Can I transition my paid-time-off plan from an annual lump sum award to an accrual system equitably?

Yes. More employers are switching to an accrual system from an annual lump sum award for their vacation or paid time off (PTO) benefits. Transition to a per payroll accrual system takes planning and preparation, but, once it is in place, it becomes easier to administer.

Prior to the transition, review your current time off policy and consider where your current plan will need to change. Review plan eligibility and how many PTO hours employees receive based upon their job category and/or seniority. One way to simplify your administration of the plan is to consider adjusting all employee accrual rates only once a year going forward, and base seniority on how many years the employee worked as of that adjustment date.

Some plans have a use-it-or-lose-it policy; at the end of the plan year you lose all earned but unused PTO before you receive your next year's award. Other plans have a policy on how many hours can be rolled over to the next year. In an accrual system, use-it-or-lose-it or roll-over policies are often replaced with an accrual cap. A plan cap is a maximum amount an employee is able to earn in the plan. The cap can be a set number of hours or a multiple of the employees' annual PTO amount (e.g., 1.5 times or 2 times the total they can earn in a year). If employees reach the cap in earned but unused PTO, they will not earn any more PTO hours until they use their time off. As soon as their bank drops below the cap, their accruals will start up again. This process encourages employees to take regular time off work to rejuvenate and also reduces the risk of paying out years and years of unused PTO time upon termination. Employers should consider any state law restrictions regarding vacation/PTO hours when implementing these practices. Once the policy is clearly written, determine how each individual employee will be affected in this transition to an accrual system. Select a logical starting point for the PTO plan year (usually calendar or fiscal year) and prorate employee accrual rates for the first year based upon their last anniversary award. This step is important in establishing a fair and equitable transition for current employees.

In the following scenarios, let's assume a transition to accrual will be effective on Jan. 1, 2020, and Employees A, B and C are eligible for 120 hours of PTO in 2019 and 2020.

Employee A has an anniversary date of Jan. 2. Employee A was last awarded vacation time on her anniversary at the beginning of January 2019. Therefore as of Jan. 1, 2020, the employee would be able to immediately transition into the accrual system for PTO and receive her full 120 hours of PTO.

Employee B has an anniversary date of Oct. 31. Employee B was awarded 120 hours of PTO on Oct. 31, 2019. As of Jan. 1, 2020, it has been only two months since his award. It would not be equitable to provide Employee B with a full accrual of an additional 120 hours in 2020. Instead, prorate the accrual amount as one might prorate a salary increase for a new hire. The employee has received the PTO award through Oct. 31, 2020. Therefore, determine how much more PTO he should receive for the remainder of the year (November and December 2020). In this example, the employee would only be eligible for 2/12 of the accrual amount [120 * (2 / 12) =20 hours], or 20 hours.

Employee C has an anniversary date of April 15. Employee C has received PTO time through April 15, 2020, from the 2019 anniversary award. Prorate the 2020 accrual rate based upon the number of months in which no PTO award was provided (second half of April, May, June, July, August, September, October, November and December = 8.5 months / 12). Multiply this proration (8.5 / 12 = 0.708) by the full year PTO award (120 hours) to determine how many hours in total the employee is still eligible to receive in 2020 (0.708 *120 = 85 hours).

Once the total hours are determined, break this down into a per pay period accrual rate. Divide the total eligible hours by the number of pay periods in the year. For example if the employer uses a bimonthly payroll cycle, there are always 24 pay periods. Employee A's accrual rate is 120 hours / 24 pay periods = 5 hours per pay period. Employee B's 20 hours / 24 pay periods would be less than one hour a pay period. Employee C's rate is 85 hours / 24 pay periods.

The above examples outline the process for determining transition year accrual rates. This proration is based on the months in which PTO time has not yet been awarded in the transition year. At the end of the transition year, all employees should return to a full eligibility accrual rate. There will no longer be a need to prorate PTO after the transition year in an accrual system. New hires can start to accrue at the full rate they are eligible no matter what month or date they start working. Employees on an unpaid leave of absence would not receive PTO accruals in weeks they don't receive a paycheck, so no future prorating is necessary. Post-transition, an automated accrual system will continue to provide a fair and equitable PTO program with very limited administrative burden.

To make the transition as successful as possible, clearly communicate how benefit changes will affect each employee, include an FAQ and consider soliciting feedback prior to implementation to address employee concerns.