Matt McClellan

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says Mona Sarkar, J.D. MTax, a Vice President, Client Advisor and Wealth Team Manager for FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Sarkar about how to prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries, or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’ I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney to find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

Mona Sarkar, J.D. MTax, is a Vice President, Client Advisor and Wealth Team Manager for FirstMerit Bank. Reach her at 1-888-384-6388 or Mona.Sarkar@firstmerit.com.

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says Curt Ramkissoon, the Vice President of Wealth Management Services with FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Ramkissoon about how businesses can prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’

I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney and find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

Curt Ramkissoon is the Vice President of Wealth Management Services with FirstMerit Bank. Reach him at (614) 570-7570 or curt.ramkissoon@firstmerit.com.

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says James D. Roseman, a Vice President of Wealth Management and Business Development with FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Roseman about how businesses can prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’

I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney and find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

James D. Roseman is a Vice President of Wealth Management and Business Development with FirstMerit Bank. Reach him at (216) 618-1335 or james.roseman@firstmerit.com.

Lending standards are tough and not getting easier.

Even though insurance terms have softened over the last few years, the amount of capital a company has tied up in collateral with its insurer can be a threat to working capital and a barrier to growth, says Edward X. McNamara, senior vice president, regional sales director — East Central Region, Aon Risk Solutions.

“Collateral, especially in this credit market, can be a material component of an insurance program’s costs,” says McNamara. “To meet collateral obligations, companies often have to tap existing credit lines or cash reserves, each representing a drain on the company’s available capital or borrowing capacity.”

Smart Business spoke with McNamara about how re-examining your risks and insurance programs can help free up capital and increase borrowing capacity.

Why is collateral necessary for a business?

Insurance companies or carriers typically require collateral for deductible insurance programs because the insurer is obligated to pay all claims up front. Subsequently, the insurer goes back to the client to be reimbursed for claims that fell under the deductible limit, creating a credit exposure for the carrier. Insurers have credit officers to evaluate these, yet the analysis carries a high level of uncertainty due to the long-term nature of the underlying claims.

To protect themselves from failure to repay deductible losses, insurance companies require clients to put up collateral. Only certain instruments are acceptable as collateral, such as letters of credit, cash and marketable securities.

And while surety bonds have historically been accepted on an exception basis for a portion of collateral requirements, these are not an approved form of collateral by many state regulators. Furthermore, the values of these items are often discounted when the carrier assesses the amount of collateral held with an insured.

Does the collateral requirement pose a burden for companies when purchasing insurance?

Posting collateral for insurance requirements can pose a serious burden for many companies. Letters of credit can diminish borrowing capacity and require substantial fees to procure. Cash that is dedicated toward the collateral requirement is money that is not being used by the business to pay down its debt or to reinvest in the company.

Collateral requirements can also limit a company’s ability to switch insurance carriers. If a company’s carrier is holding redundant collateral — which is more collateral than is warranted based on the remaining liability of the policy — it can be used as leverage for keeping a company from switching to another insurer.

Rather than adjusting the collateral requirement downward, the carrier will use that redundancy to offset the new collateral needed for the following policy year.

How does that prevent a company from seeking a new insurer?

While a prospective new carrier may offer advantageous pricing, its collateral requirement for the first year and the prospect of stacking that requirement for future years can overshadow cost-saving benefits, especially for a company with limited capital availability.

As a result of these factors, corporate risk managers should evaluate current insurance programs in conjunction with their financial objectives. Given the impact of collateral requirements on a company’s cash flow and available borrowing capacity, risk managers might do well to make some changes to the terms of deductible insurance programs.

In this environment, however, buyers should recognize that insurance companies have pressures, too. With tightening credit markets and a weak economy, insurance companies are at increased risk that clients might fail to reimburse deductible payments.

These defaults can range anywhere from a delay of payment to an actual bankruptcy resulting in a default on obligations owed to the insurance company.

How can companies benefit by pursuing a zero-collateral policy?

Property and casualty insurance brokers have watched premiums shrink and stagnate for the past five or more years. They understand that growth isn’t happening unless their clients grow, and collateral burdens hurt their clients’ ability to reinvest in new projects. Recognizing this axiom, brokerages are now offering zero-collateral deductible insurance programs that eliminate collateral requirements, freeing these funds in the form of cash or lines of credit for capital investments by their clients.

These insurance programs may still carry deductibles that allow customers to benefit from the cost and cash flow advantages. But rather than require collateral, the credit exposure is insured by an additional policy. As a result, there is no requirement to post collateral, which would otherwise be in place until all claims are closed, a process which can take many years from the program’s inception.

The value of these programs for clients can be tremendous, as it allows them to invest available cash and credit in the business and avoid tying it up with insurance companies.

With the help of an adviser, companies would be well-advised to look into the zero-collateral option.

Edward X. McNamara is senior vice president, regional sales director — East Central Region, at Aon Risk Solutions, a risk management and insurance brokerage firm with regional headquarters in Cleveland. Reach him at (216) 623-4146 or edward.mcnamara@aon.com.

Lending standards are tough and not getting easier.

Even though insurance terms have softened over the last few years, the amount of capital a company has tied up in collateral with its insurer can be a threat to working capital and a barrier to growth, says Keith DeCoster, senior vice president, managing director, Aon Risk Solutions.

“Collateral, especially in this credit market, can be a material component of an insurance program’s costs,” says DeCoster. “To meet collateral obligations, companies often have to tap existing credit lines or cash reserves, each representing a drain on the company’s available capital or borrowing capacity.”

Smart Business spoke with DeCoster about how re-examining your risks and insurance programs can help free up capital and increase borrowing capacity.

Why is collateral necessary for a business?

Insurance companies or carriers typically require collateral for deductible insurance programs because the insurer is obligated to pay all claims up front. Subsequently, the insurer goes back to the client to be reimbursed for claims that fell under the deductible limit, creating a credit exposure for the carrier. Insurers have credit officers to evaluate these, yet the analysis carries a high level of uncertainty due to the long-term nature of the underlying claims.

To protect themselves from failure to repay deductible losses, insurance companies require clients to put up collateral. Only certain instruments are acceptable as collateral, such as letters of credit, cash and marketable securities.

And while surety bonds have historically been accepted on an exception basis for a portion of collateral requirements, these are not an approved form of collateral by many state regulators. Furthermore, the values of these items are often discounted when the carrier assesses the amount of collateral held with an insured.

Does the collateral requirement pose a burden for companies when purchasing insurance?

Posting collateral for insurance requirements can pose a serious burden for many companies. Letters of credit can diminish borrowing capacity and require substantial fees to procure. Cash that is dedicated toward the collateral requirement is money that is not being used by the business to pay down its debt or to reinvest in the company.

Collateral requirements can also limit a company’s ability to switch insurance carriers. If a company’s carrier is holding redundant collateral — which is more collateral than is warranted based on the remaining liability of the policy — it can be used as leverage for keeping a company from switching to another insurer.

Rather than adjusting the collateral requirement downward, the carrier will use that redundancy to offset the new collateral needed for the following policy year.

How does that prevent a company from seeking a new insurer?

While a prospective new carrier may offer advantageous pricing, its collateral requirement for the first year and the prospect of stacking that requirement for future years can overshadow cost-saving benefits, especially for a company with limited capital availability.

As a result of these factors, corporate risk managers should evaluate current insurance programs in conjunction with their financial objectives. Given the impact of collateral requirements on a company’s cash flow and available borrowing capacity, risk managers might do well to make some changes to the terms of deductible insurance programs.

In this environment, however, buyers should recognize that insurance companies have pressures, too. With tightening credit markets and a weak economy, insurance companies are at increased risk that clients might fail to reimburse deductible payments.

These defaults can range anywhere from a delay of payment to an actual bankruptcy resulting in a default on obligations owed to the insurance company.

How can companies benefit by pursuing a zero-collateral policy?

Property and casualty insurance brokers have watched premiums shrink and stagnate for the past five or more years. They understand that growth isn’t happening unless their clients grow, and collateral burdens hurt their clients’ ability to reinvest in new projects. Recognizing this axiom, brokerages are now offering zero-collateral deductible insurance programs that eliminate collateral requirements, freeing these funds in the form of cash or lines of credit for capital investments by their clients.

These insurance programs may still carry deductibles that allow customers to benefit from the cost and cash flow advantages. But rather than require collateral, the credit exposure is insured by an additional policy. As a result, there is no requirement to post collateral, which would otherwise be in place until all claims are closed, a process which can take many years from the program’s inception.

The value of these programs for clients can be tremendous, as it allows them to invest available cash and credit in the business and avoid tying it up with insurance companies.

With the help of an adviser, companies would be well-advised to look into the zero-collateral option.

Keith DeCoster is senior vice president, managing director, Aon Risk Services. Reach him at Keith_Decoster@aon.com or (317) 237-2400.

When an employer moves from a fully insured health care plan to a self-funded plan, it becomes responsible for 100 percent of the claims risk. That transition can be frightening, especially as medical costs continually increase. But purchasing stop-loss coverage from reinsurance carriers can help mitigate some of that risk.

“Stop loss allows an employer to transfer a portion of the claims risk to the reinsurance carrier in exchange for a monthly premium,” says Donna Cowden, senior vice president with Aon Hewitt, Health & Benefits.

Smart Business spoke with Cowden and Jim Gloriod, resident managing director, Aon Risk Solutions, about how stop-loss coverage can help protect your business.

How can an employer limit risk with stop-loss coverage?

The employer can limit risk by purchasing aggregate coverage, which insures against an employer’s total annual claims exceeding an estimated dollar amount (with a corridor of 20 to 25 percent added), or specific coverage, which insures against a single, large, catastrophic claim that exceeds a selected dollar amount (deductible) during the plan year.  They work well together by protecting the employer if the year’s claims have exceeded the carrier’s claims estimate plus margin, and monthly by limiting the loss of a large, unexpected claim. Aggregate claim reimbursement occurs at the end of the contract period, while specific claim reimbursements take place as they occur during the plan year.

How can an employer determine which type of coverage is the best fit?

Employers need to determine what risk they are trying to protect against. Are they concerned about overall claims exceeding a budgeted amount and feel comfortable absorbing large losses that might occur during the year, or are they only concerned about a hit if a large, unexpected claim occurs?

Aggregate stop-loss coverage protects an employer against claim volatility, if annual claims exceed what is budgeted. Smaller employers have a more difficult time absorbing the claim fluctuations, so they will purchase aggregate coverage.

Most employers will purchase specific coverage but the level of the specific deductible will depend on their size and risk tolerance. Specific-only coverage is typically for employers with more than 5,000 covered lives.

How does stop-loss coverage work with a self-funded benefit plan?

Self-funded employers that purchase stop-loss coverage have the benefit plan document and the stop-loss contract. The employer’s plan document outlines benefit provisions and how benefits are paid. Ideally, a stop-loss contract will overlay the provisions in the employer’s benefit plan. The employer does not want the stop-loss contract to have exclusions or limitations that contradict or add to the employer’s benefit plan.

How can an employer determine whether it should purchase stop-loss coverage?

It is critical for employers to understand their risk tolerance and determine how much they can tolerate paying out without creating a cash flow issue. How easy is it to fund a $500,000 claim month when claims generally run $100,000 per month? Once that is determined, they can purchase the contract that provides them the appropriate protection.

In what other ways within the contract can employers share risk to keep the premium down?

One way is an ‘aggregating-specific,’ or ‘split-funded specific,’ contract and the other is a ‘tiered,’ or ‘coinsurance,’ contract. With an aggregating-specific/split-funded contract, the employer shares in the risk for a reduction in premium. The employer will accept claims up to the specific deductible and will accept additional claim liability generally equal to a 20 to 30 percent premium reduction. If the employer has no claims over its specific deductible during the year, it saves the amount of the aggregating deductible. If there is a claim in excess of the specific deductible, it is paid by the employer until the aggregating deductible is exhausted and the carrier pays the remainder. With a tiered/coinsurance contract, the employer agrees to share in more risk after the specific deductible has been exceeded for a reduction in premium. Once the specific has been exceeded, the employer may take on a reduced percentage of claims above the deductible up to a specified dollar amount, after which the carrier accepts all risk.

What potential pitfalls should employers be aware of when switching plans?

The first year an employer switches to a self-funded plan, claims incurred but not paid when it moved are the responsibility of the fully insured carrier. So instead of 12 months of claims for that first self-funded plan year, the employer has only nine to 10 months. The stop-loss rates and contract are referred to as immature and are discounted up to 20 percent. The second-year rate increase will look very high because not only is the rate increasing by trend but by the additional 20 percent because of a full claim year. An employer should purchase complementary contracts to prevent gaps in coverage.

How is health care reform affecting stop-loss coverage?

The most immediate impact is the change requiring benefit plans to have unlimited lifetime maximums. The stop-loss contract generally duplicates the benefit plan maximum, so when unlimited lifetime maximums were implemented, carriers struggled to determine the financial impact on their rates.  Stop-loss contracts should be reviewed to make sure the maximum reimbursement matches the employer’s maximum and the carrier hasn’t put a cap on the maximum. That would leave the employer at risk once the reimbursement maximum has been exceeded. We are also finding large employers that never had stop loss request very high specific deductibles because of the unlimited lifetime maximum.

Donna Cowden is senior vice president, Aon Hewitt, Health & Benefits. Reach her at (336) 728-2316 or Donna.Cowden@aonhewitt.com. Jim Gloriod is resident managing director at Aon Risk Solutions. Reach him at (314) 719-5148 or jim.gloriod@aon.com.

When an employer moves from a fully insured health care plan to a self-funded plan, it becomes responsible for 100 percent of the claims risk. That transition can be frightening, especially as medical costs continually increase. But purchasing stop-loss coverage from reinsurance carriers can help mitigate some of that risk.

“Stop loss allows an employer to transfer a portion of the claims risk to the reinsurance carrier in exchange for a monthly premium,” says Donna Cowden, Senior Vice President with Aon Hewitt Health & Benefits.

Smart Business spoke with Cowden, Candice Mill, Senior Vice President, Aon Risk Solutions Health & Benefits, and Daniel D’Alessandro, Regional Managing Director, Aon Risk Solutions, about how stop-loss coverage can help protect your business.

How can an employer limit risk with stop-loss coverage?

The employer can limit risk by purchasing aggregate coverage, which insures against an employer’s total annual claims exceeding an estimated dollar amount (with a corridor of 20 to 25 percent added), or specific coverage, which insures against a single, large, catastrophic claim that exceeds selected dollar amount (deductible) during the plan year.  They work well together by protecting the employer if the year’s claims have exceeded the carrier’s claims estimate plus margin, and monthly by limiting the loss of a large, unexpected claim. Aggregate claim reimbursement occurs at the end of the contract period, while specific claim reimbursements take place as they occur during the plan year.

How can an employer determine which type of coverage is the best fit?

Employers need to determine what risk they are trying to protect against. Are they concerned about overall claims exceeding a budgeted amount and feel comfortable absorbing large losses that might occur during the year, or are they only concerned about a hit if a large, unexpected claim occurs?

Aggregate stop-loss coverage protects an employer against claim volatility, if annual claims exceed what is budgeted. Smaller employers have a more difficult time absorbing the claim fluctuations, so they will purchase aggregate coverage.

Most employers will purchase specific coverage but the level of the specific deductible will depend on their size and risk tolerance. Specific-only coverage is typically for employers with more than 5,000 covered lives.

How does stop-loss coverage work with a self-funded benefit plan?

Self-funded employers that purchase stop-loss coverage have the benefit plan document and the stop-loss contract. The employer’s plan document outlines benefit provisions and how benefits are paid. Ideally, a stop-loss contract will overlay the provisions in the employer’s benefit plan. The employer does not want the stop-loss contract to have exclusions or limitations that contradict or add to the employer’s benefit plan.

How can an employer determine whether it should purchase stop-loss coverage?

It is critical for employers to understand their risk tolerance and determine how much they can tolerate paying out without creating a cash flow issue. How easy is it to fund a $500,000 claim month when claims generally run $100,000 per month? Once that is determined, they can purchase the contract that provides them the appropriate protection.

In what other ways within the contract can employers share risk to keep the premium down?

One way is an ‘aggregating-specific,’ or ‘split-funded specific,’ contract and the other is a ‘tiered,’ or ‘coinsurance,’ contract. With an aggregating-specific/split-funded contract, the employer shares in the risk for a reduction in premium. The employer will accept claims up to the specific deductible and will accept additional claim liability generally equal to a 20 to 30 percent premium reduction. If the employer has no claims over its specific deductible during the year, it saves the amount of the aggregating deductible. If there is a claim in excess of the specific deductible, it is paid by the employer until the aggregating deductible is exhausted and the carrier pays the remainder. With a tiered/coinsurance contract, the employer agrees to share in more risk after the specific deductible has been exceeded for a reduction in premium. Once the specific has been exceeded, the employer may take on a reduced percentage of claims above the deductible up to a specified dollar amount, after which the carrier accepts all risk.

What potential pitfalls should employers be aware of when switching plans?

The first year an employer switches to a self-funded plan, claims incurred but not paid when it moved are the responsibility of the fully insured carrier. So instead of 12 months of claims for that first self-funded plan year, the employer has only nine to 10 months. The stop-loss rates and contract are referred to as immature and are discounted up to 20 percent. The second-year rate increase will look very high because the rate is increasing by trend and the additional 20 percent because of a full claim year. Employers should purchase complementary contracts to prevent gaps in coverage.

How is health care reform affecting stop-loss coverage?

The most immediate impact is the change requiring benefit plans to have unlimited lifetime maximums. The stop-loss contract generally duplicates the benefit plan maximum, so when unlimited lifetime maximums were implemented, carriers struggled to determine the financial impact on their rates.  Stop-loss contracts should be reviewed to make sure the maximum reimbursement matches the employer’s maximum and the carrier hasn’t put a cap on the maximum. That would leave the employer at risk once the reimbursement maximum has been exceeded. We are also finding large employers that never had stop loss request very high specific deductibles because of the unlimited lifetime maximum.

Donna Cowden is Senior Vice President, Aon Hewitt Health & Benefits. Reach her at (336) 728-2316 or donna.cowden@aonhewitt.com.

Candice Mill is the Senior Vice President of Aon Risk Solutions, Health & Benefits. Reach her at candice.mill@aon.com or (412) 263-6387.

Daniel D’Alessandro is the Regional Managing Director of Aon Risk Solutions. Reach him at  daniel.dalessandro@aon.com or (412) 594-7515.

Partner violence — also known as domestic violence — is most commonly viewed as a personal issue and is associated with someone’s home life. While it’s true that partner violence often occurs in and around a home, it doesn’t stay at home when the victim and the abuser go to work.

“Partner violence is a workplace issue because the behavior impacts the workplace and is costly to employers,” says Sandra Caffo, the senior director of LifeSolutions, a UPMC WorkPartners affiliate.

Smart Business spoke with Caffo about partner violence and the impact it has on the workplace, employers and employees.

How would you define partner violence?

Partner violence is a pattern of abusive behavior that is done by one person to control a partner. It’s not about being angry. It’s not an over-reaction to a partner making a mistake. The goal is for the abuser to let the partner know who’s in charge. This behavior can be physical, sexual, psychological or emotional. Most often the abuser is a man and the person being abused is a woman, but there are female abusers as well. And, partner violence happens in all types of relationships — married, unmarried, heterosexual, gay, lesbian, bisexual, transgendered — and it touches all economic groups.

What is the scope of partner violence in the workplace?

According to statistics from Standing Firm, an organization in Southwest Pennsylvania that is dedicated to addressing partner violence as a workplace issue, more than one in five full-time employed adults have been victims of partner violence and 64 percent of those say that their work performance has been significantly impacted as a result. This includes receiving harassing phone calls, e-mails and text messages at work to having the abuser come to the partner’s worksite and verbally or physically assault that employee.

Abusers are also employees. Employed abusers have told researchers that they have misused company time and resources — such as phones, computers, e-mail and automobiles — to remind the partner that they are always present. Each and every workplace, regardless of size, can be impacted by partner violence.

How does partner violence impact the workplace?

First, partner violence is costly to employers. There are the direct costs, such as the hospital visits required by the abused individual and the cost of ongoing care. In addition, there is the problem with absenteeism and presenteeism. Many times, abused employees are not productive at work because they may have been up all night protecting themselves from or being harassed by the abuser. They also arrive at work late as the abuser may hide their clothes, hide the keys to the car and/or threaten not to take care of the children.

Secondly, partner violence doesn’t just impact the person being abused. It also affects that person’s co-workers. Because so many people work in cubicles rather than offices, many times co-workers overhear threatening phone calls to a person near them. They don’t know what to do to help and may even be fearful for their safety, as well as the safety of the co-worker, and worried that the abuser might come to the workplace and harm them as well. This raises the stress level for everyone and interferes with workplace focus and productivity.

What kinds of things should an employer do about partner violence?

It’s a concern that only about 5 percent of all employers have a policy in place to deal with partner violence. Most employers still view this as a personal issue to be handled outside of work.

So the first thing employers can do is recognize the ways that their workplace and work force are being affected by partner violence. Step two is to build on that recognition by putting a plan in place to address the issue. This includes developing a policy and should involve human resources staff, managers, security and an Employee Assistance Program (EAP), if you have one. The policy formalizes the company’s commitment and outlines the responsibilities for all parties to ensure safety.

How can an EAP work to make the situation better?

The EAP will assist the employer to develop a plan of action, including a policy. It helps both the employee being abused as well as the employee who is the abuser get help, thereby making it a worthwhile and effective company investment.

The EAP is an important internal resource to confidentially enable the employee being abused to develop a safety plan and get access to needed community resources. Abused employees are often ashamed even though they don’t cause this, and may be fearful to tell the employer about what’s going on. The EAP does not share information without written permission, so it is a trusted source to go to.

EAPs can also help an abuser get help. It is possible to learn new and safe ways of interacting with loved ones.

Finally, the EAP supports co-workers who are impacted. Figuring out how to approach an employee when concerned or addressing fears about safety are examples.

For information about resources in Southwestern Pennsylvania that deal with this issue, visit Standing Firm’s website at www.standingfirmswpa.com.

Sandra Caffo is the senior director of LifeSolutions, a UPMC WorkPartners affiliate. Reach her at caffosm@upmc.edu or (412) 647-9480.

Telecom expense management (TEM) is the process through which an enterprise’s IT and accounts payable/finance departments work in sync to acquire, provide and support any corporate fixed and mobile communications services.

“We are trying to simplify your financial control by reducing costs and increasing productivity with workflow management,” says Anthony Buono, enterprise solutions specialist with Simplify Inc.

Buono says there are benefits to telecom expenses management as well as facility management, including reduced operational costs, life-cycle management, and improved productivity and control.

“Our industry-leading software platform (Advocate) is the core benefit of Simplify’s services and we strive to deliver to our clients a full lifecycle management solution,” he says.

Smart Business learned more from Buono about how businesses can benefit from TEM and facility management.

How does TEM reduce costs and help workflow management?

Basically, the IT/telecom team orders products and services, while the finance team approves invoices. The teams typically work hand-in-hand, and the TEM solution works to bridge any gaps. Instead of chasing after each other to ask questions back and forth, the application automates some of the process work they would do, such as approving invoices.

Typically, many companies choose to contract a third-party service provider in order to utilize an application that controls and leverages the automation of the invoice management process. Additional services play a key role in a complete solution, including sourcing, ordering and provisioning management, inventory management, contract management, usage and dispute management. The goal is to develop a customized workflow to complete a telecom lifecycle management solution that includes reporting and business intelligence.

Why is TEM applicable to businesses with multiple telecom vendors?

Last year, in Magic Quadrant for Telecom Expense Management, technology research and advisory company Gartner Inc. wrote ‘For most organizations, fixed and mobile communication services are among the top five business expenses, but (organizations) often do a poor job of managing processes relating to communication spending.’

This is one key area that companies need additional help with, especially organizations with multiple telecom carriers. They may obtain assistance with the up-front services to help save money on telecom carrier options, but those organizations are typically left handling the invoice process. Where multiple carrier invoices are standard, a TEM solution is the perfect fit to streamline the workflow for the invoice management process. If a company has one invoice, it’s manageable. But if they have three or four carriers, it gets more complicated.

Based on client feedback, Simplify has added layers of services to our custom application called Advocate that include Enterprise Cost Management.

What are some examples of cost management in telecom, and how do they work?

Some clients with multiple carriers have difficulties approving the invoices manually in order to make accurate payments. If that payment to the carrier is not made on time, then service may be cut off, resulting in downtime for the business.

Consider changes to inventory that impact the invoice and approvals that aren’t timely. Service is disrupted requiring a manager to step in and call the carrier to get the service back up and create a dispute. Why not rely on someone else to do that?

Our Advocate platform powered with our ECM solution allows clients to rely on the automation of the application to upload all invoice details for viewing and approval. This eliminates the need for stacks of invoice files on the desk and working through massive Excel spreadsheets to track all invoices every month.

How does workflow automation impact telecom costs and efficiency?

The key is to transfer the current process each client uses today and embed that as part of the workflow utilizing the TEM platform. Where most companies may look at the top 10 percent of the invoices coming in every month, the other 90 percent are slipping through the cracks. The system will automate the receipt and validate each invoice for any various overage fees and charges for services not rendered.

This is a huge benefit of automating with a software application. Additionally we leverage our relationship with the carriers to convert a paper invoice into an electronic file for uploading into the platform. If a company doesn’t have an expense management platform, they do that manually. So if they are a small company, they may get multiple paper invoices from their carrier. Larger carriers like Verizon or AT&T will give larger companies an online portal, which they have to visit to track down their invoice information. Companies typically spend hours and hours manually organizing all that data in Excel spreadsheets. It’s chaotic to think that’s the case, but it is.

What should companies look for in facility management?

Some of the key features to look for in a facility management service include capturing maintenance contract expiration dates, scheduled maintenance, pictures of assets to control and a complete work history of contractors and service provided. Companies should always be looking for partners that think outside the box to help them in ways that would create additional cost savings. Simplify has partnered with a company that provides a full service application in order to manage the workflow of service requests into work orders, allowing complete Facilities Lifecycle Management by tracking expense allowance and invoice reporting.

Anthony Buono is an enterprise solutions specialist at Simplify. Reach him at (203) 888-3146 or anthony.buono@simplifycorp.com.

Risk is present in every phase of business, but is not always self-evident. The creation, effective implementation and maintenance of a risk management program can significantly reduce and in some cases eliminate the possibility of a claim against a company, says Michael J. Lucas, CIC, CRM, a partner with Millennium Corporate Solutions.

“Risk management is important to protect the company’s assets from lawsuits and claims,” Lucas says. “Taking a systematic approach to a risk management program will make the process go more smoothly.”

Smart Business spoke with Lucas about how to make the risk management process more effective in your organization.

What are the steps in the process?

The risk management process can be expressed in five general steps: risk identification, risk analysis and prioritization, risk control and loss prevention, risk financing, and risk implementation/administration. Many companies focus on one or two of these and fail to effectively use all of the steps in considering operational, strategic and financial risks that can impact the company at many levels.

Are there keys to effective risk management?

Some of the keys include identifying the company’s hazards/exposures, incorporating all levels of the organization into the process, and elevating the importance of risk management companywide.

There are six general classes of risk that an organization must consider when developing and implementing its own risk management program: economic, legal, political, social, physical and juridical risks. Within these general classes, risks can come from many sources. To make matters worse, risks are changing faster than companies can keep up with ways to manage them.

There are several tactics that risk management professionals can use to help companies stay ahead of the curve. Identifying the company’s corporate culture is a good start. Next, it is very important to establish the company’s risk appetite and tolerance level. This helps determine just how much risk an organization is comfortable allowing. Risk management projects such as installing risk control programs, advanced engineering techniques, and increasing or decreasing deductibles should be strongly considered if the potential benefits outweigh the projects’ costs on a short-term and/or long-term basis.

How does corporate culture affect risk management?

Some corporations are willing to retain more risk than others. Through a risk analysis and by identifying the corporate culture, you can identify whether a specific exposure coincides with the culture relative to the organization’s tolerable risk levels. For example, if a company’s corporate culture is to have high retention on its programs, as far as deductibles are concerned, then it is going to be more comfortable taking on risk because it has controls in place. The company will put more emphasis on and funding into risk management and will elevate its importance in an effort to coincide with its corporate culture and ultimately control its exposures.

Why is it important to elevate the importance of risk management companywide?

Due to the catastrophic effect some exposures can have on an organization, it’s important for the risk management to be implemented consistently companywide. Risk retention can and may vary from department to department within an organization outside of the normal company culture, but only after a thorough risk analysis has been performed on the specific hazard/exposure. Corporate culture may dictate that the organization carry higher retentions, but if the organization is unable to control frequency, higher retentions become cost prohibitive.

How does a company’s level of risk tolerance impact risk management?

Identifying the company’s risk tolerance zone is important and will be considered when determining what solution best fits the organization for each exposure identified.

As different projects, changes in operations, exposures or hazards arise, a risk analysis should be performed to completely understand and identify the potential impact of the exposure to the organization. If the risk analysis falls within the tolerance corridor and is deemed acceptable to the organization, it can move forward with the appropriate risk management tool. Insurance is just one solution to risk management. Once the hazard or exposure is identified, the company will choose to eliminate, retain, reduce, transfer, minimize, avoid or control the risk.

How do you evaluate the data?

Data will be gathered at various stages of the risk management process based on historical data, industry data, flowcharts, inspections, compliance review, surveys or policy/procedure review. There are several ways to evaluate the data. This can be done by determining the likelihood and impact of the event occurring. When determining the likelihood, loss analysis, risk mapping, forecasting or probability analysis can be used. When determining the impact on the organization, cost benefit, payback analysis, net present value analysis or internal rate of return analysis can be used. Understanding the importance of the administration phase of the risk management program is critical and requires an organization to look at loss trends, or a trend in certain other factors. This is when the organization will use the data and make changes from an implementation or procedural standpoint to mitigate future losses. Many companies will effectively identify an exposure and will put a policy or procedure in place, but fail to monitor or revisit this exposure from time to time to measure the effectiveness of the program.

Exposures and hazards to an organization appear and change quickly, forcing companies to be reactive instead of proactive through their risk management program. Again, this is why it’s crucial to elevate the importance of risk management companywide.

Michael J. Lucas, CIC, CRM, is a partner with Millennium Corporate Solutions. Reach him at (909) 456-8911 or mikel@mcsins.com.