Flexibility has become a top priority for HR teams, who are focused on meeting their employees’ evolving needs. In recent years, employees have been questioning traditional working arrangements in a way they never had before. This process was sparked by the shift towards remote and hybrid work. It has also extended to other areas such as professional development and benefit programs. It’s not surprising that flexible benefits are on the rise.
Companies are exploring conversion of PTO as a means to help their employees maximize the time they’ve earned and achieve their financial goals. Employees can exchange their time off in lieu of other financial benefits, like student loans, retirement contributions and charitable donations. PTO is underutilized, even though it’s an important part of most benefits programs. By implementing a PTO plan, HR teams ensure that the benefit is not wasted and employees get the flexibility they demand.
HR teams need to be more creative about the benefits that they provide. HR teams must adapt to the rapidly changing employee expectations, as well as the realities of today’s workplace. This will help them retain and attract talent, increase productivity and engagement, and improve employee wellbeing holistically.
Why the status-quo doesn’t work
HR teams are also considering new approaches to PTO because of the growing demand for flexible, customized benefits. HR teams are also aware that the PTO status quo has become dysfunctional. 78 percent of employees do not use their entire time off. This proportion jumps to 83 and 89 for Gen Z. It’s not just that employees are deprived of the full benefit of their major benefit, but it also leads to large financial liabilities. In many states, companies are required to pay the full value of PTO unused upon separation. They can also be fined and punished for not doing so.
Many employees don’t take their full PTO because they are worried about their workload, their colleagues’ and managers’ perceptions, or that they will miss out on opportunities. However, Pew reported that one of the main reasons employees do not take their PTO is that they “do not feel that they need to.” Convertible PTO is also a way to address the growing problem of financial stress at work. A recent SoFi study found that 86 percent feel stressed out about their finances. This can affect mental health, motivation and other aspects of wellbeing.
PTO should reduce stress for employees and improve work-life balance. However, many are more concerned about their finances rather than their workload. PwC reported that 57 percent said finances were the main cause of stress in their life. Many employees would rather use their PTO value to improve their financial health, and HR teams must give them this option.
A recent Goldman Sachs study states that the implementation of PTO convert programs will be one of the biggest trends in PTO by 2025. According to Goldman Sachs, the number of companies implementing these programs has increased. This shift is in line with the trend of flexibility, as the SECURE 2.0 Act, for example, allows employees the option of receiving matching contributions when they pay student loans instead of making 401(k).
How does PTO convertible work? HR teams can build programs around their needs and integrate PTO conversion into their payroll system. Conversion programs can redirect funds that have been already allocated to a variety of uses, including student loan payments, 529 plans, retirement contributions, HSAs and other types of savings. Employees can use convertible PTO to pay for travel, make direct cash payments or donate time off to their colleagues. Tax implications of convertible PTO are dependent on the purpose for which employees use it. If they wish to cash out their PTO, they must pay regular compensation tax. If employees are planning to contribute money to their 401(k), or any other investment or savings vehicle, HR teams should be aware of the contribution limits.
HR teams should use PTO conversion instead of wasting large amounts of PTO or adding them to the balance sheet as unfunded liabilities. This will give employees more flexibility in using their benefits.
Considerations for adopting a PTO convertible
There are a few guidelines that can help HR teams maximize the value of convertible PTO. HR teams need to have a dialogue with employees on their needs and concerns. This includes ensuring employees are informed of all the options available and any tax implications. There are large gaps between the perceptions and reality of HR teams about employees’ financial health. Nearly three quarters of employees want assistance with their finances. Companies that provide financial literacy and assistance have happier and more productive workers.
HR teams must also address the cultural issues which have led to the current unhealthy PTO status-quo. 63 percent of employees claim that the pressure to maintain productivity and meet deadlines prevents them from taking vacation time. Even when they are on vacation, 60% of employees report that they find it difficult to disconnect from their work. 86 percent will check emails from their bosses while they’re away. Many employees claim they do not need any more PTO. However, HR teams should be doing more to combat the culture of excessive work that is prevalent in many companies.
Converting PTO can help employees make the most of an important benefit that’s currently being wasted on a large scale, causing unnecessary financial hardship for businesses. As with any benefit, convertible PTO should be part of an overall and flexible strategy that improves employee wellbeing.
