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Moving to Paid Time Off (PTO)

We are looking to move to paid time off (PTO) but we don't have any accruals on our books as of right now because we have a use it or lose it rule.  How do you change the benefit and not hit the books by millions of dollars? 


Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

You can set your PTO policy to have a use it or lose it rule. You also have many ways to also cap your liability. What is very typical is to set a cap on how many hours you can accrue. So for example if you set it at 240 hours then if an employee reaches that level they do not accrue anything further. I have also seen companies shut down over Christmas but make employees uses their PTO

You set the terms and just inform your payroll provider.



Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |


I'm missing something here; you don't have any accruals for vacation under your prior plan?

Joan maps out the basics well; it is a simple change.

Are you perhaps saying that since all vacation under your current plan needs to be consumed within the year, that you don't have accruals, and you don't want to have accruals under the PTO plan either? In this case, so long as you are following the same rules (use it or lose it), you'll (as Joan points out) end up in the same place.

If you do want to allow people to accrue and hold the PTO (and yes, a cap is important), you can do the forced-flush (per Joan), annual payouts (not my favorite, but I've done it), etc. Basic premise is if you end the year with an accrual, you've got to show it.

One potential "nit" to a use it or lose it plan is that if you accrue the PTO, then January becomes difficult for employees to take vacations. I've done "loan" time to deal with that; let the folks go negative so that they can take their 4 weeks whenever they want.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

Hi -- this really needs more information to fully answer the question. Moving to PTO from "what"? Does PTO mean vacation or something else? This potential hit of millions comes from where? Again, more before and after info is needed. Best way I can help is to explain our policy and see if it translates into your needs. We have a vacation policy AND a PTO policy. Vacation is for vacation, and PTO (40 hours per year) is for sick, doctor visits, funerals, kids graduations, etc. Employees get 1, 2, or 3 weeks annual vacation accrual depending on employment tenure. They accrue vacation per payroll and knock off what they take. Total unused vacation accrual can never exceed twice their then annual vacation allowance, and upon leaving one can only get paid out one year of then annual accrual amount. We accrue vacation up to the "twice" annual limit as necessary. PTO (40 hours per year) runs Jan to Dec and can never roll over from Dec 31 (use it or lose it), and is never paid out upon leaving. We do not accrue anything for that PTO benefit. Just expense it as it is taken within the year. Hope this translates into help with your question/plans. Lee

kadidia cooper
Title: office manager
Company: atchison barisone et al
(office manager, atchison barisone et al) |

Be careful here with the use it or lose it rule as vacation time is a benefit that is part of compensation and is treated as a cash-equivalent, because it is not tied to a specific event. Sick time can be lost because it is tied to actually being sick, personal holidays can be lost if they are tied to birthdays for example, but once vacation time is accrued you cannot take it away from the employee. That's why accrued vacation time gets paid out when an employee leaves the company whereas accrued sick time is usually not. PTO is treated the same as vacation time, as it no longer differentiates between sick and vacation time and is therefore not tied to a specific event.
But as was said above, you can put caps on it if you do not want a liability on the books of which you do not know when it will hit you. Put a cap on it - 240 hours seems to be pretty common. If you have different accruals for different levels of employees, i.e. lower level gets 2 weeks per year and higher level 5 weeks, you can make the cap the equivalent of 2 years accrual. Please note, if employees already have more than the cap accrued, you can now stop the accrual, but everything they have already earned they keep, you cannot take away for example the difference between 270 accrued hours and the new cap of 240 hours.
And yes, you can shut down for certain pre-determined periods of the year and give employees the option to use their vacation/PTO time during that period if they want to get paid - but you cannot force them to use that time. You can force employees to use vacation/sick/PTO hours if they are out for extended periods of time for disability leave or on maternity/paternity/FMLA leave to get paid before the disability benefit kicks in. During this time employees typically also do not accrue any more PTO.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

If you think about it, you can make this a non-accounting issue. You are most likely just adding days to the amount of time a person can take off, but sticking to a use it or lose it policy; there is little or no need to add an accrual.

julie browder
Title: administrative assistant
Company: central christian church
(administrative assistant, central christian church) |

We are thinking of going to a PTO system, but can't quite figure out how to let employees take vacations in the first half of the year; they won't have had enough time to build up a "cushion", so if they take a vacation in February then get sick, they're in real trouble. But November and December are the busiest times of year for us, so we definitely don't want a bunch of employees taking vacations then. How does this work?

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Retain the "use it or lose it" rule, and a year end liability will not be required.


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