Kid Stuff

How to create affordable alternatives to on-site day care
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Every company president should know the statistics by now. Half of all mothers with preschool children work outside the home; 80% of all women in the work force are of childbearing age, and 85% to 90% of them will become pregnant sometime during their careers; estimates are that in 1990, there will be 10.4 million children under the age of six with working mothers. Combine those numbers with an inadequate supply of child care, and what you've got is a growing number of employees -- mothers and fathers -- spending a sigificant portion of their workday worrying about their children.

Even though child-care assistance has been considered a tax-deductible benefit for employers since the passage of the Economic Recovery Tax Act of 1981, many companies have been slow to respond. If you are among those chief executive officers who think your only option is an on-site day-care center, you're not alone. But you are wrong. Summa Associates Inc., a Los Angeles-based child-care benefit-planning firm, reports that of the 2,300 employers (excluding hospitals) that provide some type of child-care assistance, only around 150 have on-site centers. As it turns out, the types of assistance you should consider offering your employees are less expensive and often more effective than opening a company day-care center.

While they are still few and far between, consortiums have begun to appeal to a growing number of companies. The best way to deal with child care, these companies have found, is to pool their resources. In Tysons Corner, Va., for example, 20 companies recently put up a total of $100,000 to start a day-care center that will open its doors this fall.

The Milton Co., a builder and developer with $100 million in sales and more than 350 employees, is one of the companies participating in the consortium. "The majority of our employees are in the age range where they have school-age children or young children requiring day care," says Debby Ladd, Milton's director of human resources. She had also noticed that more female employees were requesting maternity leave, a sure sign that child-care problems were bound to follow. Ladd's observations were confirmed by Cheri Sheridan, president of PAL Corporate Child Care Inc. and the force behind the Tysons Corner Play & Learn Children's Center (TCPAL).

Sheridan had studied the demographics of northern Virginia, had interviewed personnel managers and employees, and had found that "the gap between the need for care and the actual number of spaces available was about 800." She also discovered that each parent of preschoolers costs employers $1,800 a year, "either because they are on the phone or away from their offices because of child-related problems." For Milton and the other companies involved, the statistics hit home.

The most attractive feature of the project for the participating companies is that even though they are footing the bill to start the center, they won't have to worry about running it or about potential liability. Sheridan's company has found a site to lease, has recruited and screened teachers, and will manage the independent, nonprofit facility.

To raise the start-up money, the companies paid a tax-deductible $1,500 for each space they wanted to reserve at the center for their employees, an amount that is separate from tuition. Unused slots will be available to the public, but the original sponsoring companies will get first shot at any new openings. And each year, says Sheridan, the companies can get priority enrollment for their employees by paying a set fee.

Such consortiums as TCPAL allow companies to have a direct impact on the supply of child care without actually getting into the day-care business. To be successful, though, a consortium needs a committed individual to act as a linchpin. Sometimes that person is a consultant, like Sheridan. And sometimes it's a developer who wants to use a day-care center to help market space in an office park. In rare instances, it is a company president. Whoever it is, a prime mover is needed to make sure the financial projections are realistic, to check into state and federal regulations, and to ensure that the companies involved are protected from liability and that they are contributing their fair share. Some consortiums are set up so that participating companies can offer in-kind services, providing the center with janitorial or printing services, for instance, or footing the bill for a year's supply of milk. But whatever the structure, all consortiums need a champion.

Companies also can get together to provide other types of child-care service. In the Orlando area, for example, a group of nine companies has formed a kind of public/private partnership with Community Coordinated Child Care for Central Florida Inc. (4C), a local organization that is funded primarily through federal block grants and the United Way. The companies contract with the agency to provide their employees with, among other related services, information on the availability of child care.

Before joining the consortium, says Frank Robinson, vice-president of Philip Crosby Associates Inc., "we were finding that our telephone system got jammed immediately after school." The $40-million consulting firm, which specializes in quality management (#188 on the INC. 500 in 1985) has been using 4C's services for the past six years, and Robinson calls it "peace of mind for the parents." Employees phone the agency directly to find out about openings in day-care centers or family day-care homes, all of which are monitored by 4C for quality and adherence to state regulations.

Philip Crosby Associates also provides financial assistance through 4C -- up to $25 a week per child -- to help its employees with tuition costs. The firm pays the agency directly, which then disburses the funds to the providers for a 10% service charge. The subsidy is tax free to employees and tax deductible for the company. Close to 15% of Philip Crosby's 250 employees benefit from the assitance, at a cost to the company of about $700 a month. Robinson considers that a small price to pay for what the company gets back. "We absolutely have seen more productivity," he says. "And I believe attendance is better."

Resource and referral (R&R) is one of the more popular child-care services that companies offer their employees, and most make the arrangements on their own, without joining a consortium. According to The Conference Board, a nonprofit business and management-research and information service, around a fourth of the companies that offer some kind of child-care benefit opt for R&R. Employees like it because it allows parents to choose their own day-care facility. Companies like it because their involvement is minimal. And it is relatively inexpensive -- costs range from $4 to $15 per employee per year, with the charges based on the total number of employees in a company. While that is the method used by most R&R agencies, some charge per referral, with fees ranging from $60 to $100.

Genetics Institute Inc., a $20-million biotechnology research-and-development firm in Cambridge, Mass., began to offer R&R a year ago. "We felt that there was a pressing need internally," says human-resources manager Barbara Covel. Genetics contracted with the Child Care Resource Center, a private, nonprofit outfit in Cambridge, to provide its 350 employees with information on local day care. For about $3,000 a year, Genetics employees are given access to a hot line, which they may call anytime to get an updated child-care listing. The center also organizes seminars on the developmental needs of children and how to select child care.

"It's a minimal fee, and, from a recruiting standpoint, it certainly goes a long way," says Covel. Since parents make the final choice, both the R&R agency and Genetics are relieved of potential liability. And, like all employer-sponsored child-care assistance, the amount spent on R&R is fully deductible as a business expense or a charitable contribution.

Genetics also has a Dependent Care Assistance Plan (DCAP), a term that applies to the document employers must have on file to support tax deductions from child-care costs. Through its DCAP, Genetics offers a salary-reduction plan, which is the most popular and least expensive form of financial assistance for child care. A salary-reduction plan, sometimes referred to as a flexible spending account or a salary set-adide, allows employees to reduce their pretax income by up to $5,000 per family and to place that money in a special account from which they are reimbursed for child-care expenses. Salary-reduction plans can stand alone and be used only for child care, or they can be incorporated into broader "cafeteria" plans that allow employees to choose from a number of benefit options.

The beauty of salary reduction, in addition to the tax break for employees, is that it ends up costing companies very little. For example, since Genetics doesn't pay Social Security or federal unemployment insurance taxes on the amount of salary reduced, the cost of setting up and administering the program balances out. Susan Velleman, a principal at William M. Mercer-Meidinger-Hansen Inc., an international benefits-consulting firm, believes it's possible for companies to come out ahead after the first year. "Once it's up and running, it's not that expensive to maintain, especially for small employers," she says.

A recent study by Summa Associates revealed that around half of the 2,300 employers offering day-care assistance use salary-reduction plans. It's the simplest, most painless way for a company to show employees that child care is a priority. But in some cases, salary reduction may not be enough. "The first thing a company ought to do is figure out what their employees need," says Valleman. "If employees need child-care facilities and not just financial assistance, then that implies that you've got to do something other than just help pay for it."

Velleman also suggests that companies with any sort of reimbursement plan, such as salary reduction, think through the sort of proof of coverage they'll require from their employees. If a company requires its employees to present a receipt and the provider's name, for example, some employees may be excluded from the reimbursement plan. That's because half of the child-care providers don't report their income to the Internal Revenue Service and are therefore reluctant to give receipts for payments. Often, employers merely require employees to sign a statement verifying that the day-care service they are using meets IRS requirements.

When it comes to setting up dependent-care benefits of any kind, it's a good idea to check out the IRS regulations first to be certain you won't get any surprises down the road. There are antidiscrimination rules, for example, stating that benefits may not favor high-income employees or company owners. The IRS also stipulates the types of child care that are eligible for favorable tax treatment. If a facility cares for more than six children, for instance, it must comply with all state and federal regulations. And the tax code prohibits employees from using tax-free dollars to pay sposes or older siblings for child care. For a company's own protection, it should inform employees in writing about the IRS rules. Should questions arise later on, it can show that it has made a "good-faith effort" to educate its work force, and that it had, therefore, a "reasonable expectation" that the funds used to pay for day care were not subject to taxation.

An increasing number of companies are beginning to realize that being receptive to their employees' child-care needs can also be good for business. A survey sent by Summa Associates to companies with various forms of child-care assistance revealed that 95% felt that the benefit outweighed the cost. Eighty-five percent stated that they were able to recruit employees more effectively, 65% reported that turnover improved, 53% cited lower absenteeism, and 37% thought the quality of their products and services had increased. "The fact is that child care saves a company more money than any other employee benefit," says Sandy Burud, chairman of Summa Associates. "It's also a management tool, and that's why the number of companies providing child care has mushroomed. It's a bottom-line issue."

Last updated: Sep 1, 1987

DONNA FENN | Inc.com Contributing Editor

Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.




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