Module 7--The Strategic Partnership--HR & Finance Flashcards
Human Resources and Finance – The Strategic Partnership
■ Budget process – The human resources department has responsibility for managing the human capital budget, which includes compensation and benefits. Although HR may have the responsibility for managing, decisions need to be made jointly with the finance department. Each decision has a direct effect on the bottom line. Thus, both sides must sit at the table to evaluate the budget.
■ Budgetary issues
* Audit of budget versus actual expenses
* Allocation of cost to business units
* Compensation programs
* Merit and salary budgets
* Incentive plan designs and payouts
* Payroll
* Health and welfare benefits
* Retirement
* Communications
How are DIRECT LABOR Reconciled?
TYPE Where Shown How Expensed
Factory Direct Labor——————–> Inventory ———————-> COGS
Costs related to Capital Projects——-> Capital Asset—————->Operating Expenses
Other Compensation and Benefits—–>SG&A————————-> Operating Expense
What are the THREE DIFFERENT PLACES Compensation and Benefits costs are recorded?
Compensation and benefits costs are recorded in three different places.
■ Factory direct labor
* Inventory cost
* Shown on balance sheet as a current asset. As inventory is sold, it is shown on income statement as cost of goods sold.
■ Costs related to capital projects
* Capital asset to be depreciated
* Noncurrent asset shown on balance sheet and depreciation expense shown on income statement
■ Other compensation and benefits costs
* Selling, general and administrative
* Shown on income statement
WAGES AND SALARIES
Compensation and benefits costs normally are recorded as an expense by the company when the services of the employees are performed. They are a tax-deductible expense (either current or deferred) for the company. Many benefits are not taxable to the employee.
■ Merit budgets – Deal with rate of pay to employees. HR makes the determination of how much each employee is paid based on internal/external factors. Merit budgets can be prepared using either a simple or weighted average approach.
■ Salary budgets – Monies paid to employees through the payroll process. Finance accounts for the actual wages paid to employees and monitors the comparison of actual paid to budget.
What is EBITDA?
EBITDA = Earnings before Interest, Taxes, Depreciation and Amoritization
What is Incentive Pay?
Incentive Pay
■ Based on financial and nonfinancial results of the company
■ An IRS safe harbor allows companies to pay bonuses within two and a half months after the close of the fiscal year. The bonuses are a tax deduction for the year in which the bonuses were earned.
■ Deferred compensation in a plan not “qualified” by the Internal Revenue Code (IRC), is an expense for the shareholder books when the services are performed, but is not a tax deductible expense for the company until it’s paid to the employee.
What are BENEFIT COSTS?
Benefits Costs
■ Mandatory benefits
* Social Security
* Medicare
* Unemployment
* Workers’ compensation
* Disability insurance (required by some states)
■ Typical welfare benefits
* Health insurance
* Dental insurance
* Life and LTD
■ Typical retirement plans
* Defined benefit
* Defined contribution
■ Other benefits
* Work-life benefits
What are the MANDATORY BENEFITS?
Mandatory Benefits
In the United States, the following are mandatory benefits required by federal and/or state legislation:
■ Federal Insurance Contribution Act (FICA) wages
* Retirement
– Paid by both employer and employee
– Percent up to a maximum annual amount
* Medicare
– Paid by both employer and employee
– Percent of total pay, with no limit Medicare has no cap.
■ Unemployment compensation
* State level compensation paid to unemployed workers
* May be self insured or fully insured
* Formula driven
■ Federal Unemployment Insurance Tax Act (FUTA)
* Intended to pay for programs to help unemployed workers
* Formula driven
■ Workers’ compensation
* Compensation paid to employees who have been injured in the course and scope of their employment
* Formula driven
What are WELFARE BENEFITS?
Welfare Benefits
■ Welfare plans
* Self insured – company financially responsible for claims incurred; normally claims processed by a third-party administrator
* Fully insured – risk transferred to insurance carrier; employer pays premium to insurance carrier and carrier pays claims
* Stop loss insurance – covers catastrophic claims
* Claims payment method – can affect the cash flow of a company
* Claim reserve levels – amount set aside for claims incurred but not paid, can affect financial statements
* Plan design issues – adding or deleting a provision of the plan will have a cost impact
■ Post-employment benefits (ASC 715)
* Must be recorded as expenses during the period the employees work, not when the benefits are actually paid after retirement based on ASC 715.
* Balance sheet liabilities – shown on the company balance sheet as a liability (ASC 715)
* Note: The IRC does not allow a tax deduction for this expense until payment is made in the future.
WHAT are RETIREMENT PLANS?
Retirement Plans
■ Qualified plans
* Qualified plans receive favorable tax treatment under the IRC, despite the fact that employees do not receive current taxable income. Examples are:
– Defined benefit
– Defined contribution
* Trust assets for qualified defined contribution and defined benefit plans do not appear on the company’s balance sheet. Each plan has its own balance sheet.
■ Nonqualified plans do not receive a company tax deduction until the employee receives the
money and pays taxes on it. Examples are:
* Excess plans – nonqualified plan that provides supplemental retirement plans in excess of limits from IRS section 415
* Offset plans – coordinate a set of retirement plans to provide a minimum benefit amount
* Deferred compensation
What are DEFINED BENEFIT PLANS?
Defined Benefit Plans
These plans specify a determined benefit based on specific factors.
■ Actuarial methodologies
* For reporting to shareholders a specific actuarial methodology as required by ASC 715
■ Assumptions
* Companies may use different assumptions for factors such as salary increases, earnings, turnover, etc.
■ Trust assets
* Need to be managed
* Certain restrictions on investments
* Not shown on company balance sheet unless overfunded or underfunded
■ Governmental filings
* Need to be completed yearly showing financial gains and losses
What are DEFINED CONTRIBUTION PLANS?
Defined Contribution Plans
■ Individual accounts
* Defined by the Employee Retirement Income Security Act of 1974 (ERISA) and the IRC as a plan that provides for future income from an individual account for each participant with benefits based solely on the amount contributed to the participant’s account plus any income, expenses, gains and losses, and forfeitures of accounts of other participants that may be allocated to the participant’s account.
* The benefit amount to be received by the participant at retirement is unknown until retirement.
■ Investment funds
* At least three funds need to be selected and monitored for performance.
* Employer needs to provide education on funds.
■ Employer match
* May be designed based on the financial performance of the organization
■ Administration
* Funds must be deposited as soon as administratively possible. While the absolute latest deposit must be by the 15th business day following the month in which the employee contribution was received or withheld, an IRS audit will not permit the 15th business day as the standard.
WHAT are NON-QUALIFIED PLANS?
Nonqualified Plans
Plans that provide benefits in excess of those possible within qualified plans, or otherwise do not meet Internal Revenue Service requirements, and therefore do not qualify for current favorable tax treatment for the company.
■ Purpose – provide additional retirement benefits most often for executive-level employees
* Above qualified plan limitations
* Beyond plan provisions
* May relate to either defined benefit or defined contribution plans
■ Tax implications
* Do not qualify under tax laws for a current tax deduction for the organization
* Company records the costs during the period of the employee service, receives a tax deduction when money is paid to the employee
■ Unfunded liability
* No security for participants
* Monies may be held in rabbi trust or paid from general assets of company.
* Monies available to creditors in case of bankruptcy
What are some examples of Communication that HR must have with other partiedses
Communication
Human resources must communicate with many different parties regarding accounting and finance issues. For example:
■ Internal communications
* What do we communicate?
– Approval of programs
– Compensation and incentive plan payouts
– Funding issues
* To whom do we communicate to
– CEO
– Finance
– Employees
■ External communications
* What do we communicate
– Audit of plans – Plan design changes
– Governmental reporting – Issues management
– Valuation of plans
* To whom do we communicate
– Auditors – Department of Labor
– Actuaries – State agencies
– Insurance brokers – Legal counsel
– IRS
- Which budget deals with the rate of pay to employees and requires HR to determine how much each employee is paid based on legal considerations?
A. Merit budget
B. Operating budget
C. Capital budget
D. Salary budget
A. Merit budget
