One of the most prevalent headlines in the news these days is the shortage of public school teachers around the country. According to the Bureau of Labor Statistics, there are at least 280,000 fewer public school teachers than there were before the pandemic.¹ While this shortage of educators was emerging before COVID-19 changed life as we knew it, the pandemic and the ensuing Great Resignation of 2021 exacerbated the problem. Now, as the 2022-2023 school year begins, the deficit has only gotten worse and has expanded to include positions such as bus drivers, custodians, school nurses, and cafeteria workers.
In fact, a survey² sponsored by EdWeek Research Center—the research arm of the non-profit and non-partisan publisher of Education Week—confirmed that most schools are seeing fewer candidates for critical positions during the same period last year. More than 2/3 of survey respondents said they do not have enough candidates to fill teacher, paraprofessional (e.g., teacher assistants, teacher aides), and food service worker positions, and 86% said they don’t have enough bus driver candidates.
Addressing the Issue
While attrition and recruitment issues can occur for many reasons—some of which are beyond the control of school administrators—it’s hard to deny that benefits such as health insurance and retirement plans are every bit as important as salary when an employee is deciding whether to stay or go, or when a candidate is wondering if they should accept a position in the first place. It’s critical that decision makers start thinking creatively when it comes to “bulking up” benefits packages—especially amid budgetary constraints. Fortunately, there are some unique plan designs that can help attract and retain talent in a budget-friendly way.
A Triple Tax-Free Defined Contribution Benefit—For Health Care
In these inflationary times, the cost of everything is going up, and health care is no exception. Helping employees offset the rising cost of medical expenses or bridge the gap between retirement and Medicare eligibility could be just the incentive needed to make your benefits package competitive.
Enter the Defined Contribution Health Reimbursement Arrangement (dcHRA). A triple tax-free way to pay for eligible medical expenses upon retirement or separation from service, the dcHRA is funded by the employer while the employee is actively working—so the employee can see the contributions they’re receiving. Here are some other key features of the dcHRA that make it a win-win for both employees and employers:
- Funds are invested for potential tax-free growth.
- Depending on plan design, the dcHRA can help offset costs like prescriptions, eyeglasses, doctor visits, and premiums completely tax-free.
- Funds can be used by the participant, their spouse, and any eligible dependent once the employee becomes claims eligible.
- Plan factors such as vesting schedules can be applied to persuade employees to remain with the district until they are fully vested in their benefit.
- Both the employer and the employee permanently save 7.65% on FICA taxes.
- Plan can be funded using unique forms of compensation like unused accumulated leave, maximizing already earmarked funds.
Maximizing Accumulated Leave to Offer a Tax-Advantaged Retirement Plan—the Special Pay Plan
Similar to the dcHRA, the Special Pay Plan, which is a type of 401(a), 403(b), or 457(b) retirement account, can be funded using unique forms of compensation, such as unused sick leave and unused vacation pay. The benefit can be used—tax-deferred—for whatever purpose a participant chooses once they retire or separate from service. Here’s a closer look at what makes the Special Pay Plan a winning addition to any benefits package:
- Contributions into the retiree’s plan can be based on years of service and severance.
- Contributions are made pre-tax, which means the retiree receives the full, untaxed value of their unused compensation.
- Income tax is deferred until a withdrawal is made.
- Funds are invested with the potential to grow tax-deferred, which means increased value due to earnings over time, further maximizing the benefit.
- Both the employer and employee permanently save 7.65% in FICA taxes.
The best part of a Special Pay Plan is how seamlessly it works alongside the HRA. Plan sponsors can create a unique plan by diverting a portion of the employee’s unused accumulated leave into the HRA to cover medical expenses and a portion into the Special Pay Plan to be used for any purpose once the employee retires. To learn more about how the Special Pay Plan and HRA work together, click here.
A Powerful Retirement Benefit for Part-Time, Seasonal, and Temporary Workers—the FICA Alternative Plan
The need for workers in our schools is not limited to full-time positions. There’s a high degree of availability for jobs categorized as “part-time, seasonal, and temporary”, which includes substitute teachers, cafeteria workers, and school bus drivers. Many employers have difficulty providing meaningful benefits for this population of the workforce. Fortunately, there is an IRS-approved retirement benefit designed specifically for this category of workers—the FICA Alternative Plan. Designed to be an alternative to Social Security under Section 3121 of the Internal Revenue Code, the FICA Alternative Plan* places 7.5% of an employee’s pre-tax wages into the plan, resulting in a contribution nearly equal to the 6.2% they would have otherwise paid to Social Security. While it may appear to be an increase in the employee’s contribution, that employee is actually left with close to the same take-home pay—because of the pre-tax scenario. The funds are invested in an interest-bearing account with the potential to grow over time, and the account balance—with earnings—is tax-deferred until distribution.
From the employer’s standpoint, they are able to avoid the matching 6.2% Social Security contribution, replacing it with an impactful benefit for their employees and reducing the stress on their own budgets.
Attracting and retaining talented school employees has probably never been as challenging as it is right now—and there is no single remedy to alleviate this crisis. However, there are tax-advantaged vehicles employers can incorporate into their benefits landscape that will not only garner significant payroll tax savings for their organization as well as their employees but will also appeal to candidates who understand the importance of preparing for their financial futures.
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*The FICA Alternative Plan may not be permitted in all states.