Pay increases in 2009 were at an all-time low, at least since good records have been kept on this type of data. In 2009, over 50% of companies either froze pay or worse, by far the highest pay pull-back/retrenchment numbers I have seen in my 25+ year career in HR and compensation.

2010 portends to be a bit better for employees, but employers are still keeping a pretty tight clamp on their purse strings, and understandably so, with economic recovery still looking a bit tepid.  Predictions are for pay increase budgets of about 2.7% in 2010, a vast improvement compared to an average 1.8% increase in 2009, by far the lowest year on record. Both of these data points are from a recently released Hewitt report.

Variable pay budgets (budgets for incentive or "bonus" programs) are expected to remain stable at about 12% for 2010. While the 2010 variable pay budgets are about in line with 2008 and 2009, the long-term trend has seen a slow but steady upward march, and we at the StrategicPay Series expect that trend to continue.  In 1990, corporate variable pay budgets were about 5% of payroll, and today they are more than double that, while merit pay budgets have been at historically low levels since the 2001 recession. 

Hewitt expects variable pay budgets to slowly continue upwards.  In a study released in the spring of 2009, Hewitt predicted  an average variable pay budget of 16% of payroll and a base pay increase pay budget of 2.0% in 2020.

While, of course, no one knows what's going to happen 10 years into the future, the predicted trends are clear: continued pressure on fixed-cost compensation increases (i.e. base pay), combined with a continued willingness to pay for performance, in the form of variable pay.  We agree.

This post is from derived from my recent post at the Compensation Cafe.

After more than two decades of slow but steady erosion and a few body blows in the recent recession, the state of job satisfaction, and more importantly the state of the overall employee-employer relationship, are at new generational lows. Employee morale is in the tank, and the willingness of workers to bolt at the next opportunity is at a multi-year high. Numerous studies have shown these trends, including the recent Conference Board report, which confirmed the multi-decade low in job satisfaction.

The 2008-2009 recession was a real punch in the gut to an already injured relationship between employers and their most "valuable" asset (at least that's what a lot of annual reports say). Between the massive layoffs, skimpy or non-existent pay increases (or outright pay cuts), and with the on-going push for "doing more with less," the foundation of the employee-employer relationship has weakened considerably over the years and is in need of some serious shoring up.

Some HR and compensation professionals have told me they think "engagement" is an overused buzzword. Even you may believe this, but just think about your typical "dis-engaged" employee and ask yourself how much value they bring to your organization?  Buzzword or not, having employees who are actively engaged in their work and believers in their organization and leadership is absolutely critical to organizational performance and maintaining a psychologically-healthy workplace, where people tend to thrive and stay.

So, what's an employer to do? How can we enhance this somewhat nebulous "engagement" concept?  If you're looking for simple/easy, "plug-and-play" solutions, they don't really exist, but here are several areas that merit your consideration:

• Increased/enhanced communication: nearly every broad-based or organizational study I've seen has shown a desire on employees' part for more communication, about their organization and their goals, and especially about their job expectations and performance. Communication takes some time and effort, but it's virtually free to provide it, so why do so many organizations fail in this key element of management and leadership?
• Increased transparency: who doesn't want to know how and why they are paid what they are? The more open you can be about your compensation philosophy/strategy, and how as an organization you're meeting the goals of your compensation program, the better off you'll be in the minds of your employees. Transparency fosters trust, while a lack of it may foster distrust.  If you have a soundly-built and competitive rewards program, what's to hide? Share the truth! I am not suggesting total transparency or gritty behind-the-scenes details, but if you've got a program you can be proud of, share it, and how your organization's' approach is a win-win for the organization and its employees.
• Recognition: recognition is the missing link in many rewards programs, and a failing of most management teams.  Can you catch your employees performing highly, going above and beyond, or notice those who provide great customer service on a regular basis? Are you ready and willing to provide genuine appreciation and recognition for/to your most valuable asset?  Recognition, a corollary of communication, is inexpensive to deliver, but can provide great psychological benefits for your workforce, and eventually to those who practice it genuinely.
• Listen, trust and empower: this may not come easy for some managers, but managers who can learn to listen better, trust in their staff, and delegate more responsibility and authority (and with the resources/tools to handle it) will find that most employees respond quite favorably to this approach. While some staff want to be led by the hand, most workers want to be heard, to have input into their work, and have the trust, resources and authority to get it done.
• Develop thy managers: Have you ever heard the phrase that people don't leave their jobs, they leave their manager (or company leadership)? Well, in most cases it's true. People tend not to leave managers and companies they respect and like working for, but they do tend to leave ones they don't believe in. Thus, it's critical that companies train and develop their management teams, as well as reward their best people managers, while dealing with the ones who aren't (see next point).
• Get your management performance act together: organizations that don't address performance issues within their management/leadership teams are destined to have morale and dis-engagement issues within their non-management ranks. Working for a poor manager makes your work life suck, is the single biggest contributor to turnover and poor morale, and is a guaranteed "engagement killer."
• Cash compensation: let's not forget that most folks are to at work trying to make a living for themselves and their families. But notice, it's nowhere near the top of my list. Dollars are very important, but you can't buy workplace love. If you were one of the many employers that engaged in wage cutting and other forms of pay-related retrenchment during the recession, then the first thing you should be thinking about is getting at least back to where you were prior to those cuts.  After that, it's time to start thinking (or re-thinking) about competitiveness with the external market for your talent. Paying competitively won't guarantee you anything, but it should reduce pay-related turnover, and enhance your ability to attract and keep talent. Don't believe that just because the labor market is a mess right now that it renders this topic as unimportant. Staying competitive always important, as there is always a market for top talent.  Several studies have shown that a high percentage (over 50%) of the workforce is ready to move onto the next opportunity when it presents itself, so don't help push them out the door by ignoring this critical aspect of the "employment deal."
• Developmental opportunities for professionals: when times get tough, training and development budgets are usually one of the first things to be cut. If that's the case at your organization, you should help to make it one of the first things to be restored. Beyond being appreciated, communicated with and paid fairly, the opportunity to learn, grow and develop is high on many people's importance list. A lack of growth and learning opportunities is a significant competitive disadvantage for any employer, but especially in the so-called "knowledge" industries (technology, scientific, engineering-related, etc.) where ongoing education and learning form the collective knowledge backbone of the organization.

Well, that's my list.  I'd like to hear your thoughts too.  Go forth and actively nurture satisfied, motivated and engaged workers!

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy and lead author of the StrategicPay Series Base Pay Toolkit, a hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

The Five Domains of High-Performance Organizations
i4cp identifies the five key areas in which High-Performance Organizations excel

Seattle, WA (January 21, 2010) - After conducting thousands of studies that cover hundreds of issues related to productivity and the workforce, one thing is clear: there is no single organizational element that is correlated with high performance. Rather, there are five.

For decades, the research team at the Institute for Corporate Productivity (i4cp) has studied what separates high-performing organizations from their lower-performing counterparts. The results of that research have consistently shown that companies that excel in the following five domains are typically high performers:
•    Strategy
•    Leadership
•    Talent
•    Culture
•    Market

In December, i4cp set out to clarify the differences between high-performing and low-performing organizations across these domains, and to determine whether certain issues or traits have increased in importance in the current economic climate. The results were interesting, if not startling. The gap between higher-performing and lower-performing organizations has widened considerably from previous studies. Based on a scale from 1 to 7, high-performance organizations scored an average of 6.03 across these domains, compared with 2.88 for low performers.

"High-performance organizations all seem to recognize that, while excelling in these five areas is critical, these domains need to work together as an integrated system," said Kevin Oakes, CEO of i4cp. "The culture should be focused on the customer and reflective of the organization's talent, which in turn feeds off the leadership, who need to be aligned with the strategy, etc. If one domain is ignored or inefficient, the system breaks down. This five-domain system also contains many important sub-domains - our members would recognize them as knowledge centers -that are just as critical to explore."

Specifically the new study found the following in each domain:

1. Strategy
High-performance organizations outscored low performers by 6.14 compared with 2.58 in the critical area of Strategy. In looking at specific areas of strength vs. weakness, it's clear that an organization's strategic approach is vitally important to high performance. The common wisdom of "walk the talk" is an indispensable ingredient in high-performance organizations. If an executive says one thing and then does another, employees draw a variety of conclusions, most of them destructive to the organization.

Executives in high-performance organizations avoid these problems by ensuring that employees are clear about the strategic plan and the company's approach to business, and by ensuring that managers behave consistently. The study shows that the single most widely cited strategic practice among high-performance organizations was, "My organization's philosophy statement is consistent with its strategy." And the strategic practice in which high performers outstrip low performers the most is "Organization-wide performance measures match the organization's strategy," followed by "Organization's strategic plan is clear and well thought out."

2. Leadership
In Leadership, the gap between high-performance and low-performance organizations was 5.96 compared with 2.47. The study found that one of the most widely agreed-on leadership-related strategies is ensuring that "Everyone is clear about the organization's performance expectations." Another important factor associated with high performance is "Making sure employees believe that their behavior affects the organization." Leaders can't do their jobs alone. They must be able to convince others of just how important their own behaviors are to the success of the whole organization.

A third factor that was strongly associated with performance was the idea that "Management promotes the person who has the best skills and knowledge to do the job." Performance tends to be higher in organizations where promotions are based on talent and merit rather than on other factors, such as organizational politics.

3. Talent
With high-performance organizations scoring 5.82 in Talent, compared with 2.73 for low performers, the gap between the two is certainly wide. High-performance organizations know that effective Talent Management moves beyond a focus on HR practices, processes and systems, to a strategic approach that is linked to business outcomes. This begins with stepping outside of HR and looking at the organization from an outside-in perspective. This entails identifying the business model components and areas that drive value, and determining what the organization needs. It enables organizations to take a holistic approach to treating employees as individuals, while managing and making decisions based on data-driven information, all of which benefit the organization as a whole.

4. Culture
The difference between high and low performers in the all-important Culture category is 5.99 compared with 2.94. Being seen as a "good place to work" is a solid indicator that an organization is a high performer in this domain. Not only is this characteristic the most widely cited by high-performance organizations, it's also the biggest differentiator from low performers. High-performance organizations are also well aware of external factors - such as customers, markets and competitors - and they are ready to take on new challenges. Another element of culture that's relatively strongly correlated with high performance is a commitment to innovation and internal fostering of creativity.

5. Market
High-performance organizations scored very high in market or customer focus (6.23) vs. lower performers (3.69). The research shows that high performance is associated with a strong emphasis on customer service, including vigorous efforts to serve customers better than anyone else in the industry. High performance is linked with the use of "Customer information as the most important factor related to developing new products and services." High-performance companies are usually organized internally around what's best for the customer, and their strategy is based on customer data.

"The study reaffirms i4cp's focus on its 44 ongoing research projects, and our discoveries to date on high-performance organizations," Oakes commented. "Throughout 2010, i4cp will be launching new iterations of its most important studies - on such topics as leadership agility, customer-focused workforces and strategy execution and alignment - to see which tactics, strategies and practices high-performance organizations are using in this economic climate."

The High-Performance Organization Survey was conducted by i4cp in December 2009. The full results of the survey are available exclusively to i4cp corporate members.

About i4cp, Inc.

i4cp is the world's largest vendor-free network of corporations focused on building and sustaining a highly productive, high-performance organization. Through a combination of peer networking, human capital research, tools and technology, we enable high performance by:
•    Revealing what high-performance organizations are doing differently
•    Identifying best and next practices for all levels of management
•    Providing the resources to show how workforce improvements have bottom-line impact
With more than 40 years of experience and the industry's largest team of human capital

WorldatWork Survey, January Update: Pay Cuts Not as Prevalent as Pay Freezes in 2009
 
January 19, 2010 – Washington, D.C. – In response to the sluggish economy, many corporations either froze or cut pay in 2009. Even as the economy starts showing signs of life, a majority plan to remain conservative when it comes to pay practices in 2010. The WorldatWork 2009-10 Salary Budget Survey, January 2010 Update (fielded in October 2009), found that 52% of U.S. employers froze pay for some or all employees in the 2009 recession, while 13% cut pay.
 
Will employees see their pay restored in 2010? At least 22% of organizations that froze pay in 2009 are planning to prolong the freeze into 2010, while 54% plan to resume normal pay activities this year. More than a third said they were in a recession (in October) and were not in a position to unfreeze pay.

 Of those organizations that cut pay, 37% said they remained in a recession and were not yet considering recovery actions; 29% planned to restore pay in full, while 15% said the pay cuts were permanent.
 
"Employers are taking a 'wait and see' stance when it comes to returning to normal pay practice," said Jim Stoeckmann, CCP, compensation practice leader at WorldatWork. "There are risks both ways. Moving too fast in restoring salaries and merit budgets leaves employers vulnerable if the recovery fails to materialize. Moving too slowly creates the risk of turnover as employees look for a better opportunity with another company. Even with jobs scarce, there are always opportunities for employees with the right skill set."
 
As salary budgets remain tight and employee satisfaction low, organizations are turning to other ways to motivate and reward employees. Employers are focused on providing or enhancing career development opportunities (33%), non-cash rewards and recognition (28%), leadership training on employee motivation (21%), flexibility options (20%), monetary rewards for high performers (19%), and monetary rewards for mission-critical talent (15%).
 
"With lower than normal employee satisfaction levels, it is crucial for employers to center the employee value proposition on the entire total rewards package," said Alison Avalos, research manager for WorldatWork. "Employers can cultivate employee loyalty by highlighting non-cash rewards, particularly for key employees. These programs validate the employee's time, effort and talent, even in the absence of salary increases."
 
About the Survey:
The WorldatWork 2009-10 Salary Budget Survey, January 2010 Update was fielded in October 2009. Survey respondents are WorldatWork members employed in the HR, compensation and benefits departments of mostly large U.S. companies. N = 875.

Good riddance to 2009! It's onto 2010 and beyond...

For many of us, the second half of 2008 and most of 2009 was like a bad bad dream that was all too real: massive layoffs/job losses (over 6 million) and skimpy (or no) pay increases for those that survived the crunch; terrible business conditions and plummeting sales and profits (if you were lucky enough to have profits!); tapped out consumers and losses on real estate and retirement holdings, to name a just few fond memories of the past 18 months.

Indeed, let's move on. Here's a brief summary of the current outlook for 2010 for us HR and compensation professionals, with links to additional information.

Employment and Hiring

The most recent national employment data is encouraging, and indicates we are in a bottoming phase, if not getting ready for a slight rebound in early 2010 (don't expect a barn-burner turnaround anytime soon).  Job losses in November 2009 were only 11,000 nationally, which is by far the lowest total in well over a year. The U.S. unemployment rate dropped from 10.2% to 10.0%, and 36 states reported slight to moderate drops in their unemployment rates for November as well.

The recently released Manpower Employment Outlook Survey also reveals some encouraging trends and data.  While 12% of employers expect a decrease in employment in the 1st quarter of 2010, an equal percentage expect an increase.  While this may seem less than inspiring news, when the data is seasonally adjusted for typical seasonal employment patterns, there is a net 6% increase in expected hiring over historical employment trends for the 1st quarter.

When compared to a year ago, employers in the Western U.S. are the most confident, but all areas show improved employment outlooks. Using the seasonally adjusted data, all regions anticipate moderate quarter-over-quarter increases in employment levels.

Bottom line, the outlook is from flat to improving in the first quarter, depending on who you ask, but compared to the past 18 months, this is a huge improvement, and should provide encouragement to job seekers and businesses alike.

For more information on the labor market, see my recent post at the Compensation Cafe.

Base Pay Compensation Trends

While merit budgets for 2010 will be near to historical lows (2.5% to 3.0% in most studies we've reviewed), at least there will be pay increase budgets for the vast majority of employers, unlike late in 2008 and in 2009. (See earlier posts from this blog for more specific information).

2009 merit budgets (most commonly implemented in late 2008 or in the first quarter of 2009) were slashed or eliminated by large numbers of employers.  Depending on the study, 25% or more of employers had 0% pay increase budgets for 2009, and many actually cut pay.  Well over three-quarters of all employers reduced their original planned merit budgets for 2009, but we do not think we will see anything close this type of wholesale budget-slashing in 2010.  Recently completed studies (Mercer, Hewitt, Culpepper, etc.) suggest only about 10% of employers are planning 0% budgets or pay reductions for 2010, and we expect these percentages to drop further, assuming the nascent recovery continues.

Incentive Compensation Trends

Incentive compensation/variable pay budgets (but not necessarily payouts) are holding strong, despite the weak economy and labor markets.  Variable pay is getting more and more ingrained into the foundation of compensation plans in the U.S. (and internationally too, just more  slowly than here). Hewitt, who does a major survey of variable pay trends each year, reports that variable pay budgets dropped a very modest 0.2% (from 12% of payroll to 11.8%) in their latest research on the topic.

Despite this minor drop, the long-term trend toward increased variable pay budgets remains intact.

Executive Compensation in 2010

Executive compensation is the fastest moving target in the world of compensation.  From rapidly evolving reporting and disclosure requirements, to increased government intervention in executive pay, to shareholder activism concerning perceived excesses in executive compensation, it's been a wild past few years for anyone who follows this topic, and the pace of change isn't likely to slow down anytime soon.

The changes are so numerous (and in some instance convoluted) that we won't even attempt to describe them here, but here are a few thoughts as to where we are likely heading:

• New and increased executive compensation disclosure requirements for public companies (see "A Holiday Present from the SEC - New Proxy Disclosure Rules!"  from our friend William Parsons at CompWiser).
• Greater intervention/intrusion by the Federal Government into the executive compensation arena in general (already a very heavily regulated area).
• A greater focus on pay/performance linkages and increased transparency for executive compensation plans.
• An expectaion from various stakeholders (shareholders, unions, shareholder advisory groups, etc.) to see reduced excesses in executive compensation (expensive perquisites, tax gross-ups, huge "parachute" payouts, etc.).  This is already starting to happen, but this one has a ways to go still.

Longer-Term Compensation and Related Trends

• Continued historically low merit budgets. Don't expect a surge back to more normalized merit budgets, even after the labor market gets back to a more healthy supply/demand balance. Some are predicting a long period of historically low merit budgets, and we largely agree, as we see a greater willingness of companies to invest in variable pay than increasing their fixed costs via base pay increases.
• An on-going upward bias towards increasing variable pay budgets, in lieu of larger merit budget pools.
• Pay for performance (real pay for performance) will continue to increase in prevalence and intensity, and will become the the new "merit pay."  Only this time, it will be delivered via various incentive vehicles, rather than via a slight up-tick the annual base pay increase. Follow our friend Paul Hebert at Incentive Intelligence for daily lessons on all things incentive and motivation related.
• Taking better care of people psychologically (not just financially) will become more in vogue, and for good reason: most people desire more feedback and appreciation, and respond positively to it. Increased communication and various forms of recognition can help to build and maintain a healthier workplace. To get you thinking more about recognition and related concepts, see "12 Gifts for Cash-Short, Recession-Weary Workplaces" and "All I Want for Christmas" plus two recent recognition postings here at the StrategicPay Blog from our friend Theresa Chambers at Recognition Works.

Well that's about it for now.  Hopefully you haven't fallen asleep while reading this. We at the StrategicPay Series will continue to keep you informed of the latest information, thoughts and research in 2010.

Until then, here is wishing everyone a happy and safe New Years, and great start to 2010!!

On December 19th President Obama signed into law H.R.3326 - Department of Defense Appropriations Act, 2010 which contains the anticipated extension of the federal COBRA subsidy. The changes to the federal COBRA subsidy are effective immediately. Below is a summary of the new subsidy extension provisions.

Extending the period during which individuals may qualify for the subsidy:

Original Law – Both involuntary termination and COBRA continuation start date must occur by December 31, 2009.

New Law - Involuntary termination must occur no later than February 28, 2010.
The original law required the Assistance Eligible Individual's Qualifying Event to occur, and COBRA continuation coverage to begin no later than December 31, effectively denying the subsidy to many otherwise eligible Assistance Eligible Individuals whose active coverage extended through December 31. The new provision only requires the involuntary termination to occur on or before February 28, 2010 regardless of when the individual's COBRA eligibility period begins.

Extending the length of the subsidy:

Original Law – maximum 9-months of subsidy
New Law – maximum 15-months of subsidy

Assistance Eligible Individuals who exhausted the subsidy (generally beginning in November) and subsequently dropped or modified their COBRA coverage, are entitled to an extension of their December payment due date. (NOTE: Because COBRA is a federal law, this extension of the payment period is not binding on state plans not subject to the federal law. The individual states will have to address this issue relating to insurance plans in their specific state.)

Assistance Eligible Individuals who continued COBRA by paying the full premium will be entitled to a credit and must be notified of the Plan's application of the credit under rules similar to the original law.

Plans are required to provide notices to individuals affected by these changes explaining the revised provisions, as well as the Assistance Eligible Individuals' rights and responsibilities under the new law, including any reinstatement rights.

The timing for distribution of the notices is generally tied to either the date of passage or, if applicable, the date the COBRA subsidy was exhausted by an Assistance Eligible Individual.

If you have questions concerning technical details as to how this extension affects your COBRA eligible former or furloughed staff, you should consult with your benefits broker and/or COBRA administrator.

Note: Thank you to the folks at the LWHRA e-networks group for this information!

The StrategicPay Blog would like to thank guest blogger Caprice Pine of Swift HR Solutions, a strategic partner of the StrategicPay^® Series.  Thanks for the very useful information Caprice! For more information, or to reach Swift HR Solutions, see the contact information below.

There have been and continue to be legislative changes that may directly impact your company's administrative and cash flow procedures. We hope that this article helps clarify issues around COBRA and related legislation passed as a part of the Economic Stimulus Package. Congress is currently considering continuing some of these programs, to continue to help the lagging job market recover as it struggles behind the economic recovery.

What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act of 1986, as Amended (COBRA) is an act that requires most employers with at least 20 employees to allow covered employees and/or their dependents ("qualified beneficiaries") to continue their employer-sponsored group medical, dental and/or vision coverage for up to 18 months after losing coverage due to a COBRA "qualifying event" (e.g., termination of employment for other than gross misconduct, divorce, no longer being a legal dependent, etc.).  Coverage may be continued for up to 36 months if a covered individual experiences a "secondary event" while on COBRA health care continuation (e.g., if he or she becomes disabled).

An employer offering a group health plan to its employees becomes COBRA-liable on the first day of a calendar year when it has employed at least 20 W-2 employees for at least 6 months of the previous calendar year. Under COBRA, the covered individuals must normally pay 100-102% of the monthly premium themselves.

What is ARRA and how does it impact your company?
With the American Recovery and Reinvestment Act of 2009 (ARRA), the U.S. government extended a 65% COBRA subsidy to covered employees of COBRA-liable companies (employed at least 20 W-2 employees for at least 6 months of the previous calendar year) who are involuntarily terminated between September 1, 2008 and December 31, 2009. Employers play a large role in providing this subsidy, since they must pay the subsidy up front and then recover the funds via a tax credit when they file their quarterly Federal Income Taxes on Form 941. The COBRA subsidy provisions under the ARRA apply to all group health plans, including both fully- and self-insured health plans, maintained by essentially all types of employers that are required to offer COBRA in the first place. This is a great boon for folks who lose their coverage because of the down job market, and it is also something employers need to be prepared to continue dealing with. It is quite possible that Congress may extend this program.

So what do you need to know about COBRA/ARRA? Here are your Subsidy Essentials:

• OBRA-liable plan sponsors must notify former employees of their rights under          COBRA and ARRA using the new language provided by the DOL for this purpose.
• To qualify for the subsidy, a worker must have been involuntarily separated between Sept. 1, 2008, and Dec. 31, 2009, and not for gross misconduct.
• Workers who lost their jobs between Sept. 1, 2008, and enactment of the ARRA in 2009, but failed to initially elect COBRA because it was unaffordable, got an additional 60 days to elect COBRA and receive the subsidy.
• Eligible workers must self-declare as "Assistance-Eligible Individuals" (AEIs).
• AEIs have to pay 35 % of the premium to their former employers.
• The employer must pay the other 65% of the premium to the carrier, and can recapture that money from the Federal government via a tax credit on quarterly tax filings, using form 941.
• The subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.
• The 65% subsidy is payable for up to nine months from the date it begins.
• If an AEI becomes eligible for other group coverage at any time during the 9 month COBRA/ARRA subsidy period, he or she is still eligible for COBRA, but no longer eligible for the subsidy.
• Once a COBRA covered individual becomes covered under another group plan, he or she is no longer eligible for the subsidy or for COBRA health care continuation.

 
Is your plan subject to the COBRA/ARRA subsidy?
All group health plans, except for health flexible spending account arrangements offered through a IRS Code § 125 cafeteria plan, are subject to the COBRA premium subsidy under the ARRA. This includes not only major medical plans (indemnity, PPO, etc.) and HMOs, it also includes dental-only plans, vision-only plans, health reimbursement arrangements ("HRAs"), employee assistance programs ("EAPs"), and on-site medical clinics that provide medical care. Note, however, health savings accounts ("HSAs") are NOT considered to be group health plans for COBRA purposes, even though a related high deductible health plan ("HDHP") may be subject to COBRA.

What is an Assistance Eligible Individuals (AEIs)?
For purposes of the new COBRA subsidy provisions, an AEI means any individual who (a) is a qualified beneficiary as the result of his or her involuntary termination of employment during the period from September 1, 2008, through December 31, 2009; (b) is eligible for COBRA at any time during that period; and (c) elects COBRA continuation coverage. In Notice 2009-27 the IRS clarified that the involuntary termination of employment and the loss of coverage must occur between September 1, 2008, and December 1, 2009, for an individual to be considered an AEI. It is important to note that the individual must not be eligible for coverage under Medicare or any other group health plan (including a successor employer plan or the spouse's group health plan) in order to receive the COBRA premium subsidy.

Does this subsidy apply to Dependents too?
The new subsidy provisions apply not only to the covered employee who is involuntarily terminated, but also to a spouse and other dependents of the employee who were covered by the employee's group health plan immediately prior to the involuntary termination of employment and loss of coverage. Since each qualified beneficiary can independently elect COBRA, they will also be independently eligible to receive the subsidy. Important (as many plans cover domestic partners): for purposes of the COBRA premium subsidy the terms "spouse" and "dependent" follow the definition of spouse and dependent under federal, not state law. Thus, a same-sex spouse, domestic partner (registered or unregistered), or the child or children of a same-sex spouse or domestic partner may qualify for COBRA, but they are not eligible for the premium subsidy if they are not qualified dependents of the employee under federal law.

What if you have High-Income individuals?

• All qualified beneficiaries—even high-income individuals—who are also AEIs can receive the COBRA premium subsidy
• However, when the qualified beneficiary files Form 1040 at year-end, all or part of the COBRA premium subsidy received by the taxpayer, spouse, or dependent must be paid back (as additional income taxes) if the taxpayer is a high-income individual
• Partial recapture begins when modified adjusted gross income (AGI) is $125,000 ($250,000 for joint returns)
• Full recapture if modified AGI is $145,000 ($290,000 for joint returns)
• The taxpayer can avoid recapture by making a permanent election to waive the right to COBRA premium assistance

What is the difference between a Voluntary and Involuntary Termination?
Under IRS Notice 2009-27, an involuntary termination means "a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee's implicit or explicit request, where the employee was willing and able to continue performing services." The determination of whether a termination is involuntary is based on all the facts and circumstances. This can get tricky. For example, a resignation in lieu of termination would still be considered an involuntary termination for purposes of the new COBRA subsidy rules if the facts and circumstances indicate that the employer would have otherwise terminated the employee and the employee had knowledge that the employee would be terminated. The IRS has clarified this somewhat and noted that the following specific situations resulting in loss of group insurance coverage constitute an involuntary termination of employment for purposes of the COBRA subsidy law (high-level summary only—details can be found in IRS Notice 2009-27):

• An employer's failure to renew an employment contract.
• An involuntary reduction in hours of employment down to zero, such as a lay-off, furlough, etc.
• An employer's action to end an individuals employment while the individual is absent from work due to illness or disability.
• An employee's retirement, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee and the employee had knowledge that he or she would be terminated.
• An involuntary termination for cause; however, if the termination of employment is due to gross misconduct, the employee and covered dependents are not eligible for federal COBRA.
• A termination elected by the employee in exchange for a severance package (i.e., a "buy-out").
• A work stoppage due to a lockout initiated by the employer.

Note that if an individual disagrees with the employer's decision as to whether a termination was involuntary, the AEI will have the right to file an appeal with the DOL, which will render a decision within 15 business days of its receipt. The DOL's decision will be final in any disputed situations.

When does the COBRA/ARRA subsidy end?
COBRA premium assistance from the federal government ends on the earliest to occur of the following events: 1) The end of the nine-month period of COBRA premium assistance; 2) The first date the AEI becomes eligible for coverage under Medicare or any other group medical plan (with certain minor exceptions); 3) The date on which the AEI's COBRA coverage ends under federal and state law; or 4) The end of the month in which the AEI informs the employer that he or she is waiving the right to receive COBRA premium assistance. AEIs are required to notify the employer (or pay a tax penalty) if they become eligible for or covered under Medicare or any other group medical plan.

What happens if a company ceases to exist?
If an employer (including all members of the controlled group of corporations that includes that employer) ceases to sponsor any group health plan, all obligations to provide COBRA coverage cease. The COBRA premium subsidy ceases as well. If a related or successor employer is responsible for providing continuation coverage to former employees of the bankrupt employer, the former employees can enroll in the related or successor employer's group health plan. The related or successor employer must notify and make the COBRA premium subsidy available to the former employees of the bankrupt employer.

So what are some action items you should consider if you are a COBRA-liable employer?

• Provide (or have your COBRA administrator provide) the new COBRA notices created by the DOL for this subsidy program, including language regarding AEIs' right to the premium assistance.
• Include a description of the obligation of the AEI to notify the plan of eligibility of subsequent coverage under Medicare or another group health plan, and the penalty for failure to notify the plan (Failure to notify the plan may result in a penalty of 110% of the premium reduction provided).
• Identify AEIs – employees and their dependents losing group health coverage due to involuntarily terminations during the period of September 1, 2008 and December 31, 2009.
• Pay 65% of the COBRA premium for AEIs. AEIs will pay 35% of premium rate. Make sure the carrier receives the total premium each month on time (employer/COBRA administrator coordinate).
• Take payroll tax credit for subsidy using line 12 of Form 941.
• Employers may only claim the credit after the AEI has paid their portion of the reduced premiums.
• Reimbursement is made out of payroll taxes. If payroll taxes are insufficient, then IRS will issue a refund directly to the employer or carrier IRS Form 941 for 2009 (Employer's Quarterly Federal Tax Return)

What if your plan denies coverage to a COBRA premium assistance request?
If the group health plan denies an individual's request for COBRA premium assistance, the individual may appeal the decision to the federal government

• The federal government is required to make its determination on review within 15 business days after receiving the individual's appeal
• The federal government's determination will be made "de novo" (i.e. without regard to the decision made by the plan)

Fun COBRA Facts—Did You Know?

• COBRA-liable companies are required to notify newly covered individuals of their COBRA rights when they first become covered (this is called the Initial COBRA Notice). Many companies don't realize this and only notify folks of their COBRA rights when they lose their coverage.
• If an employee has covered dependents residing at more than one address (e.g., dependent children living with an ex-spouse), COBRA notices must be sent to each address.
• Many group insurance brokers now offer COBRA administrative assistance for a small or no fee—check with your broker to see if they may be able to help. Caveat: they don't usually handle the initial COBRA notice, just the notices and premium collection when people lose coverage. A full-service COBRA administrator will handle it all for you, and will charge you fees and usually collect a 2% administrative fee from the covered individuals (this 2% should be included in the total premium when calculating the COBRA/ARRA subsidy).
• Each eligible dependent can make a separate election to continue or not continue coverage under COBRA, and can continue one coverage without the other coverages, unless coverage is "bundled". For example: a former employee whose covered spouse has a pre-existing condition might elect to cover the spouse under COBRA for medical, but cover the former employee and any other eligible dependents under individual insurance with a higher deductible and lower monthly premium.
• If an individual continues COBRA medical coverage for the full 18 months, an insurance company must accept them onto coverage without requiring completion of a health risk questionnaire (i.e., the insurance company can't exclude or charge them more for any pre-existing conditions).

This article is by no means a comprehensive analysis of COBRA and/or of the COBRA/ARRA subsidy—it is intended as an overview only. For more information, check out the Department of Labor's Website pages below:

An Employer's Guide to Health Continuation Coverage Under COBRA
FAQs About COBRA
COBRA Continuation Coverage Assistance Under ARRA
FAQs for Employers Re: COBRA Continuation Coverage Assistance Under ARRA
COBRA Model Notices from the DOL

Or contact Swift HR Solutions and they will be happy to help.

Author:
Caprice Pine, Senior Consultant
Swift HR Solutions
caprice@swifthrsolutions.com
425-503-5770
www.swifthrsolutions.com

Swift HR Solutions: Winner "Best Service Provider to Startups" Seattle 2.0 May, 2009

As an occasional writer/blogger for the Compensation Cafe, I must say that I'm really impressed with the content that comes from my fellow writing/blogging colleagues.  Since a lot of innovative thinking and informative writing comes from this exceptional group, I thought I would pass on links to a few of my favorite posts from the past several weeks, for your reading pleasure and edification.

• Retaining Your Top Talent, by Darcy Dees
• Talking with Employees About The Cost of Living, by Margaret O'Hanlon
• The State of Pay for Performance, The Future of Salary Increases, by Ann Bares
• Coffee's for Closers (on the state of incentive pay and "merit" increases), by Laura Schroeder
• Can't You Just Convert the Currency? by Chuck Csizmar
• 7 Keys to Designing a Sales Comp Plan That Delivers, by Becky Regan
• Engagement & Turnover in the Recovery, by Doug Sayed

Subscribe to the Compensation Cafe to receive daily content from this team of compensation pros, who also happen to be excellent writers.

Another major salary budget survey (this one from Hewitt Associates)  is out and it shows that merit and variable pay budgets have largely stabilized for 2010. With the economy (but not the labor market yet) on the mend, it's likely that these numbers will approximate what we will actually see in 2010.

Projections made in 2007 for 2008, and again in 2008 for 2009, turned out to be completely off the mark, mostly because few saw the recession (or or its strength) coming. But barring another swoon, merit projections have largely stabilized and are now looking like they will hold in 2010, for the most part.  Thanks to our friend Ann Bares at the Compensation Force blog for lending us her graphic.

As you can see, compared to projections made months earlier, it looks like most employer budgets are headed for the 2.5% range +/- based on this sample of over 500 companies, mostly larger employers.

Variable pay budgets have held up fairly well too, with companies budgeting 11.2% of payroll for variable compensation for salaried exempt workers, down somewhat from 11.7% in the earlier study done by Hewitt. Other employment groups were virtually unchanged from the previous survey.

Despite the slight drop in variable pay budgets, the longer-term trend for variable pay has been steadily up, increasing from 6.4% in 1994 to 11.2% in 2010 for exempt workers.

Another encouraging trend is that far fewer employers are planning to freeze salaries in 2010, 17%, down from nearly half (48%) in 2009.  Our guess is that if the economy continues to stabilize and slowly improve, the prevalence of salary freezes will drop even further.   In addition 0% of companies in the study were planning salary reductions for 2010, vs. 10% in previous earlier survey earlier this year.

Hewitt predicts, and we agree, that merit budgets will remain constrained for some time, as employers put more emphasis on variable/incentive pay, and as employers continue to struggle with rapidly rising employee benefits costs, primarily in health care.

As a compensation professional who tries his best to stay up on what's happening on the business, HR and compensation world, I must say that I'm astonished at how much information and advice is available, especially on-line.  There is an amazing array of information for HR and compensation professionals on the web, but but it requires a fair amount of sifting through the mass of information to find the really valuable pieces of information out there.

One blog posting I read this morning while catching up on the latest happenings really got me going. The post, "Six Pay Raise Alternatives" presents some good issues and ideas to think about, but also floats a fair amount of questionable ideas and advice.  Briefly paraphrasing, here are six pay raise alternatives that were suggested:

1. Pass into your employees some of the perks you as a manager receive. The primary examples used were sporting and concert tickets, such as "a $150 ticket to a Billy Joel concert goes a long way, and provides maximum ROI." First of all, while this would be a nice firm of recognition, it's not a credible pay raise alternative.  Second, if the company is following the IRS code (always a good idea!), this example would create a taxable event for the employee, but I digress...
2. Treat your employee to a luxury meal. Certainly a nice gesture, and one that many employees would appreciate, but this is another form of recognition that should be an ongoing part of being a good manager, by recognizing and expressing appreciation for your employees and their performance. 
3. "Give cell phone breaks." Another nice gesture, but something employers should already be assisting with or providing for employees who are expected to be available or reachable most hours of the day.  This is a mild perk/benefit, but certainly not something virtually any employee would consider to an alternative or substitute for a merit-based pay increase, even a small one (which most of them are today).
4. "Award your employee a new title."  Yikes!  As compensation advisor that spends a good chunk of his time trying to untangle the messes and expectations that lie behind the indiscriminate awarding of job titles, this is really unsound advice (and I'm struggling to stay diplomatic).  Anyone who tells you that job titles are "free" or don't change expecations doesn't understand what they are talking about, because inflated or "vanity" titles almost inexorably lead to internal equity concerns, revised and/or unrealistic pay expectations, etc.
5. "Offer flexible schedule or telecommuting."  Yea, something we can agree on, but not really a pay increase alternative, although this would be considered is a valuable benefit to some.  Many employees appreciate the opportunity to save on commuting time and related time and cost elements of going into the office every day.  This benefit should be reserved for highly motivated self-starters that don't need a lot of prodding or supervision (in other words, the employees you should fight to give a raise to, and to ensure their on-going pay competitiveness).
6. Let your employees come up with their own perk, and if it's a viable option, implement it immediately.  This option has appeal on it's face, but be aware of potential perceptions of internal equity issues or favoritism.  I'm not opposed to individualized rewards and recognition, but most employees are are keenly aware of what they observe around them, and it they sniff "unearned" or obviously inequitable rewards, you as a manger will will suffer from other morale and internal equity concerns that can challenge your credibility and effectiveness.

There are actually some really good nuggets embedded in here: recognition is a good thing, but it's not something that should be done only on special occasions.  It's a part of being a good manager and component of being an employer of choice. Other nuggets: people really appreciate being appreciated, and we recommend showing appreciation as a habit, and not something done on an infrequent or special-occasion basis.

In short, there is a lot of information and advice out there, but be discriminating and choose carefully, because when it comes to base pay and other forms of rewards and recognition, there can be negative or unintended consequences of poorly designed efforts and programs.

For instance, if you're looking to implement a new recognition or incentive program, or a strategy to address pay issues while keeping down fixed cost increases, talk with a specialist or at least someone who truly understands the issues, alternatives and consequences of of various strategies and approaches.  Too much is at stake to to take the chance of implementing poorly-designed programs or un-vetted ideas without considering the consequences.

OK, I'm getting off the soapbox!