HR + Workplaces
March 29, 2024

A Better Way to Self-Fund Your Paid Parental Leave

Learn about self-funded paid parental leave options and how adding paid parental leave insurance is a win-win solution.
Written by
Parento
Category
HR + Workplaces

Parenthood is a beautiful journey, but many employees are not able to take time off with their new children. Recognizing the importance of supporting working parents, competitive companies are implementing paid parental leave and family-friendly policies. Based on the limited options available for employers to offer paid parental leave, some companies choose to self-fund. But this can pose financial risks and challenges. To help you choose the best option for your company, we’ll review the different self-funding types, risks, and how insurance can help companies affordably and easily manage their paid parental leave programs.

Self Funding Options, Risks, and Challenges

For companies to offer paid parental leave that goes beyond mandated state plans today, it’s usually through self-funding. Unfortunately, this option can strain a company's finances, especially if small or medium-sized businesses are offering 100% pay. It’s also risky and difficult to manage. While offering parental leave is essential for attracting and retaining talent, the financial burden of paying employee salaries during extended absences can be daunting. While “leave pay” is the most common method for companies that don’t have the resources available to manage a separate paid parental leave program, here are a few of the common options for self funding and their risks.

Employer Funded Leave Pay (Company Specific)

When we think about self-funded paid parental leave, this is the first option that usually comes to mind. This falls under the company policy and may be called leave pay, salary continuation, or advice-to-pay if the management is outsourced. In these self-funded programs, the employer's own company policy covers salary while an employee is on parental leave. Oftentimes, 100% pay offered is a way for companies to attract and retain talent, but it’s also the simplest way to manage without the resources.

Payment: This is paid directly by the employer to the employee through payroll. 

Risks and Challenges

  • While this is the simplest, it’s also the hardest to manage costs. Even if state-mandated Paid Family Leave (PFL) is available to reduce the employer's out-of-pocket costs, continuing pay while on leave can get expensive - especially if a temporary replacement needs to be hired.
  • Companies may be paying more than needed if there are state-mandated plans available, but this varies across states and is difficult to manage with a small team.
  • Based on the company policy, there’s also a risk of not offering paid parental leave equitably and meeting EEOC compliance. 

Self-Funded Voluntary Plan (California)

Another option is to self-fund using a Voluntary Plan, which is only available in California. Employers have the option to replace the state benefit program which gives them more flexibility to what benefits are offered. Like State Disability Insurance (SDI), PFL benefits are funded by employee contributions, so the Plan must offer the same or better benefits as the state plan, and there must be at least one benefit that’s greater than the state plan. Based on the health of the plan, companies may be able to offer higher benefits or for a longer duration of time (e.g. 12 instead of 8 weeks) to match with their company policy if their funds support it. 

Payment: This is paid from the VP Plan administrator to the employee. 

Risks and Challenges

  • A lot of PFL claims could deplete the Plan’s funds with a lot of parental leaves, since this Plan also needs to cover serious medical conditions and family care PFL claims. 
  • Paid parental leave benefits are contingent on the health of the Plan and can change at any time.
  • This excludes any parent who is not on the birth certificate to substantiate the PFL claim. 
  • Employees do not stay on payroll for PFL and there can be disruption and delay in pay. 

Self-Funded STD Plan (Any State)

Another less common option is through a self-insured short term disability (STD) plan. Similar to a Voluntary Plan, some companies choose to self-insure their own STD Plan. This is more common with larger companies that have a higher tolerance for risk, and depending on the plan, they can mirror a Voluntary Plan to provide PFL-type benefits for employees. But if these plans are governed by ERISA, there are specific regulations the Plan must abide by, which restricts how the funds can be used beyond what’s considered a “disability.”

Payment: This is paid from the STD plan administrator to the employee. 

Risks and Challenges:

  • ERISA governed STD Plans only cover birth moms and the duration that’s covered as “disability” (e.g. pregnancy only), excluding all other parents.
  • For a STD plan to provide PFL-type benefits, the plan must qualify as a payroll practice exemption and pay benefits out of company general assets. This is risky, like the other two self-funding options.
  • Employees do not stay on payroll and there can be disruption and delay in pay. 
  • Not offering paid parental leave equitably to all employees is a discriminatory practice.

Get Reimbursed with Paid Parental Leave Insurance

Based on the challenges and risks with self-funding, paid parental leave insurance is a game changer. Being the first and only business solution for paid parental leave insurance, Parento is a proactive solution that offers financial protection to companies, protecting their bottom line, while providing paid parental leave to their employees. As an added bonus, the Parento program is also gender-neutral and EEOC compliant, insulating employers from gender equality risk. 

Let’s look at what happens when you add paid parental leave insurance by comparing the common employer options: 

Parento alleviates the burden of self-funding for employers by providing coverage for a portion of the employee's salary during their leave period. Any existing self-funded program could continue, but salary expenses from a parental leave can be reimbursed directly to the employer to recoup some of those costs.

While self-funded VP or STD plans need a Plan administrator, employers who choose Leave Pay to self fund do so because they want to offer paid parental leave but don't have the resources available to manage the program. Parento's included Leave Concierge program makes managing self-funded paid parental leave simple by providing ongoing support with the calculations and integration of benefits.

When companies add Parento, they can continue to offer paid parental leave through, but reduce their out-of-pocket costs AND free up their HR team, providing a better experience for everyone

Win-Win Solution with Parento

The Parento program represents a forward-thinking solution for companies seeking to support their employees while managing paid parental leave. Employer paid leave pay, PFL, and STD is not enough. By investing in paid parental leave insurance, companies can mitigate the cost and risk that self-funding brings while providing comprehensive wraparound care for all parent employees (or parents-to-be). This supportive work environment helps companies compete for top talent while promoting gender equality through equitable leave policies. As companies continue to prioritize paid parental leave through self-insuring, paid parental leave insurance with Parento stands out as a win-win solution for both employers and employees alike.

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