteria plan rules. As a result, the person who posted the original question should know that most cafeteria plans limit the number of days that can be bought or sold because paid vacation days that are subject to an election may not be carried over to a subsequent plan year. Where plans permit the purchase of additional vacation days, employers sometimes permit employees to cash out elective days before the end of the plan year. If plans permit the sale of vacation days to serve as a source of fund for the employee's share of premium costs or to fund an FSA, those funds must be used during the plan year (or subject to forfeiture at the end of the plan year). Some of these things may come as a "culture shock" to employees who are used to carrying over PTO or vacation days.

I would be interested in hearing your thoughts about the California law implications of paid vacation days in a cafeteria plan.

[Guest Matt J]

Sorry about the delay in responding ... I think I meant to say that the days bought pre-tax cannot be rolled over to the next year. They would have to either be exhausted or paid out in that plan year.

Does that follow with what was posted? Maybe I am getting confused now.