Yes, there are still many companies that maintain defined benefit plans, but most ceased crediting benefits years ago to stop the pension liability growth. However, even though the majority of Fortune 100 and 500 companies have frozen their plans, they often still have contributions due for what participants have already accrued, as plans typically aren’t 100 percent funded at the time they are frozen. If a company hasn’t settled its obligation or transferred the risk, then it still owns it.
Rich McCleary, Director, Actuarial Service, at Tegrit Group, says, “It’s a popular discussion topic. Our firm has over 300 defined benefit plan clients with whom we work, and many traditional plan sponsors we talk to want to find a way to terminate their plan.”
Smart Business spoke with McCleary about how business owners can mitigate their defined benefit plan risk.
How do defined benefit plans differ from other retirement plans?
A defined benefit plan promises a certain amount of benefits, typically in an annuity form, at retirement to plan participants. The company contributes to the plan and maintains the obligation to provide those benefits once they are earned or accrued. Much like the Social Security system, promises to plan participants are virtually irrevocable. If a company can’t fulfill them, the Pension Benefit Guaranty Corporation (PBGC), the governmental agency that insures pension plans, will step in.
What’s the current situation for defined benefit plans?
On the investment side, pension plan performance has been lackluster over the last decade, remaining steady or decreasing slightly against expectations. In addition, in this severely declining interest rate environment, liabilities have consistently gone up. Along with that, the federal government has continually passed regulations to make the funding requirements more stringent.
Companies maintain this liability and risk on their balance sheets, and the liability remains until the last participant or contingent beneficiary is paid out. Manufacturing in particular has been hit hard, as the industry often used these plans to meet union benefit demands. Also, the liabilities on the balance sheet don’t truly reflect the entire economic cost of the plan. There are numerous administrative expenses, such as fees for investment management, actuarial, legal and accounting, as well as PBGC premiums, which can add 3 to 5 percent to the liabilities.
What are some strategies for plan sponsors to mitigate risk?
Liability-driven investments are a popular way to drive down the risk. Investment managers can help with transferring the risk into fixed income investments that closely match the duration of the pension liabilities.
In order to reduce their pension risk, some large companies have offered lump sum payments to retirees and beneficiaries. Although there might be a higher initial cost, the pension liability is transferred either directly to the participant or an insurance company, which improves the stability of the balance sheet and ultimately, shareholder value. Amazingly, some companies have pension plans with liabilities that approach or exceed the total market capitalization of the company, creating volatility and jeopardizing profits.
Although a smaller company may not be publicly traded, it can find ways to get the necessary cash from other sources besides loan covenants or issuing bonds. As an example, one business took out a second mortgage on its building because it happened to be cheaper at the current mortgage interest rates and loan period than paying down the pension plan liability. However, there are accounting and tax implications that occur when transferring risk, so use expert advisers to carefully review the balance sheet and make sure the risk transfer makes sense.
Rich McCleary is Director, Actuarial Service at Tegrit Group. Reach him at (330) 983-0539 or firstname.lastname@example.org.
Insights Retirement Planning Services is brought to you by Tegrit Group
Companies typically want to do what’s right for those they serve. Key priorities should be customers, investors, employees and the communities in which the company is located — but not necessarily always in this order. The dilemma, however, is that many times short-term decisions can prove to be long-term problems that cause more pain than the initial gain.
It’s difficult to make all constituents happy every time. As a result, management must prioritize decisions with a clear understanding that each action has ramifications, which could manifest themselves in the short, intermediate or long term. Seldom does a single decision serve all of the same timelines. There are no easy answers and anyone who has spent even a short amount of time running a business has already learned this fact of life. So what’s a leader to do?
It’s a sure bet that investors want a better return, employees want more money and benefits, and customers want better quality products, higher levels of service and, oh yes, lower prices. This simply all goes with the territory and is a part of the game. The problem can be that, most times, it’s hard to give without taking something away from someone else. Here are a couple of examples.
Take the case of deciding to improve employee compensation packages. Ask the auto companies what happened when they added a multitude of perks over the years, as demanded by the unions? The auto titans thought they didn’t have much choice, lest they run the risk of alienating their gigantic workforces. History has shown us the ramifications of their actions as the majority of these manufacturers came close to going belly up, which would have resulted in huge job losses and an economic tsunami.
Basic math caused the problems. The prices charged for cars could not cover all of the legacy costs that accrued over the years, much like barnacles building up on the bottom of a ship to the point where the ship could sink from the weight. Hindsight is 20/20, and, of course, the auto companies should have been more circumspect about creating benefit packages that could not be sustained. Yes, the employees received an increase to their standard of living for a time anyway, but at the end of the day, a company cannot spend more than it takes in and stay in business for long.
Investors in public companies can present a different set of problems because they can have divergent objectives. There are the buy-and-hold investors, albeit a shrinking breed, who understand that for a company to have long-term success, it must invest in the present to build for the future. The term “immediate gratification” is not in their lexicon; they’re in it for the long haul. Another type of investor might know or care little about a company’s future, other than whether its earnings per share beat Wall Street estimates. These investors buy low and sell high, sometimes flipping the stock in hours or days. And, actually, both types are doing what’s right for them. The issue becomes how to serve the needs and goals of both groups. When a company effectively articulates its strategy, it tends to attract the right type of investors who are buying in for the right reason. This will avoid enticing the wrong investors who turn hostile because they want something that the company won’t deliver.
When interviewing and before hiring employees, it is imperative that candidates know where the company wants to go and how it plans to get there. Many times, this means telling the prospective newbie that the short-term compensation and benefits may not be as good as the competitors’ down the street, but in the longer term, the company anticipates being able to significantly enhance employee packages, with the objective of eventually outmatching the best payers because of the investments in equipment being made today.
The key to satisfying employees (present and prospective), investors, et al, is communicating the types of decisions a company will make over a specific period of time. Communication from the get-go is integral to the rules of engagement and can alleviate huge problems that can otherwise lead to dissatisfaction.
Knowing what is right for your company, based on your stated plan that has been well-communicated, will help ensure that you do the right thing, at the right time, for the right reasons.
Michael Feuer co-founded OfficeMax in 1988, starting with one store and $20,000 of his own money. During a 16-year span, Feuer, as CEO, grew the company to almost 1,000 stores worldwide with annual sales of approximately $5 billion before selling this retail giant for almost $1.5 billion in December 2003. In 2010, Feuer launched another retail concept, Max-Wellness, a first of its kind chain featuring more than 7,000 products for head-to-toe care. Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. Reach him with comments at email@example.com.
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In our world of quick text missives, sharing the daily joke via inner office email, and generally more relaxed workplaces, informality can become a workplace hazard. Studies show that employers and managers often assess an employee’s career potential based on how that employee carries himself or herself in the workplace. None of us wants to be judged by the externals, but our respective “book covers” matter.
Poor manners at work – however unintentional - can lead to workplace conflict because they distract fellow employees from working or, in the worst cases, offend co-workers who have differing viewpoints and cause potential legal liability for the employer.
Therefore, it’s ideal to avoid these 8 bad work habits:
- Talking loudly on telephones and in person in common areas.
- Interjecting comments into conversations between other employees, unless your opinion is solicited.
- Taking supplies – even if they were bought by the office – from other employee’s work areas without getting prior approval.
- Wearing perfume that can be smelled even after you leave an area.
- Gossiping about co-workers or people outside the workplace.
- Sharing racial, religious or sexual jokes in any format.
- Arriving late to meetings.
- Regularly using large chunks of work time to resolve personal and family matters.
Most employees want to be viewed as valuable, contributing members of the company team. Thus, it’s worthwhile to periodically assess our workplace demeanor and, perhaps, adjust our behaviors, to help convey that image. Your future with your employer likely depends on it.
Patricia Adams is the CEO of Zeitgeist Expressions and the author of “ABCs of Change: Three Building Blocks to Happy Relationships.” In 2011, she was named one of Ernst & Young LLP’s Entrepreneurial Winning Women, one of Enterprising Women Magazine’s Enterprising Women of the Year Award and the SBA’s Small Business Person of the Year for Region VI. Her company, Zeitgeist Wellness Group, offers a full-service Employee Assistance Program to businesses in the San Antonio region. For more information, visit www.zwgroup.net.
One of the signs of a boom — or at least a boomlet — is that companies start wanting to drive their competition crazy. This occurs when “survival” is no longer an issue and optimization or maximization can become a goal. However, the desire to do things to the competition can lead a company astray — or drive it to even greater heights.
Companies go astray when defeating the competition becomes more important than taking care of customers. When companies become obsessed with the pursuit of excellence, by contrast, they often reach new levels of greatness. Here’s how to avoid the former and achieve the latter.
1. Know thyself. Before you can drive your competition crazy, you have to understand what your company stands for. Otherwise, you’ll succeed only in driving yourself crazy. For example, Apple stands for cool technology. It will never represent a CIO’s safe bet, an “enterprise software company,” or service and support. If it decided it wanted to drive Microsoft crazy by sucking up to CIOs, it would drive itself crazy — that is, if it didn’t perish trying.
2. Know thy customer. The second step is to truly understand what your customer wants from you — and, for that matter, what it doesn’t want from you. One thing that your customer seldom wants to do is to help you drive your competition crazy. That’s in your head, not your customer’s. One more thing: A good company listens to what a customer says it wants. A great company anticipates what a customer needs — even before the customer knows it wants it.
3. Know thy enemy. You cannot drive your competition crazy unless you understand your competition’s strengths and weaknesses. You should become your competition’s customer by buying its products and services. I never truly understood what it was like to be a customer of Microsoft until I bought a Sony Vaio and used Windows. Sure, I had read many comparisons and competitive analyses, but they were nothing compared with hands-on usage.
4. Focus on the customer. Here’s what most people find surprising: The best way to drive your competition crazy is to succeed because your success, more than any action, will drive your competition crazy. And the way you become successful is not by figuring out what you can do to the competition but for the customer. You succeed at doing things for the customer by using the knowledge that you’ve gained in the first three steps: understanding what you do, what your customer wants and needs and what your competition doesn’t do. At the intersection of these three factors lies the holy grail of driving your competition crazy. For most companies, the key to driving the competition crazy is out-innovating, out-servicing or out-pricing it.
5. Turn customers into evangelists. There are few things that drive a competitor more crazy than unpaid customers who are evangelists for a company. Create a great product or service, put it out there (“let a hundred flowers blossom”), see who falls in love with it, open up your arms to them (they will come running to you), and then take care of them. It’s that simple.
6. Make good by doing good. Doing good has its own, very sufficient rewards, but sometimes you can make good and do good at the same time. For example, if you own a chain of hardware stores, you can help rebuild a community after a natural disaster. You’re bound to get a lot of publicity and create bonds with the community — this will drive your competition crazy. And you’ll be doing something good!
7. Turn the competition into allies. One way to get rid of your competition is to drive it out of business. I suppose this might be attractive to you, but a better way is to turn your competition into allies. My favorite author of children’s books is Tomie DePaola. My favorite DePaola book is “The Knight and the Dragon.” This is the story of a knight and a dragon that train to slay each other. They are smashingly unsuccessful at doing battle and eventually decide to go into business together. Using the dragon’s fire-breathing ability and the knight’s salesmanship, they create the K & D Bar-B-Q. For example, if a Home Depot opens up next to your hardware store, let it sell the gas barbecues, and you refill people’s propane tanks.
8. Play with their minds. If you’re doing all this positive, good stuff, then it’s OK to have some fun with your competition — that is, to intentionally play with their minds. Here are some examples to inspire you:
- Hannibal once had his soldiers tie bundles of brush to the horns of cattle. At night, his soldiers lit the brushwood on fire, and Hannibal’s Roman enemies thought that thousands of soldiers were marching towards them.
- A pizza company that was entering the Denver market for the first time ran a promotion offering two pizzas for the price of one if customers brought in the torn-out phone directory ad of its competition.
- A national hardware store chain opened up right next to a longtime community hardware store. After a period of depression and panic, the store owner came up with a very clever ploy. He put up a sign on the front of his store that said, “Main Entrance.”
Guy Kawasaki is the co-founder of Alltop.com, an “online magazine rack” of popular topics on the web, and a founding partner at Garage Technology Ventures. Previously, he was the chief evangelist of Apple. Kawasaki is the author of ten books including Enchantment, Reality Check, and The Art of the Start. He appears courtesy of a partnership with HVACR Business, where this column was originally published. Reach Kawasaki through www.guykawasaki.com or at firstname.lastname@example.org.
While attending an event we put on with a local charity, I was impressed with the difference that seemingly minor things can make in someone’s life. I was proud of the contribution and effort that our employees put into the event and the dedication the nonprofit showed for its mission.
The event made me think about the business community and all of the wonderful things companies do for those in need. Take the recent destruction from Hurricane Sandy as an example. Businesses have pledged more than $90 million in assistance, two-thirds of which was monetary donations to organizations like the American Red Cross.
While companies give back in as many ways as possible, even during these difficult economic times, I was wondering if there wasn’t more that could be done in our local communities. Not every effort has to always include a financial component.
Here are some nonfinancial ways to give back in addition to what you already do for the community:
- Give more time. Some organizations have a greater need for man-hours in addition to financial backing. Your business may already give generously on the financial side, but maybe your favorite charity could use a labor boost as well. Nationally, about 35 percent of companies have some sort of formal volunteer program. Consider donating employee time to help out with a big project or basic cleaning and organizing.
- Offer advice. You probably already serve on one or more boards for a nonprofit, but there is always another charity out there that could use your help. You don’t have to become a full-fledged board member, but you can offer advice as needed to help the existing members navigate through a problem that plays to your strengths. If the nonprofit is looking for a board member and you don’t have the time, help it find the right person by making a recommendation or referral.
- Hire nontraditional employees. One way of giving back to the community is helping others help themselves. There are many skilled employees with either physical or mental disabilities that could be a great addition to your company if given the chance. When you have a job opening, make sure you are considering all candidates, including those from nontraditional backgrounds.
- Do pro bono work. If you can provide a service that a nonprofit needs, consider donating it. Marketing, printing, IT services — basically anything an office needs is probably something a charity could use. Find out what the nonprofit could use, then figure out a way to help out. Even if your company can’t help, maybe you know someone else who can.
In this season of giving, it’s not hard to find a worthy cause. There’s also no question that you and your company have most likely already given a lot, assuming you are in a position to do so. But there’s an old question that asks, “How much charity is enough?” The answer is easy: Just a little more.
Take the time to evaluate whether you can do just a little more than what you are already doing to make an even bigger difference.
If you are in search of a worthy cause, consider donating to The Pillar Fund, a donor-advised fund administered through the Cleveland Foundation. For more information, contact Dustin Klein at email@example.com.
Fred Koury is president and CEO of Smart Business Network Inc. Reach him with your comments at (800) 988-4726 or firstname.lastname@example.org.
The Ohio Bureau of Workers’ Compensation calculates an employer’s annual premium based on three factors: the employer’s industry, claim costs and payroll. In order to begin to control claim costs, organizations at a minimum should have written work rules that are enforced uniformly and consistently, implement best practices for injury reporting, and have written guidelines and procedures for supervisors to follow for proper injury investigation.
“One of the most important phases in the life of a claim starts at the very beginning, when the claim is first acknowledged,” says Nick Principe, vice president of claims at CompManagement, Inc. “Every organization should have policies in place for reporting injuries, investigating and documenting accidents, offering transitional duty and having ongoing communication with injured workers.”
Smart Business spoke with Principe about what all employers should be doing when a claim occurs in their workplace.
How do I know the difference between an injury and an incident?
An injury, or claim, is when an employee seeks outside treatment instead of onsite first aid, an accident report is completed and submitted to a supervisor instead of filing an incident report, and a supervisor investigates the ‘accident’ instead of a supervisor investigating the ‘incident’ or ‘near miss.’
What is key information to communicate to an employee prior to any injuries occurring?
Make sure all employees understand the reporting protocol, such as the time frame for reporting, who should complete an accident report and to whom it should be submitted, and whether failure to comply with the company policy could result in disciplinary action.
Failure to properly report injuries also results in loss of calendar and disability days and does not allow the employer to address workplace hazards that may exist.
How do I know if a claim is compensable in Ohio?
Ohio has a ‘no-fault’ workers’ compensation system, which means injuries are compensable regardless of negligence by any party. The only exceptions to this are when an injury results from drugs and/or alcohol; a self-inflicted injury, or an injury resulting in or arising from ‘horseplay.’ With a substantial aggravation or worsening of symptoms, a pre-existing condition can be considered compensable.
Should I always certify a claim?
Claim documentation should be reviewed to determine if, as the employer, you are in agreement with the injury description and each condition listed, and then the claim may be certified. The claim should be continually monitored to ensure that only appropriate medical benefits and compensation are being paid. A valid reason for not certifying a claim is always needed. Rejecting a valid claim only delays recovery time and may increase your workers’ compensation costs. If you believe the claim is invalid, information must be gathered to support rejection of the claim.
What are some key points an employer should look for when a new claim is filed to help with the certification decision?
• Injury reporting: Watch for lapses between the date of injury and the first notice to the employer. This could indicate that the injury occurred outside of the workplace.
• Timing of the injury: Watch for injuries reported prior to holidays or before/after the weekend. Some may view an injury as an opportunity to extend a holiday, weekend or take a vacation.
• Witness statements: Watch for injuries that have no witnesses or that contain conflicting statements. This can lead to credibility issues and opportunities to reject the merits of the incident.
• Accident descriptions are subjective or vague: Watch for accident descriptions that do not paint a clear picture of what happened. You should be able to visualize the accident and draw conclusions from the description. Be on the lookout for changes to statements or inconsistencies in recollection of the accident/injury.
• Work performance: Watch for injuries following disciplinary actions. These types of injuries are often retaliatory in nature and either lack the objective evidence to support them or can be viewed as self-inflicted.
• Multiple claims: Watch for injuries to similar body parts or claims filed around the same time of the year, for example, a reinjury to the same body part or a link to outside activities such as hunting season, sports or hobbies.
How can I prevent significant ongoing costs in a claim if one does occur?
One cost containment strategy that may be utilized is developing a transitional work program. Transitional work is a cost-containment strategy for workers’ compensation that helps injured workers return to productivity in the workplace by providing modified job duties that accommodate their medical restrictions due to work-related injuries. The idea is to return an injured employee to gainful employment activities as soon as possible to avoid the so-called ‘disability trap.’ With transitional work, the injured worker receives a full paycheck with the ultimate goal of returning to his/her original job. The advantages to implementing a transitional work program include a reduction in costs associated with long-term claims, improved productivity, lower injury downtime, improved employee recovery time, increase in employee morale and a protection of your work force investment, as the loss of experienced employees will result in additional training costs associated with hiring new employees.
NICK PRINCIPE is the vice president of claims for CompManagement, Inc. Reach him at (800) 825-6755, ext. 65819, or Nicolas.Principe@sedgwickcms.com.
Insights Workers’ Compensation is brought to you by CompManagement, Inc.
All businesses face obstacles at some point that will impair growth and evolution.
“It’s important to push through the problem by understanding its cause,” says Josh Klarin, vice president of Business Development, Consulting, at Sequent. “What do you do when this cycle hits? Many factors could be the cause, and it’s easy to blame them. But you need to face the situation with honesty and realism and take a tough look at things.”
“We all get stuck, we all hit bumps and even take steps back as we build our businesses. The successful learn from these sticking points, build new knowledge and blast through them. Sometimes we just have to ask ourselves a few questions, remain calm and rediscover the things that built our companies in the first place.”
Smart Business spoke with Klarin about ways to address and surpass hurdles that your company encounters.
What do you mean when you say a business is stuck?
You’ve hit a level where you’ve just plateaued. It’s typically a revenue or profitability measurement, something financial. It could also be technology or controls, or you have lost sight of why you’re in business, your core services.
How do you identify the obstacles and bottlenecks causing the problem?
Ask yourself these questions:
- Are you stuck because everything has to flow through you or someone else at every step?
- Are your products and services clear?
- Do your people understand purpose and pricing?
- Have you built an environment of empowerment?
- Is there a fear of mistakes that stifles creativity or reasonable risk taking?
Owners of small and mid-sized businesses usually know there’s a problem but sometimes don’t want to admit it because of a founder’s pride or an unwillingness to look outside the forest and see what’s out there. The No. 1 cause of getting stuck is that the leaders of the business get in their own way — ‘I built it. I know it. Therefore, everything must come through me.’ That stifles the company and it stifles people.
What can you can do to overcome obstacles and grow your business?
First, employees want to have some authority and to know that not every little thing they do has to be run through an approval chain. You can use the analogy of raising children. When they’re young and small, you have to take care of them and feed them. As they get older, you have to let go a little bit and trust you’ve taught them and empowered them to do the right things. This really isn’t a lot different. That’s why when companies hit various growth stages, they’ll bring in a different person, someone with experience in operating a company of that size. In a small business, you’re not going to do that. You just have to look in the mirror and trust the people who helped you get to where you are today.
What role can employees play in moving the business forward?
It doesn’t matter how big or small your company is, employees not only want to be heard, they actually care and have something to say. Sometimes you just have to ask. The second thing you can do is ensure your environment encourages feedback, input and ideas. Have an informal gathering and engage employees. The simple act of asking can uncover some wonderful things and help your culture. They see things on an everyday basis that you wouldn’t necessarily see.
Once you’ve asked the right questions, you can create an environment where people want to engage, which is the third step. If they think you’re asking and are going to throw the ideas away, or they worry that if they say something wrong they’re going to be fired, that’s not creating the right culture and environment.
How can customers help move the business?
Customers are a fourth way to overcome obstacles and grow your business. Ask them what they are seeing with your business, how you are perceived, and what is working and what isn’t. Ask them why they decided to use you or to no longer do business with your company. Involve them in improvement by asking what they need and want. Remember, without your customers, you have no business. You should be able to find two or three that you can sit down with and start trying to address what they might be thinking about.
Could the solution be branching out into other products or services?
So many times, small businesses just want to get money, which you can understand, but they get stuck by spreading themselves too thin. A customer wants something, it’s not exactly what a company does or what it’s good at, but the business tries it. Before long, you’re trying five or six things that you’re not really good at and you forgot what got you here. Understandably, when you’re small it’s all about making payroll and keeping the lights on, but losing focus is such a big risk. You don’t want to abandon your core.
The final way to grow your business is to look at the core business to see if it has plateaued. If it hasn’t, that’s when you need to look at your competition and what your opportunities are. If you’re in a market that’s shrinking, it’s a whole different question. But if that’s not the case, you need to find out the elements that are making people chose a competitor, whether it’s a better product, price or service.
That’s not saying you shouldn’t look at new product lines or services, but there has to be some thoughtfulness to what you go into and don’t just jump into something that may be more than a few degrees from your core business.
Josh Klarin is vice president of Business Development, Consulting at Sequent. Reach him at (614) 410-2368 or JKlarin@sequent.biz.
Insights HR Outsourcing is brought to you by Sequent
The election is over and there are still many unanswered questions regarding tax law, making it difficult to do tax planning for 2012 and beyond.
“You need to partner with a tax adviser,” says Rich Lundy, CPA, Director, Tax and Business Advisory Services with GBQ Partners LLC. “It’s difficult for the general population to stay up to date because a lot is still up in the air. It is not yet known when any potential changes will take effect and what the outcome will be, both in the short term and long term.”
Lundy says working with an adviser on year-end planning can result in potential permanent savings due to possible changes in tax rates.
Smart Business spoke with Lundy about the major tax issues impacting year-end planning for businesses and individuals.
How is the fiscal cliff affecting year-end tax planning?
Late in 2011, Congress couldn’t agree on spending cuts, so it put in automatic mechanisms to reduce expenditures. In addition, if nothing is done by the end of the year, tax rates will increase for almost everyone. There are major economic concerns over the impact of reduced government spending and increased tax rates going into effect at the same time. If Congress doesn’t act by the end of the year, the top tax rate would revert to 39.6 percent, up from the current 35 percent, and there would be increases in the lower brackets, as well.
President Barack Obama has proposed keeping the rates the same for the lower brackets — less than $200,000 of taxable income for individuals, or $250,000 for those married filing jointly. Tax rates currently range from 10 to 28 percent below those income levels. In a potentially higher tax rate environment, in general, individuals could benefit from maximizing income before tax rates increase.
Businesses, specifically C corporations, are currently subject to a maximum tax rate of 35 percent, one of the highest corporate tax rates in the world. The president has proposed reducing that rate to 28 percent, along with potentially curbing some business deductions. The strategy for a C corporation would be to try to defer deductions and/or income to some time in the future when rates may be lower.
What impact will the Medicare tax increase have on year-end planning?
There are two types of tax increases enacted by the health care reform in 2010 that take effect on Jan. 1, 2013. The first is on earned income: If you exceed the earned income limit of $200,000 for individuals or $250,000 for those married and filing jointly, there will be an additional 0.9 percent tax, increasing the Medicare tax rate from 1.45 to 2.35 percent. Those who will fall into this category in 2013 may want to consider taking an early bonus in 2012, or maximizing income before the end of the year if self employed.
The other tax is on unearned income, including interest, dividends, rental income, royalties, passive income and capital gains. This will be an additional 3.8 percent tax if you have income in these areas and exceed modified Adjusted Gross Income of $200,000 if single or $250,000 if married and filing jointly. Those whose modified AGI exceed these limits should consider accelerating these types of income into 2012, rather than deferring to 2013, to the extent possible.
What other areas of concern exist?
One is the capital gains tax. Currently, the long-term capital gains tax rate is 15 percent. In 2013, with no further action, rates could increase to as high as 25 percent. Many people are choosing to take their long-term gains now by selling stocks and bonds to generate long-term capital gains, and some who were already considering selling their businesses have moved the timeline up to this year. This is one of the most significant changes and an area where you can take action in your year-end planning to avoid those higher rates next year.
Another area of concern is qualified dividends, which are now taxed at 15 percent for higher- and middle-income taxpayers. If Congress does nothing, the phrase ‘qualified,’ which generally means that you’ve held the stock for 120 days, disappears from the tax code. The higher bracket could increase from 15 percent to 39.6 percent, the middle bracket from 15 to 28 or 33 percent and the lowest bracket from zero to 15 percent.
As noted earlier, the new Medicare tax on unearned income applies to interest, dividends and capital gains as well, so there would be an additional 3.8 percent tax for the upper-income individuals in this area. This could potentially triple the tax rate on qualified dividends. This is problematic because not only are dividends subject to double taxation, but many investors have invested in companies that are paying reasonable yields because they cannot get reasonable investment income from vehicles such as CDs and money market funds.
These expiring tax rates could wreak havoc on the stock market. There has been discussion about whether companies will unleash some of their cash before the end of the year in the form of dividends while the rate is still 15 percent. This could potentially impact stock valuations and large company behavior toward shareholders.
Finally, alternative minimum tax could hit an additional 33 million taxpayers if Congress does not implement a patch before the end of the year. The proposed two-year patch would restore exemptions to near 2011 levels, retroactive to the beginning of 2012. Because alternative minimum tax is not indexed for inflation, more and more people will be subject to it.
Rich Lundy, CPA, is Director, Tax and Business Advisory Services with GBQ Partners LLC. Reach him at (614) 947-5264 or email@example.com.
Insights Accounting & Consulting is brought to you by GBQ Partners LLC
In today’s business climate, people want the convenience of BYOD (Bring Your Own Device), in which employees use their personal mobile devices to access company resources such as email, file servers and databases. VoIP, or Voice over Internet Protocol, is also a part of the BYOD movement.
“People want their voice to follow their devices,” says Alex Desberg, sales and marketing director at Ohio.net. “To meet this demand, VoIP providers are looking at assimilating voice and video, integrating tablets with phone systems and running different types of voice applications.”
Smart Business spoke with Desberg about how technology has improved VoIP capabilities, how it can help keep a business up and running in the event of a disaster, and the cost savings associated with this phone service.
How has VoIP availability expanded in recent years?
In the early days of VoIP, providers installed their own networks and used their own facilities to port numbers and bring services to new areas. In essence, providers shouldered the responsibility for creating an infrastructure.
As the product has matured and more services have become available, carriers and other telephone companies now port numbers for providers into remote service areas. It has become far easier for providers to deploy services in places where, previously, there was no availability.
How has technology improved VoIP capabilities?
VoIP came on to the scene about seven years ago. As it has become more accepted and heavily used, the software programming has become much more refined. The code has been tightened, which allows for better networking and compatibility with different devices. As with any technology, the more it is used and the more it becomes accepted, the less expensive it becomes to maintain and operate, and the easier it is to deploy.
Why is VoIP ideal for disaster recovery?
With Hurricane Sandy dominating the news, disaster recovery is a hot topic. Businesses are making sure that they back up their data and have alternative points of access so they can keep their companies up and running if there is a catastrophe. Unfortunately, many businesses fail to include a plan for their phone system when preparing for a disaster.
A common misconception is that an organization can simply rely on cell phones if its phone system is down. In reality, a business cannot operate at full strength when its communications system is down for an extended period of time.
With VoIP, businesses can be prepared for a disaster by having their provider host their phone system. This enables organizations to run seamlessly in the event of a calamity and carry on business as normal.
Customers and suppliers won’t even realize that your business model has changed and that you have switched to disaster recovery mode.
How can telecom costs be contained with VoIP?
Usually, as new technologies emerge, a service becomes cheaper and easier to deploy. However, when it comes to traditional telephone services, this has not been the case. People have requested new features for their phones and those have been accompanied by exponential increases in cost. The biggest costs associated with traditional phone systems are adding new features and the monthly service fees that accompany those.
VoIP has taken a different approach. Providers have simplified the process of delivering a dial tone to phone systems and driven down the cost of monthly service. Also, VoIP serves as a fixed-cost model, and additions and changes are usually included as part of the package. You are not making another investment every time you need an upgrade to meet the demands of your business.
Finally, VoIP is a nonregulated product, so tariffs are not set by the FCC. This enables providers to be able to offer new services at whatever rate they choose.
How does VoIP compare to traditional phone service in terms of ease of management?
Oftentimes, management of a phone system falls to IT personnel. In other cases, there is a dedicated telecom professional whose sole responsibility is the upkeep of the phone system.
VoIP providers offer two options. First, they can take all of the management responsibilities away from an organization by adding a hosted provider and serving as a service provider, which includes adding and changing features, troubleshooting and training.
Second, they can change the level of management to provide a single point of contact. A business can take as much or as little responsibility for managing its phone system as it would like.
In what ways has the track record of VoIP improved over the years?
Customers have demanded improvement. If VoIP providers are going to offer cloud-based phone services, the quality has to be as good, if not better, than that of traditional phone companies. Good means dependable and reliable. Better means that VoIP providers need to offer features and services well beyond those of any regulated telephone company, and they must be ahead of the curve in terms of developing and deploying new offerings.
Alex Desberg is a 20-year veteran of launching and marketing Internet technology. Most of his technology tenure has been with regional and national providers. At Ohio.net, a wholly owned subsidiary of Doylestown Communications, Desberg has been the development spearhead of a mature VoIP product line designed for business application and brings his support and knowledge to the B2B environment.
As leaders in Washington, D.C., head toward a fiscal cliff, their counterparts in Columbus, Ohio, also are looking at major budget changes for the state.
At both the state and federal level, taxes will be at the forefront of discussions, says Steve Tugend, chair of the Government and Legislative Affairs Practice Group at Kegler, Brown, Hill & Ritter Co., LPA.
“At the federal level, the candidate who was less likely to raise taxes was defeated, so the risk that businesses will see increased tax liability has increased significantly,” says Tugend. “At the state level, the legislature has no interest in raising taxes, and there will probably be a proposal to lower the income tax rate.”
Smart Business spoke with Tugend about the recent election results and how they will impact Ohio businesses.
How will the recent election impact the Ohio legislature?
There are going to be some changes. Leadership in the Ohio Senate will change, while William Batchelder will remain speaker of the House. Leadership in the Senate will change, with Tom Niehaus retiring because of term limits and Keith Faber becoming the new president. The transition to a Faber presidency will be a relatively orderly one and it is highly unlikely there will be a contested vote, as the Republican Caucus worked out the issue of leadership over the last couple years.
Because the governor is from the same party as the leadership in the legislature, he, by and large, sets the state’s public policy agenda on larger issues.
What major proposals do you expect from Gov. John Kasich in the upcoming term?
Two issues are particularly important because of their breadth and depth. The first is tax reform, and it is anticipated that the governor will introduce a plan to further cut the state’s personal income tax rate, from a top rate of 5.925 percent to a level that is under 4 percent.
When you are proposing to cut an income tax rate that significantly, the result is that the state will forego a significant amount of revenue. There are only two things that can be done to make up for that loss, which must be done because the state is constitutionally obligated to balance its budget. One, the state can impose taxes on goods and services that had not previously been taxed. As a result, businesses that offer services that are not currently subject to a state income tax should keep a close eye on the state budget to see what will be proposed. Alternatively, spending can be cut.
The second major issue that the governor is expected to address in the next term is school funding reform, although the specifics of that are not yet known.
Another issue is uniformity in the way municipal income taxes are calculated. Ohio has 600 entities that charge municipal income taxes, using 300 different forms, which business groups argue creates a significant administrative burden for Ohio businesses with employees who earn income in multiple jurisdictions. Many in the General Assembly view this administrative burden as an impediment to growing businesses within Ohio, and believe that the issue needs to be addressed.
What will happen at the federal level as a result of the election?
The fiscal cliff — the looming, automated, arbitrary cuts to government spending — will create a very imprecise and negative effect on the federal budget. The consensus is that the worst alternative is to do nothing. No matter what the solution is, it needs to be a long-term solution and not another temporary one.
Businesses are most concerned about the tax code. Historically, the solution to a budgetary challenge commonly results in an exemption or deduction in the tax code that lasts four to five years, which then expires unless it is reauthorized by Congress. That does not generate a feeling of certainty or predictability. Businesses want a realistic solution grounded in good fiscal policy that will set the long-term tax and spending structure for this country.
The fiscal cliff was not designed to be a well-thought-out policy; it was designed as a hammer to inspire Congress to spring into action and put together a long-term plan that works.
What do you expect to happen regarding the fiscal cliff?
Congress may decide to pass legislation that will postpone the cliff until a later date, but it also may negotiate a settlement. The fact that the president was re-elected and that neither legislative chamber will see a change in its partisan leadership increases the possibility that a compromise can be reached this year.
There is more likely to be common ground in two general areas — reform of entitlements such as Medicare and Medicaid, and tax reform resulting in reducing or eliminating some of the deductions or exemptions in the tax code. Those are the general areas that are most likely to find agreement between the negotiating parties.
The same major players are involved, so why would there be an end to the gridlock that has occurred?
There is no longer a president of the U.S. that the Republicans are looking to defeat in four years. That changes their mindset. Equally important, there is no longer a president who can and will run for re-election. The president may be increasingly inspired by the need to compromise because of a desire to leave a positive legacy for the country.
Steve Tugend is chair of the Government and Legislative Affairs Practice Group at Kegler, Brown, Hill & Ritter Co., LPA. Reach him at (614) 462-5424 or firstname.lastname@example.org.