In today’s world, commercial businesses are gaining efficiency and lowering costs by moving computer servers to a data center. As the industry morphs in new directions with cloud computing technology, outsourcing data is taking on a more important role in the effort to cut costs.
“The data center industry allows other companies to focus on their core competencies, and lets the data center provider take care of the technical infrastructure that supports the business,” says Pervez Delawalla, president and CEO of Net2EZ.
Smart Business spoke with Delawalla about how employers can use data centers to increase efficiency and allow employees to focus on growing the business.
How does the data center industry work?
A data center has specialized infrastructure to support thousands of computer servers. The industry itself has become more commercialized, as the Internet infrastructure demand has increased.
A data center provides power, cooling and fiber optics for the servers with efficiencies and redundancies not readily available in commercial buildings. Redundancies such as an uninterrupted power source and generators with on-site fuel can sustain power for days or weeks to support all critical infrastructure including commercial cooling, fiber optics systems and servers.
What’s the advantage to businesses when using data centers to outsource data?
Building your own data center for your servers can cost between $1,000 and $1,500 per square foot. In addition, commercial buildings are not designed to house redundancies such as generators and additional cooling systems that are needed to sustain data centers.
In addition, with the recent economic downturn, CFOs are asking their IT heads why they should invest in building or expanding their internal data footprint when there are other options. When servers are outsourced to a commercial data center, you can take advantage of the economies of scale to derive financial, security and redundancy benefits.
What services are provided when businesses outsource data?
The core of a data center is the redundancy — power, cooling and network backbone. In addition, there’s a high speed of connectivity, from the network to the servers. A data center may have a minimum of 440 gigabits of capacity to the Internet backbone. One gigabit is a 1,000-megabit connection, and a typical T1 line, which would be used in many commercial office buildings, is 1.5 megabits. So, if servers are tasked with downloading or performing analytical work by scanning data on the Internet, that high speed enables the data to be acquired at a faster rate.
Ancillary services also are available through commercial data centers, such as 24/7 onsite support, complete network design implementation and management, and network security such as distributed denial of service (DDoS) protection or network firewalls. A data center can deploy operating systems and manage them with continuous monitoring. Typically, these additional services are often already provided through a company’s IT department. If a company outsources these functions, then an onsite IT department becomes less critical.
How has outsourcing data changed with technology advancement?
As connectively technology has improved, the price of that connectivity has dropped dramatically. Ten years ago, if you had multiple offices and wanted to connect them, you might spend hundreds of thousands of dollars; now, you are able to connect remote offices at a fraction of that investment.
The same goes for a data center. When you outsource data, you can have multiple offices connected to that data center, and if you close or move an office, you just need a new connection, rather than mobilizing technology gear at a high expense or risk.
Cloud computing is another way businesses are using data centers these days. Cloud computing works through a data center and, in many ways, can lead a company to outsource not only its servers but its IT functions. It brings efficiency by using every ounce of your server capacity. In many cases, a business might have one server for email and another for file storage, but there are resources within each of those servers that are being underutilized.
How is security greater at a data center than infrastructure that is housed at a business?
The data center industry looks at both network and physical. With network security, data centers employ DDOS and firewall protections to protect data. Physical security is equally important, as physical access to servers is more than half the battle for hackers. Data centers are monitored 24/7 by closed-circuit video cameras, with every entry point only accessible via secured access, such as biometrics.
As technology advances, the way that companies outsource their data and utilize a data center will evolve, but data centers still increase productivity through commercial-grade redundancy and security, and as leaders in the industry strive to deliver greater efficiencies and value to their customers.
In addition, efficiencies that data centers are creating will drive lower carbon footprint for companies.
Pervez Delawalla is president and CEO at Net2EZ. Reach him at (310) 426-6700 or firstname.lastname@example.org.
Insights Technology is brought to you by Net2EZ
Without the protection of a non-competition agreement, most courts are reluctant to prevent a former employee from working for a competitor. However, even when a company has a non-compete agreement with an employee, it may be unenforceable if it is not drafted in accordance with the laws of the state in which the company seeks to enforce it, says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC.
“There’s a perception that Pennsylvania courts do not enforce non-compete agreements, but that’s incorrect,” says Goldblum. “Covenants not to compete are routinely enforced by Pennsylvania courts to the extent they are reasonably necessary to protect the legitimate business interests of the employer.”
Smart Business spoke with Goldblum about the importance of having properly drafted non-compete agreements in order to best ensure that they will be enforced by a court.
Why are non-compete agreements important?
In conjunction with other restrictive covenants such as a non-solicitation of customers and employees, confidentiality and inventions clauses, non-compete agreements are the best way a company can protect itself from the harm it can potentially suffer in the event an employee leaves the company and then solicits the company’s customers on behalf of a competitor. Although non-compete agreements are fairly common for executives and managers, they are not utilized as frequently as they should be for salespeople and other employees that regularly communicate with a company’s customers.
How does Pennsylvania law differ from other states regarding non-compete agreements?
Many states are less inclined to enforce non-compete agreements than Pennsylvania. For example, California has a statute that prohibits non-compete agreements except in very limited circumstances. Generally, Pennsylvania courts will enforce a non-compete agreement as long as the agreement is narrowly drawn and the company seeking to enforce the non-compete agreement can meet the threshold requirement of having a legitimate, protectable business interest such as customers and customer goodwill, confidential information, specialized training or trade secrets. Pennsylvania courts will not enforce covenants aimed at repressing or eliminating competition to gain an unfair economic advantage.
What should employers know when entering into non-compete agreements with employees?
In Pennsylvania, the offer of employment is sufficient consideration for a non-compete agreement entered into between a company and an employee at the outset of employment. In Pennsylvania, there are four requirements for an enforceable non-compete agreement. The non-compete agreement must be:
- Ancillary to an employment relationship.
- Supported by adequate consideration.
- Reasonably necessary to protect a legitimate business interest of the employer.
- Reasonably limited in duration and geographic scope.
There is no precise formula for what makes a covenant not to compete reasonable. A court will evaluate the circumstances and make a factual determination as to whether it will enforce a non-compete agreement on a case-by-case basis.
If an employer has employees in multiple states, it can include a provision that ensures Pennsylvania law will govern the interpretation and enforcement of the non-compete agreement.
What common mistakes do employers make when entering into non-compete agreements with existing employees?
The most common mistake is to fail to give additional consideration and simply demand the employee sign the noncompete agreement. Continued employment alone is insufficient consideration for a non-compete agreement entered into subsequent to the commencement of the employment relationship.
If the company seeks to enter into a non-compete agreement with an existing employee, it must give additional consideration, which could include many different items such as a promotion, an increase in salary or benefits or a monetary payment.
How can employers determine when and how to enforce non-compete agreements?
When an employee resigns or is terminated, the company should remind the employee of his or her non-competition obligations and provide the employee with a copy of the signed non-compete agreement. If it is subsequently determined a former employee is in violation of the agreement, the company has the right to proceed against the employee in court. The company may seek preliminary injunctive relief to prevent employment in violation of the non-compete and file a breach of contract action against the former employee and seek permanent injunctive relief and monetary damages. Typically, a case against a former employee also includes the new employer for interfering with the company’s contractual relationship with its former employee.
When hiring, a company should always inquire whether potential employees are bound by agreements that could restrict them from accepting employment or limit the performance of their duties. Otherwise, the company could be inviting a lawsuit if it hires an employee who is contractually bound not to compete with a former employer.
How often should an employer review its non-compete agreements?
Noncompete agreements should be reviewed no less frequently than every two years because the laws that govern their interpretation and enforceability change. Legal counsel that is up to date on the ever-changing landscape of employment law in Pennsylvania should review non-compete agreements to determine their compliance with existing law, which will best ensure their enforceability.
Stephen C. Goldblum is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-5961 or email@example.com.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
More than 145 million people — or nearly half of all Americans — live with a chronic condition, according to Johns Hopkins University. That number is projected to increase by more than 1 percent each year through 2030, resulting in a chronically ill population of an estimated 171 million.
So what does this mean for employers that are already struggling to control health care costs?
“There are 29 chronic illnesses that make up 80 percent of all health plan costs,” says Mark Haegele, director, sales and account management, with HealthLink. “The problem is that, with a typical health plan, you are only managing five to seven of those diseases, reaching a significantly smaller component of the population.”
Smart Business spoke with Haegele about how to remove barriers to chronic illness compliance and manage health care costs.
How are chronic diseases typically managed?
Chronic disease management may include an evidence-based care treatment plan, with regular monitoring that follows guidelines developed by the American Medical Association, the American Heart Association and others, coordination of care among providers, medication management, and measuring care quality and outcomes.
How do chronic illnesses exponentially affect employee health insurance costs?
Patients with chronic conditions often are required to take one or more medications indefinitely. The combination of dormant symptoms, coupled with long-term treatment, means that patients don’t always follow the recommended daily regime for disease maintenance. If employees don’t manage chronic illness by following treatment protocols, they may end up in the emergency room or hospital, spending more on health care costs than if they had spent money to stay in compliance through testing and medication.
With the way the health care system is structured, a patient does not know the ultimate cost of going to a doctor. Months later, he or she will get a bill in the mail — hopefully with a corresponding explanation of payment from the insurance company — that might be for $50 or $250. This uncertainty can keep patients with chronic diseases from following wellness and disease management.
In addition, failing to manage chronic illness correctly can lead to complications, which increases costs. A University of Chicago study found that three out of five patients with Type 2 diabetes suffer from at least one significant complication, such as heart disease, stroke, eye damage, chronic kidney disease or foot problems. Consequently, the yearly medical expenses of a person with Type 2 diabetes complications are nearly $10,000, with nearly $1,600 paid out of pocket.
What challenges do employers face with chronic illness compliance?
There can be challenges with many fully insured health plans because benefit designs are limited to support chronic illness compliance. Most health benefit plans have an optional disease management program that impacts 5 to 9 percent of chronic diseases, such as asthma, diabetes, cardiovascular disease and chronic obstructive pulmonary disease. The problem is that many more types of chronic illnesses drive up health care costs, and the benefit design doesn’t change to support the highest chronic disease prevalence among your specific employees. In addition, a voluntary program won’t necessarily reach the employees who are increasing costs the most.
It takes time to change employee behavior. Even with the Patient Protection and Affordable Care Act, under which companies have been paying for 100 percent of preventive care such as immunizations and mammograms, there hasn’t been an uptick in services.
How can employers use value-based benefit plans to increase chronic illness compliance?
Traditionally, employers try to save money on health insurance plans by shifting costs to employees and encouraging generic medicine use. Now, some are lowering or eliminating copayments on medications to encourage adherence to regimens through value-based benefit design.
Companies can use a series of incentives and disincentives to shape employee behavior. For example, smokers may have to pay a higher premium than nonsmokers, and employees who undergo a biometric screening each year could qualify for a plan with better benefits.
This is where the flexibility of a self-funded plan can help. If a company has a disproportionate number of diabetics, it can design its health plan to remove barriers to following a health treatment plan by taking steps such as fully paying for diabetic test strips. In addition, an employer can fluctuate employee members between plan levels based on their compliance throughout the year, rewarding good health practices with better benefits.
In a recent study of a 30,000-member business coalition in Clinton, Ill., of 250 diabetics studied, those who followed a value-based benefit plan with aligned incentives had health costs that were half those of other diabetics.
How can employers ensure that adding health care costs by lowering or eliminating copayments saves money?
You can hire professional consultants to evaluate health plan vendors, but effective communication is critical. When looking at programs, those with motivational coaching are the most effective. They get employees on board by motivating them as opposed to informing them of a checklist, then calling to ask why they aren’t following it. In addition, the program should also be communicating both with the member and primary care doctor.
You need to understand your health care population and then monitor progress monthly, quarterly or yearly to see your return on your investment. One self-funded program found that more than 90 percent of the population identified with high cholesterol had gotten cholesterol levels down to normal following a value-based health plan that ultimately lowers overall health care costs.
Mark Haegele is a director, sales and account management, with HealthLink. Reach him at (314) 753-2100 or firstname.lastname@example.org.
Insights Health Care is brought to you by HealthLink®
Businesses cannot overestimate the importance of a well-planned transportation infrastructure. Easy commutes for employees build morale and productivity. Faster response times for mobile service crews produce loyal customers. And gas prices of more than $3 per gallon impact the bottom line.
For Shermco Industries — a thriving company specializing in electrical power system and wind generator repair — proximity to airports, highways, customers, and comfortable and diverse neighborhoods for employees to live in were all keys to its corporate relocation success story.
“Relocating to Irving – Las Colinas provided us with an extensive network of highway systems and transportation options that help us meet and exceed our customers’ expectations for timely arrival, and allow us to attract and keep top talent,” says Lonnie Mullen, vice president of operations for Shermco Industries.
Smart Business spoke with Mullen about how the thoughtfully planned infrastructure of the Greater Irving – Las Colinas area enticed his growing company to relocate its operations from Dallas.
What factors make Irving – Las Colinas a great place to do business?
The cost of doing business in Irving has a respectable value compared to the surrounding cities, and Texas real estate in general has maintained its value despite the recent downturn. Irving is an established, business friendly city, centrally located in the Dallas-Fort Worth Metroplex. More than 10,000 businesses call Irving home, including Fortune 500 companies ExxonMobil, Fluor, Kimberly-Clark, Celanese and Commercial Metals Co.
Irving is regarded highly as one of the top cities for business in the nation and recently was ranked one of the nation’s Top 50 Best Places to Live. Not only is Irving a great place to work and build our company, it’s also one of the best places for our employees to reside and raise their families. Irving had exactly what we were looking for.
We were established in Dallas, a short drive from Irving. In 2000, our success demanded that we move to a bigger facility, and Irving offered the business solution we were looking for with a selection of cost-effective and functional real estate opportunities. We settled on a great building in an ideal location within an industrial complex next door to Frito Lay — one of our customers.
How has the move impacted Shermco’s bottom line growth?
When our customers need us to work on their equipment, they need help right away. Having easy access to Irving’s transportation infrastructure, including several highways, two major airports, commuter rail and the planned light rail service, is a great value to us as well as our customers.
The transportation infrastructure in and around Irving is a very important function for our company. We are an international provider of testing, repair, professional training, maintenance and analysis of rotating apparatus as well as electrical power distribution systems and related equipment for the light, medium and heavy industrial base. A lot of our business is service-oriented, so time truly is money.
Since relocating to the city of Irving, our business has continued to flourish. When we moved to Irving we had 100 employees. Today we have 425 employees, including 280 at our Irving location. We are very proud to be consistently ranked among Dallas’ finest companies by the Dallas Business Journal, which recognized us as a mid-sized company finalist for the publication’s 2010 Best Places to Work. More than 400 companies entered into the survey process, but only 23 mid-sized companies were chosen as finalists.
Another factor driving our growth is Irving’s Economic Development Partnership group. The group is engaged in both the business and governmental sides of our city. It’s extremely helpful in a sense that I’m able to ask the same group of people questions that involve either subject, essentially speeding up the process for our business to make a solid decision. And it gives you a sense of pride to know you have a partner that’s invested and supports your success.
How does the city’s transportation infrastructure help attract top talent?
To be the best you have to attract the best talent. In Irving, we have access to a work force of more than 3.1 million people within a 30-minute commute. Being established in a city like Irving that offers an excellent quality of life, an affordable cost of living and reasonable commutes has allowed us to attract and maintain our valuable employees.
Our employees and their families have access to many culturally diverse activities in and around Irving, including the Irving Arts Center, the Dallas Arts District, Six Flags amusement park, several water parks, and professional sporting venues including the Dallas Cowboys, Mavericks basketball, Stars hockey and Rangers baseball.
What are some of the best-kept secrets of doing business in Irving?
There are none. The city and the Greater Irving – Las Colinas Chamber of Commerce work very hard to make sure there are no secrets. They are truly invested in business and they want all the businesses in Irving to succeed. Come to Irving and you’ll quickly find out the city is very pro-business.
The Greater Irving – Las Colinas Chamber of Commerce comprehensively helps businesses large and small with plans to relocate their headquarters or expand operations to Irving. The Chamber is prepared to guide companies through a comprehensive process including business development strategy, strategic site selection, community demographics, expansion management, location selection, site consulting, corporate real estate management, corporate office relocation, location analysis, corporate site selection, corporate real estate strategy, corporate headquarters relocation, business relocation and corporate relocation management.
Lonnie Mullen is vice president of operations for Shermco Industries. Reach him at (972) 793-5523 or email@example.com.Visit Greater Irving-Las Colinas Chamber of Commerce at www.irvingchamber.com.
Insights Economic Development is brought to you by Greater Irving - Las Colinas Chamber of Commerce
If your business leases equipment, vehicles, office space or other facilities, the proposed lease accounting standards could have a significant impact on your company’s financial statements.
Over the past two years, the business and financial communities have been awaiting finalization of the proposed lease standards that will transform balance sheets. The proposed changes, originally outlined in an exposure draft issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in August 2010, have been delayed due to the large number of comments and questions received during the comment period. Some companies may have been hoping that the scope of standards would be lessened before they were finalized.
However, that doesn’t appear to be happening. In July 2011, the boards agreed to re-expose the revised standards to businesses and financial statement users. While the revised exposure draft isn’t expected until later in 2012, the boards have released some tentative decisions reached in their June 2012 meetings that shed light on how the standards may ultimately look.
“The boards haven’t changed their initial position that long-term leases represent an obligation that should be reported on a business’s balance sheet,” says Mark Lund, assurance services partner for Weaver. “The tentative decisions reached in their last meetings helped clarify some questions raised during the first round of responses from the public. Additionally, the boards appear to have addressed the issue of the acceleration of expenses for lessees in certain circumstances, which was criticized in the initial draft. Beyond that, I don’t see any reduction in scope or administrative relief in the updates.”
Smart Business spoke with Lund about the tentative decisions on the proposed standards and what they mean for businesses.
What are the major components of the proposed lease standards?
The proposed lease standards are a joint effort to help create convergence between U.S. and international accounting standards for leases and to address perceived weaknesses regarding current financial statement presentations of leasing arrangements. Under existing U.S. standards, leases are either classified as capital leases or operating leases. Businesses are not required to include operating lease commitments as liabilities on their balance sheets.
Under the proposed standards, lease commitments — existing and new — are to be recorded on a company’s balance sheet as liabilities with an offsetting asset called a ‘right-of-use asset.’ The lease obligation will be divided between current liability and non-current liability, similar to a note payable, and the existing capital lease presentation. The boards expect to issue a revised draft in the third quarter of 2012 and then take additional comments. The final standard likely will be issued in 2013.
How has the acceleration of expenses over the lease term been tentatively addressed?
In the first draft, capitalization of leased assets and liabilities accelerated the recognition of expenses earlier in the lease term. Companies were required to amortize the asset over the lease term, while the lease obligation was amortized using the effective interest method. That method results in more interest expense being recognized earlier in the lease term. Based on concerns, the boards have tentatively decided leases of property, such as buildings and real estate, can be accounted for using a straight-line approach, meaning the expense recognition will be recorded evenly over the lease term.
However, if your lease term represents the major part of the asset’s economic life, or if the lease payment obligation amount is the equivalent of essentially buying the asset, you won’t be able to utilize the straight-line expense approach. All other leases of assets other than property will continue to be accounted for as outlined in the original exposure draft, including:
- A business will initially recognize a right-of-use asset and the related liability for its lease obligation measured at the present value of the lease payments.
- The right-of-use asset will be amortized, similar to depreciation, on a systematic basis that represents the use or consumption of the asset.
- The amortization expense of the asset and the interest expense related to the liability are shown separately on the income statement.
What are some other key provisions?
The FASB further identified leases that are within the scope of the new standard to include long-term leases of land. Leases of 12 months or less, including the option periods, however, are excluded from the new standard. Proposed financial statement disclosures are lengthy and will add time to comply.
How will the changes impact businesses?
There will be an immediate gross-up of the balance sheet, adding right-to-use assets and related current and noncurrent liabilities to financial statements. The amounts could be significant, depending on lease activity. Bankers, sureties and other users often analyze companies’ liquidity and performance using financial ratios.
Current ratio, debt-to-equity ratio, and other leverage and coverage ratios will be affected with the addition of these new lease liabilities and related interest expenses. Covenant agreements will have to be revised for companies to remain in compliance.
How can employers prepare for the changes?
Prepare a pro-forma of your company’s balance sheet and income statement reflecting the new standard. Then, sit down with the users of your financial statement and discuss how the new standards will impact your company’s financial statements and ratios. This proactive approach will help bankers and creditors plan ahead on what to expect and how to maintain covenant compliance once the standards are finalized.
Mark Lund is an assurance services partner for Weaver. Reach him at (713) 297-6907 or firstname.lastname@example.org.
Insights Accounting is brought to you by Weaver
Good corporate governance is still looming large in the minds of investors as the government has increased regulations and scrutiny as the result of pressure from those who lost retirement savings or homes to predatory lenders and asset advisors. And customers are taking a harder look at businesses' financial information before signing contracts with them.
As a result, audit committees are no longer the committee of last resort but instead are now a significant presence that can strengthen your company's financial credibility and bring in new business.
"An audit committee’s objective is to ensure that there's integrity and reliable financial information based on good internal control systems." says Tullus Miller, Bay Area partner-in-charge at Moss Adams, who works with and serves on audit committees.
Smart Business spoke with Miller about how to create a successful audit committee that is an asset to your company.
What is the role of an audit committee and why should a company establish one?
An audit committee assists the board of directors with its fiduciary responsibilities by providing independent oversight through the integrity of the financial reporting process, which includes internal and external financial information.
For public organizations - whether publicly traded, publicly held or for the public good, such as with a governmental or not-for-profit - audit committees usually are mandated to help ensure the integrity and reliability of their financial information. Those mandates, which dictate the committee's composition and structure, can come from GAGAS standards, Sarbanes-Oxley or the exchange the company is listed on, such as NASDAQ, the New York Stock Exchange or Eurex.
For private organizations, audit committees are not required but can play an important role if a company has shareholders and stakeholders who aren’t involved with the day-to-day governance of the organization. These committees generally take best practices of public companies in a similar industry, adapting items such as creating a fully independent board.
What steps should an organization take when creating an audit committee?
The business risks and needs of the company will dictate the composition, structure and focus of the committee. Then, define the scope and objectives of the audit committee on the charter as mandated by the board of directors. Some decisions, such as hiring an auditor, can be delegated fully to the audit committee, while other boards may prefer that the committee recommend an auditor but retain the right to approve that person. The charter allows the audit committee to know what’s expected of it and how to define success, while also communicating to constituents.Finally, consider what qualities and skills members must have to ensure that a company’s needs and risks are addressed. Do they have experience with the organization’s industry? Are they familiar with financial information and how it is extricated? Do they have the time commitment necessary?
How has the role of audit committees changed with heightened regulations and scrutiny?
Over the past five to seven years, the amount of information available to audit committee members has increased. This is a positive in that it helps audit committee members stay abreast of increased regulation and scrutiny, but it also adds to the time commitment. Being on an audit committee is no longer a matter of just attending meetings. The time commitment could be as much as one day per month, for eight to 10 hours, or for a more complicated company, two to three days per month, excluding the meeting.
In addition, accounting rules have become so sophisticated, with more fair values, estimates and judgment, that committee members must take the time to understand how those items affect the financial statements and decision-making of the company. Risks are higher today, and boards have been sued, and this changes the behavior of committee members.
What are some common challenges of audit committees?
Committees should have succession, continuity and rotation planning. You need to ensure that leadership can step up and take over if an audit committee chair must step away or if a member becomes incapacitated.
Leave enough time to vet real issues, getting information out at least a week in advance of making a decision Also, limit the agenda. Less is better, especially when talking about significant decision-making and judgment in areas of increased risk.
It can present a challenge if the CEO is also chairman of the board. If an audit committee has concerns about estimates that are too aggressive, it can be difficult for a CEO who is also the chair to determine which hat to wear. The audit committee chair needs to understand that, and where necessary challenge, the risk-taking tolerance and tone at the top.
Additionally, define who manages enterprise risk management - the governance committee, audit committee or board of directors, etc. The audit committee is already responsible for managing risk on a financial reporting level, whether internal or external, so, in some cases,this may bog the audit committee down with items that aren't within its purview.
How should the relationship among the audit committee, board of directors and management be approached?
The key is communication on all sides in order to understand risks and decisions that are being recommended and approved, including with board members who are not financially oriented. Don't wait until a meeting to communicate what is happening. The decision-making processes should be transparent, with no surprises. If you encounter dissent, it should be noted and discussed thoroughly at approval time, whether it's from auditors or audit committee members.
Tullus Miller is the partner-in-charge of Bay Area at Moss Adams. Reach him at (415) 956-1500 or email@example.com.
Insights Accounting is brought to you by Moss Adams.
As the media is promoting employers will pay fines rather than continue to pay for employee benefits, I am trying to understand why they are trying to mess with the heads of business owners. We pose the argument, “Why would CEOs or executive directors pay taxes for a benefit they already offer their employees by free will now?”
Today, in 2012, we are not legally required to offer benefits to the employees, but do because we want to recruit and maintain the best talent we are able to. So why would that change? Why would employers now pay fines? I don’t know of one that would fall for that reasoning.
Of course the government would love to gain these tax dollars, but business owners are savvier than that. As a general rule we don’t like to pay more in taxes than we have to. We would rather invest in business operations, equipment, computers and/or our employees.
CEOs also care about their employees and gain employee loyalty through employee benefits, despite what the media says or thinks. Many employees would not take a job without them, unless it is a job of their choice and today some may feel they do not need benefits. These are the ones who will potentially feel the impact from this law unless they qualify for Medicare or other state insurance such as the California-offered Medi-cal.
Larger employers choosing not to offer benefits today may decide to pay taxes. However, just because they have not yet paid for benefits for their employees, why would they want to pay more taxes? The logic does not make sense. Take, for example, Medical CA HMO only: $320 (typical employer co-share cost more or less) x 100 employees = $32,000/month x 12 = $384,000, or an annual fine of $2,000 x 100 employees = $200,000.
Fines are potentially $120,000 less than paying for medical insurance for employees, under employee benefit group programs. However, what does one get in return for this? The answer is frustrated employees now mandated in 2014 to get their own individual insurance through an exchange, a broker or carrier. They may be likely to do this during office hours or leave for a company that offers insurance. Why?
- A group policy will always be richer, priced better and offer more assistance with claims through a company’s broker, and any pre-taxed dollars can be paid out through payroll.
- An individual plan has higher deductibles, co-pays and co-insurance and can cost a substantially higher amount for an individual than the group employee premium and will have to pay the bill every month with after tax dollars, on time or face cancelation.
In weighing the costs, most employers would prefer opting for employee retention, presenteeism, less turnover cost, and best offerings for recruiting. So the landmark Supreme Court ruling on June 28 upholding the individual mandate had wide-ranging implications. The legislation requires Americans to buy health insurance or pay a penalty, a key part of the law that had come under heavy scrutiny.
In a semi-conservative and also slightly technical statement, the court ruled that the mandate ius actually unconstitutional under the Constitution’s commerce clause, but it can stay as part of Congress’s power under a taxing clause. The court said that the government will be allowed to tax people for not having health insurance. Originally the wording “taxing” was avoided to make the bill a little more palatable to legislators to pass, potentially making it fall under the “commerce clause,” or ability for the federal government to regulate interstate purchasing.
Addressing the concern that this expands the commerce clause so far that people could, in the future, be forced to “buy broccoli,” as one argument puts it, Chief Justice John Roberts wrote, “(t)he Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness,” in the ruling.
The court’s ruling upholding the main part of Obama’s law means that people must buy health insurance or pay a tax up to several thousand dollars a year. It also means that other popular provisions of the law will stay, including the various employer mandates we discuss in our Smart Business webinar. We also had several carrier executives express their plans going forward to control cost through Accountable Care Organizations.
Now, as we continue to wait on the outcome of another decision pertaining to discrimination in employee benefit plans, employers are continuing business as usual. One employer states, “I hate the word discrimination when it comes to my decision to pay more toward my key executives or long term employees.” There is still a timeline on this matter expected from the Department of Labor forthcoming.
As time marches forward toward 2014, your benefits brokers will be more important than ever to help your team interpret your responsibilities. If it is not educated in HCR, then it may be time to find one who is.
Danone Simpson is the founder and CEO at Montage Insurance Solutions. Reach her at (818) 676-0044 firstname.lastname@example.org.
Insights Business Insurance is brought to you to Montage Insurance Services
Eighty-five percent of small business owners feel that their cyber security is adequate, according to a recent survey. However, that sense of security may be a false one, as two out of three businesses have been victimized by a data breach or cyber security incident, according to a national preparedness report recently released by the Federal Emergency Management Agency.
“There’s a false sense of security out there by business owners,” says Jason Corrado, commercial insurance advisor for First Commonwealth Bank. “They believe that it will never happen to them or that they are properly protected, but things are changing so quickly that more times than not, that is not the case.
Smart Business spoke with Corrado about the cyber threats facing businesses and how to prepare for them and protect your business.
Why is cyber security so important to businesses, especially mid-sized ones?
Look at where technology has gone. Think about where we were 10 years ago, where we were five years ago and where we are today as far as the transfer of electronic data, customer information, etc. And it’s only advancing faster and faster. It’s an important subject, especially now, because many businesses have been slow to realize the severity of the risk they face, and 40 percent of businesses don’t even back up their data.
As larger companies — such as Sony and Zappos.com, that have had data breaches — take this more seriously, they are investing time, energy and money into protecting their clients’ information. As a result, hackers will pursue the low-hanging fruit — the smaller and mid-sized businesses that haven’t invested the time and energy into security because they don’t think they have the resources.
What are some of the risks that employers face?
There are the obvious ones, such as hackers who find weaknesses in software and electronic systems to gain access, sometimes with the aid of malicious codes such as viruses, worms and Trojan horses. Cyber extortion, in which someone will hijack your website and hold it hostage until you give them X, Y and Z, is also increasing.
However, there are other risks you might not think about. If a company allows its employees to take laptops with them on the road or home, and one of those is stolen, what happens to the data on there, especially if it includes sensitive customer information.
Another risk is your Wi-Fi network. Have you taken steps to make sure it is secure? It sounds simple and you may assume that most people do so, but as many as 50 percent of businesses have open Wi-Fi networks that can be picked up by a smartphone, making them easier to hack.
What steps can a business take to combat exposure?
The first step is risk assessment. If you have a website, if you do business online, you need to figure out what your exposures are, and if you don’t know, then enlist the help of someone who does. What kind of data are you capturing from clients? Where are you storing it and how are you backing it up? If you don’t understand your risks, you can’t eliminate them.
Risk management is the second part. Put together an IT risk management plan, which is a formal written document that addresses the scope of the plan, the roles employees in your company play, the responsibilities of individuals and departments, compliance criteria, how you’ll tell customers if there is a breach, etc.
The plan outlines what you can do to prevent cyber attacks. You can train employees on cyber security; install and update anti-virus, anti-spy software on computer systems; check your Internet firewalls; make sure software and systems are up to date; back up and make copies of critical data; and control physical access to computers by ensuring employees use the proper passwords and don’t leave terminals or laptops open.
You can also take smart business steps such as evaluating your Internet service provider. All service providers are not created equal, so beyond getting you on the Internet, what does it offer to reduce exposure with security and privacy?
Once the IT risk management plan is in place, you need to hold all employees – including yourself — accountable. Sometimes owners and officers are the biggest offenders for not following proper procedures where data is concerned. You also need to review your plan annually, or when you make significant changes to the systems that you are operating.
Aside from an IT risk management plan, are there other ways to manage your risk?
You can identify all the exposures that are out there and getting a plan in place, but risk financing can also act as a backstop if your prevention measures fail to protect your company.
With cyber liability insurance, you pay a premium to an insurance company to help you in case something does happen. If your systems are hacked and you’re down for a couple of days or you lose data, the insurance will protect your company’s assets and help you recoup costs. Cyber liability insurance also will protect you if one of your employees sends an email with a virus and a third party’s system gets infected. In addition, you can use business interruption insurance to fill the gaps of lost revenue if a cyber attack stops you from conducting business.
By using risk assessment, risk management, risk prevention and risk financing together, even mid-sized businesses can hedge against cyber attacks.
Jason Corrado is a commercial insurance advisor for First Commonwealth Bank. Reach him at (724) 934-4569 or Jason.Corrado@fcfins.com.
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On June 28, the U.S. Supreme Court upheld the majority of the Patient Protection and Affordable Care Act with a 5-4 ruling. As both sides of the political spectrum use the decision on the controversial law to win support for their own policies, employers may be wondering where this leaves them.
“The decision provides some necessary clarity that can lead to more decisive health benefits planning,” says Bruce Davis, principal and leader of Health and Group Benefits Consulting at Findley Davies.
At the same time, Davis warns this ruling isn’t the end of the matter. Some health care issues are unlikely to be resolved until after the November election and the health care exchanges smaller Ohio employers were counting on will be operated by the Department of Health and Human Services.
Smart Business spoke with Davis about what the Supreme Court’s decision means for employers now and in the future.
How does the Supreme Court’s decision impact employers?
Employers now know what they need to do this fall as they head into open enrollment. They need to:
- Comply with the new Summary Benefit Coverage requirements by modifying open enrollment materials to include new coverage examples with help from health insurance carriers or third-party administrators and professional advisers.
- Work with payroll vendors, IT staff and human resources to ensure they can report the aggregate cost of their employer-sponsored health coverage on employees’ W-2s to be issued in January if they have more than 250 employees.
- For plan years beginning on or after Aug. 1, provide expanded coverage for eight categories of women’s preventive care without cost sharing if they are nongrandfathered under the PPACA.
What might this mean in terms of cost?
For 2013, businesses can examine their demographics to understand what expanded women’s preventive care requirements mean in terms of increased claims costs, but generally, Findley Davies believes it will be approximately 1 percent. Other costs, such as coverage for children up to age 26 and general adult/child preventive care requirements had already gone into effect.
Cost increases may elicit new work force strategies. For example, employers with more than 50 employees will be penalized for not offering essential health benefits or offering benefits deemed unaffordable. However, those requirements apply to full-time employees — those working an average of 30 or more hours weekly. Employers in some industries may begin using part-time employees or independent contractors to a much higher degree.
What parts of the Affordable Care Act remain undecided?
In July 2012, Ohio and several other states decided not to participate in expanded Medicaid, which was permitted in the Supreme Court decision, and will not establish a state-based health insurance exchange. HHS will operate the exchange in Ohio in 2014 to serve individuals and employers with fewer than 100 employees. Smaller employers were investigating the idea of moving toward a defined benefit contribution model and letting employees use the exchange to choose their own coverage based on their risk tolerance.
If you have fewer than 100 employees, you’ll need to follow the developments in each of the states in which you do business to determine whether they will move ahead with a health insurance exchange for 2014. It won’t be clear for another year which carriers will participate in each exchange, which plans will be offered and their costs.
Further, the first comparative effectiveness research fees are due July 2013. Employers will remit the $1 per member fees using IRS Form 720, but the IRS has not yet revised that form to take these fees into account. There also are several requirements where the federal government should be issuing guidance in 2012, such as how to file a quality of health care report and how non-discrimination rules apply to insured plans that favor highly compensated employees.
How does politics play into what happens next?
This will be a huge issue for the November election. For example, if the Democratic majority in the Senate changes, then some smaller measures might pass, such as restoring the ability to pay for over-the-counter medicines under flexible spending or health savings accounts.
However, employers cannot wait for the election results. Even if Republican candidate Mitt Romney is elected, the inauguration won’t happen until Jan. 20, well after businesses must comply with some of the act’s provisions.
What should employers tell their employees?
The decision relieved some anxiety and provided clarity, but employers need to begin communicating to their employees. Take advantage of this opportunity and reinforce your commitment to providing a competitive, affordable health plan as you work to comply with the new PPACA requirements.
Employers also need to be ready for questions from their female employees. Health care flexible spending accounts will become limited to $2,500 in January, which needs to be explained in upcoming open enrollment materials. In addition, there’s the misconception that reporting the value of health care coverage on a W-2 means it is taxable. Employers need to be proactive in explaining that this is information gathered for the federal government so it can administer the premium subsidies under the health insurance exchange programs.
Health benefits remain a very important part of employees’ total compensation. Employers will want to drive that message, as well as demonstrate how these benefits fit into the overall value proposition of what it means to work for their organization.
Bruce Davis is principal and leader of Health and Group Benefits Consulting at Findley Davies. Reach him at (419) 327-4133 or email@example.com.
Insights Human Capital is brought to you by Findley Davies, Inc.
As the economy has encouraged more than a few business owners to tighten budgets and search for inefficiencies, workflow automation is enabling companies to do the same amount of work with fewer people.
“We’re looking out for your bottom line because we take these inefficiencies and wrap them in automation to not only reduce overhead and cost, but also let you spend more time worrying about generating new revenue rather than the loss of revenue,” says Curtis Verhoff, systems integrations and applications manager with Blue Technologies.
Smart Business spoke with Verhoff about how business workflow automation could make sense for your organization.
How does business workflow automation work?
Employers can introduce efficiencies by looking at business processes and putting in various solutions — often a combination of hardware and software — that allow them to automate workflows for areas such as shipping and receiving, accounts payable, accounts receivable and human resources.
Business workflow automation is more than just taking physical documents and data and digitizing them so employees can view them quickly. It involves installing software with rules, actions and notifications that help employees more easily and quickly process documents and information within the organization. For example, the hiring process is growing more complex with numerous steps to be completed such testing or certifications. Automated workflows can help employees keep track of all steps and automatically initiate the next one; the workflow solution informs people when tasks have been completed, what is outstanding and what requires immediate attention.
What advantages does workflow automation bring and how are those magnified in a tough economy?
Workflow automation allows all the players in your department or business to be more productive. Along with doing more with fewer people, workflow automation is a time saver as tasks can be completed quicker. With accounts payable, for instance, the workflow automation enables the invoice to automatically enter the system by calling on various employees to look at it, approve it or move it on without a lot of handholding. The system can be set up for different levels of approval based on the monetary amount, and a series of checks and balances would require validation before payment is made.
This type of automation has become especially important as companies in the last four or five years — particularly in Ohio — have taken a hit as far as jobs. Businesses have had to find ways to keep up with the workload with fewer people. Employers are battling with keeping their level of production, satisfaction and customer service at the same level or higher with fewer resources.
Employers also are drawn to the technology because they are skeptical about the current economy and where it’s going. It’s often easier to look at software automation to help the existing staff keep up with the work level, as well as grow it, rather than hire additional people who might not be needed next year.
What departments and industries are using workflow automation the most?
Some of the biggest uses are for accounts payable and accounts receivable, as well as in the industries of law and education. However, automation works across a wide range of industries, as just about every company is working with information and documents to some degree. The automation solution can be tailored to fit from a small volume of information and documents to a large amount.
It’s important to keep an open mind because, in some cases, automation has a role that isn’t immediately obvious. In addition, the systems are flexible enough that many times they can be adapted to other inefficiencies you may find later.
How does an employer decide if it needs to consider workflow processes?
If not enough time or attention seems to be available; if you’re not able to service your current customer base; or if you see customer service levels decrease, those are some serious red flags. If inefficiencies are coming out of the woodwork, unlike in the past, the first solution might not be to hire another employee.
With the help of technology experts, you can uncover your internal challenges and current deficiencies by processing business documents or data. Those experts can spend time with you to discover what your business does and how it does it to determine what level of impact the automation would have for your organization. In a few cases, the cost might not justify itself because the inefficiencies or deficiencies don’t equate to much.
Once you’ve installed the workflow automation, what is the best way to overcome the challenge of training and employee buy-in?
There are a couple of tactics, but the most successful is to choose an employee to be extensively trained in the software and put him or her in charge of that initiative. It gives a company control and flexibility because it has someone internally who knows the solution very well and can train or re-train employees at his or her own discretion and timetable.
In addition, if the trainer is within the organization, employees take greater strides in learning the system and using it on a daily basis. You have a faster response with problems when the trainer can help another employee immediately. You’re putting skin in the game to have the employee making sure everybody is properly trained and utilizing the system to the nth degree.
Curtis Verhoff is a systems integrations and applications manager with Blue Technologies. Reach him at (216) 271-4800, ext. 2251, or cverhoff@BTOhio.com.
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