SESCO 2013 Year In Review and Forecast For 2014 — SPECIAL REPORT

December 26, 2013

In an effort to educate our valued clients, trade and business associations and their members and the general business and HR public, SESCO is proud to provide our annual year in review, projections for 2014 and professional staff recommendations to reduce liability and improve profitability.

A Look Back at 2013

The U.S. Citizenship and Immigration Services (USCIS) issued a revised version of the Employment Eligibility Verification Form I-9. The new form has a revision date of 03/08/13 and an expiration date of 03/31/16. Changes to the form include improving the form's instructions, adding data fields including telephone number and e-mail address, revising the layout of the form, and expanding the form from one to two pages.

Federal wage and hour lawsuits reached a record high. There were 7,764 FLSA cases filed in the fiscal year ending in March 2013, up 10 percent from fiscal year 2012, which saw 7,064 cases filed. By comparison, there were 4,055 cases filed ten years ago in 2003 and only 1,854 cases filed in 2000. The claims forming the bulk of these current numbers include misclassification of employees, off-the-clock work, and miscalculation of overtime pay for nonexempt workers.

On June 26, 2013 the U.S. Supreme Court struck down the portion of the Defense of Marriage Act (DOMA) that provided that only opposite sex marriages would be recognized for federal law purposes. As a result, a same sex marriage that is valid under applicable state law will be recognized to the same extent as an opposite sex marriage for federal law purposes, including many federal laws that impact employee benefits provided by employers.

In July, the administration unexpectedly announced a one-year delay in a central requirement of the health care reform law that "large" employers provide coverage for their workers or face fines. Employers with 50 or more workers must provide affordable coverage to their full-time employees or risk a series of tax penalties if just one worker ends up getting government-subsidized insurance. Originally, that requirement was supposed to take effect January 1, 2014. It will now be delayed until January 1, 2015.

In September, the U.S. Department of Labor's Wage and Hour Division announced a final rule that extends the Fair Labor Standards Act's minimum wage and overtime protections to many of the nation's direct care workers who provide home care assistance to the elderly and persons with illnesses, injuries, or disabilities. Effective January 1, 2015, home care agencies and other third party employers will be required to pay at least the federal minimum wage and overtime pay to any direct care workers. Direct care workers are workers who provide home care services, such as certified nursing assistants, home health aides, personal care aides, caregivers, and companions. Also effective January 1, 2015, agencies and other third party employers may no longer claim the overtime pay exemption for live-in domestic service workers. It should be noted that the Department's final rule allows that exemptions for companionship services and live-in domestic service employees may only be claimed by the individual, family, or household that directly employs an individual for these services, rather than third party employers such as home health care agencies.

The U.S. Department of the Treasury and the IRS issued a notice modifying the longstanding "use-or-lose" rule for flexible spending arrangements (FSAs). Plans may now be amended to allow up to $500 of unused FSA account balances to be carried over to the next year in order to pay for qualified expenses incurred in that subsequent plan year. This option will allow employees to roll over unused funds at the end of the current 2013 plan year. The carryover option will apply at the discretion of the employer and is permitted only if the plan does not include the previously established grace period rule (allowing unused account balances to cover expenses incurred during the two and one-half months following the end of the plan year).

The Affordable Care Act continues to be revised into 2014 with many employers and Insurance companies trying to manage the cost and employment impacts.

What Employers Can Expect in 2014 and Beyond

Affordable Care Act (ACA) Obamacare 2014

Waiting Period Beginning January 1, 2014 employers may not impose a waiting period longer than 90 days for health care coverage enrollment.

Wellness Programs The cap for wellness program incentives increases from 20% to 30%.

Individual Mandate Individuals who choose to remain uninsured will be subject to a tax (fine) of $95 in 2014; this amount increases to $325 in 2015 and $695 in 2016

Employers expect their health benefit cost per employee to rise by 4.8%, on average, in 2014. Organizations estimate that if they made no changes to their current plans, the health benefit cost per employee would jump by an average of 7% next year. One of the key strategies employers are using to manage cost growth is implementing consumer-directed health plans that give workers financial incentives to seek more cost-effective care. Typically, high-deductible plans are paired with a health savings account (HSA) or health reimbursement arrangement (HRA).

Although highly contested and debated, the warnings from the insiders at insurance companies include:

1. Many employers (especially "small' employers) will drop employee and family health coverage in 2014 due to cost increases. Even when facing fines, employers may find it cheaper to discontinue coverage.

2. To fill the large void of the uninsured, some industry insiders speculate that the administration will "bailout" the insurance industry and/or push for SINGLE PAYER INSURANCE, which of course is total government insurance.

Along with the increased cost of health care, additional concerns for human resource professionals include:

A more complex and aggressive legal environment and changes to laws influencing employee rights and employer legal compliance.
An aging workforce and increased retirements within the Baby Boomer generation (those born between 1945 and 1964)-creating a significant skills and productivity gap. Especially in leadership roles and critical positions.
An inability to source and hire skilled workers.
Economic uncertainty and volatility.
Greater demand for work/life balance from the younger generations.

Employers are increasingly likely to offer voluntary benefits to help workers meet their financial needs and fill gaps in health and benefit coverage. Voluntary benefits such as flexible spending accounts, specific illness/disease insurance plans, and employee assistance programs will increase in popularity.

OSHA forecasts the release of a final rule by April 2014 that will update the list of industries that are partially exempt from the requirement to maintain a log of occupational injuries and illnesses, generally due to their relatively low injury and illness rates. The new list will replace the current list of industries based on the Standard Industrial Classification system with a new list, based on the North American Industry Classification system.

The DOL's Wage and Hour Division proposes to revise the definition of a "spouse" under the Family and Medical Leave Act in light of the U.S. Supreme Court decision to reverse part of the Defense of Marriage Act (DOMA), in effect recognizing same-sex marriages for the purposes of FMLA coverage.

The elective deferral limits for 401(k) and 403(b) for 2014 will remain at $17,500. The catch-up contribution limit available to employees age 50 and above is unchanged at $5,500.

The contribution limit (employee plus employer) for Health Savings Accounts (HSAs) will increase by $50 in 2014 for the individual — $3,300; for family coverage — $6,550. The HSA catch-up contribution for employees age 55 and above remains unchanged at $1,000.

The minimum wage will increase in the following states effective January 1, 2014:

Arizona $7.90 per hour
Colorado $8.00 per hour
Connecticut $8.70 per hour
Florida $7.93 per hour
Missouri $7.50 per hour
Montana $7.90 per hour
New Jersey $8.25 per hour New York $8.00 per hour
Ohio $7.95 per hour
Oregon $9.10 per hour
Rhode Island $8.00 per hour
Vermont $8.73 per hour
Washington $9.32 per hour

The following states and Washington, D.C. prohibit discrimination based on same-sex marriage:

California
Connecticut
Delaware
Hawaii
Illinois
Iowa
Maine
Maryland
Massachusetts Minnesota
New Hampshire
New Jersey
New Mexico
New York
Rhode Island
Utah
Vermont
Washington

Statistics of Interest

Energy Oil trading will continue at $90 -$95 per barrel.

Insurance Cost Costs to rise 30% to 100% for companies and individuals. High deductibles will be a way of life.

Retail 4.5% growth in 2013, strengthening to 5.2% — 5.7% in 2014.

U.S. Gross Domestic Product 2.6% growth in 2014, up from 1.7% in 2013.

Federal Deficit 3.3% of GDP in 2014, down from 4.1% of GDP in 2014.

Inflation 1.7% in 2013, rising to 2% in 2014.

Unemployment Between 6.9% and 7.2% through mid-2014 the drop continues to be due to the unemployed dropping from the unemployment calculations.

Salary Increases Base salary increases for 2014 are projected to be 2% to 3%, consistent with the average increase in 2013.


SESCO Staff Recommendations for 2014

1. Audit all areas of labor and employment The U.S. and state governments will continue their aggressive review of employers' compliance. In addition, law firms are under significant economic pressure and as such attorneys are seeking new and creative ways in pursuing plaintiffs and employers.

2. Profit margins to tighten With margins tightening employers MUST:

Review all compensations practices. Compensation and performance management must be a priority to remain profitable. As such a formal pay system and specific performance measurements must be updated and/or employed. MEDIOCRE behavior cannot be allowed.

A serious review of all benefits offered must take place NOW.

3. Improve screening techniques It will be more critical than ever to screen applicants using state of the art tools. These include personality testing, behavior testing, risk analysis and skills testing. Fewer applicants are worthy of hire and employers cannot afford to make a bad hiring decision.

4. Review your handbook The employee handbook continues to be the cornerstone of the employment relationship. It is also your primary defense when there is alleged wrong doing. With the increase in regulations it behooves all employers to implement and update an effective handbook.

5. Succession planning With more leaders/family retiring, employers must identify those who are promotable and then provide leadership training and development.

SESCO is very appreciative of the valued clients we have served since 1945. And we look forward to assisting our current and new clients in 2014 as the challenges from profitability and liability standpoints will be difficult. Through our propriety Service Agreement, we are able to serve our clients very cost effectively. We also are proud of the staff we have retained.

Please know we are as always as close as your phone.

Sincerely,

SESCO Management Consultants

William E. Ford
President and CEO