LFTL: Worker Benefits, Part 1

"Write your injuries in dust and your benefits in marble.” - Ben Franklin

Today’s operating environment presents multiple challenges for hospitality operators – chief among them a labor shortage caused by the pandemic. This labor shortage has led to rising wages and put pressure on bottom lines across the industry. In a tight labor market, operators need to look at the totality of compensation to encourage retention, not merely wages. While puff piece articles highlight benefits that are offered at well-funded restaurant groups, smaller operators can still offer effective benefits without crimping their margins.

Worker retention is top of mind these days, so this will be a recurring Lessons From the Line feature. This month, we'll start with three key benefits, two of which Harmony has recently covered in more depth in the blog - (1) Educational Benefits, (2) Retirement Benefits, and (3) Meals and Entertainment Benefits. Providing these key benefits can make for happier employees.

Matt Hetrick, CPA
President and founder of Harmony Group Inc.

Breaking Down Worker Benefits, Part 1

Educational Benefits

We all understand the value of education, and the tax code provides employers the ability to invest in employee education: through Section 127 and Section 132. Both code sections allow employers to provide educational benefits to employees without paying the employer share of FICA taxes and the employee won’t be taxed on any educational assistance benefit, creating an incentive for employers and employees.

An Educational Assistance Program (§127) is ideal for employers who desire to provide a maximum educational benefit of $5,250 per employee (the statutory maximum). A §127 plan must be written for the exclusive benefits of employees with reasonable notification of the availability and terms of the plan and can’t be discriminatory to highly compensated employees. Additionally, employers cannot offer a choice between the educational benefit or other compensation. As a COVID relief measure employers can use §127 to give money to employees for student loan payments.

Employers can support staff education above the §127 cap of $5,250 by utilizing Code §132(a)(3) which exempts from taxation “working condition fringe” benefits that can include job-related education. Utilizing §132 is much more fact-intensive and complicated so be sure to consult your Harmony advisor if you want to offer above the §127 cap in educational benefits.

This plan can be used for upskilling employees and targeted around skills and certifications that improve the capabilities of your workforce. Additionally, a well-designed plan for educational expense reimbursement can encourage employee retention; it is permissible to have employees sign Tuition Reimbursement Agreements that require that employees who avail themselves of the benefit stay for a certain amount of time or repay a portion of the benefit funds.

Retirement Plans

Retirement plan is not common in the restaurant industry but is a core benefit offered by many companies in competitive talent environments. It's important to understand how retirement plans work because more and more states are mandating that all employers have a qualifying retirement plan for employees. There are two types of retirement plans: “Defined Contribution Plans” where the employer makes a defined monetary contribution and a plan where an employee receives guaranteed monthly income (a pension) is known as a “Defined Benefit Plan.”

For small businesses, two defined contribution plans are easiest to administer and maintain: A Simple IRA and a SEP-IRA. A Savings Incentive Match Plan for Employees Individual Retirement Account or SIMPLE IRA is a retirement plan available to small businesses with under 100 employees. Despite the pension in the name, a Simplified Employee Pension (SEP) IRA is not a defined benefit plan but is an employer funded IRA plan (or annuity program). Both allow contributions to be exempt from FICA taxes but are covered by the rules around IRA distributions.

SIMPLE-IRA is easy to set up and fund and only requires notifying employees, executing a written agreement and setting up accounts to fund but there are some requirements around eligibility restrictions and making sure employer distributions go to all enrollees. Eligible employees who opt-in make elective deferral contributions from their salary (reducing their taxable income but not FICA obligations) up to an annual limit of $14,000. Employers can choose annually one of two contribution methods to fund a SIMPLE IRA: (1) 2% of participating employee’s salary (subject to income caps) as a nonelective contribution regardless of employee contribution or (2) a dollar-for-dollar match of the employee’s contribution maxing out at 3% of the employee’s compensation. Employers can lower the matching contribution two years in a 5 year period but cannot go below 1%.

SEP-IRA is an employer funded retirement account without employee participation.  A SEP-IRA is set up by employers’ adopting a written agreement, notifying employees and setting up accounts at a qualifying institution. Employers then contribute directly to the employee’s SEP-IRA account within the guidelines that contributions cannot exceed the lesser of 25% of compensation or $61,000. Employer contributions to a SEP are not included in an employee’s gross income unless they exceed the statutory limits. Since the employer is making the contributions, employees are allowed to contribute up to the statutory maximum to separate IRAs (currently $6,000) even if they are participating in their employer’s SEP.

These are two simpler options but there are a vast array of retirement plans - if you’re thinking about setting up a retirement plan, your Harmony advisor is a great place to start that conversation.

Meals and Entertainment

If you’re in the restaurant business, you probably like dining out and eating good food. The good news is that there are many deductions that you can avail yourself to make providing meals and entertainment a fully deductible expense.

First and foremost, “family meals” and meals provided to employees in the restaurant around working hours are always fully deductible and don’t count towards employee compensation. Company wide parties and any meal with more than 50% of employees present are also fully deductible as a business expense. Buying an employee drinks, coffee, small meals or taking them out to a ticketed event is also usually fully deductible under the de minimis fringe benefit deduction. Expenses that are ordinary and necessary while traveling for business purposes, (including meals) are deductible as well. You can also provide dining allowances to employees as there is a valid business purpose for people in the restaurant business – professional research.

Those expenses that don’t qualify for a full deduction such as other meals with employees, clients and vendors (where business is discussed) can be fully reimbursed and are eligible as a valid business expense deduction up to a 50%. This means an employee can be reimbursed for the full cost of the meal but only half of the meal would be deductible to the business, creating a variance between book and taxable income.

Knowing how to sensibly provide employee benefits could give your business a leg up in employee retention and skill development and are cost-effective investments in your most valuable resource – your employees. Your Harmony advisor is available to help you understand the best benefits for your small business.

Last Bites

Taking Care of Your Staff

It’s never a bad time to bring up  and be aware of an epidemic in American restaurants – substance abuse. Strong opiates like Fetanyl are causing rising overdose deaths and restaurant workers are the second most at-risk category to die from a drug overdose. Restaurant Business Online offers an in-depth look at the evolving epidemic  and offers suggestions to help with this problem – including changing the culture by creating team building alternatives to hitting the local bar after a shift. Local DC Chefs started a running club with exactly this goal in mind.

Golden Arches Put on the "Hot Light" While Dunks Bros are Red Hot

McDonalds has reached a deal to incorporate Kripsy Kreme doughnuts to their breakfast menu in a test run in the Louisville Market. This partnership is seen as a defensive move to incorporate a possible competitor in the breakfast market – which was McDonalds best day part in 2022 Q2 and a vital part of the chain’s success. The importance of maximizing revenue in a rising cost environment has led Dunkin’ to be less generous with their rewards program, which isn’t wicked pissah at all. Thinking about sensible brand partnerships to enhance business and regularly reviewing loyalty programs is something that can help any size restaurant.

And on the 4th, 5th, 6th, and 7th Day They Rested...

Chick-Fil-A is always closed on Sunday for a day of rest, but an enterprising operator decided on an interesting schedule – he instituted a 3 day workweek of 13 hour shifts with two “pods'' of workers staffing the restaurant  and makes sure employees get seven consecutive days off each month. While acknowledging that the schedule isn’t for everyone, he is thrilled with the results and says most employees appreciate the flexibility. We caution anyone who wants to emulate this approach that while legal under Federal Law, some states have overtime requirements based upon daily hours worked.