Employer-sponsored 401(k) plan fees can cut retirement savings by 30 percent over a lifetime, according to Demos, a public policy research group. However, recently enacted disclosure requirements will shine a light on the hidden fees for plan sponsors and participants.
For employers that sponsor retirement plans, there is a fiduciary responsibility.
“You, as a plan sponsor, might be overwhelmed due to lack of expertise and wish to avoid extra time spent thinking about and understanding retirement plan fees,” says Kimberly Flett, CPA, QKA, QPA, director of retirement plan design and administration for SS&G. “However, you are ultimately responsible for adequate disclosures if you are the owner of a company that maintains a qualified plan.”
Smart Business spoke with Flett about how employers can take responsibility as retirement plan sponsors beyond passing along a stack of papers or website addresses to participants.
What are the new fee disclosure requirements for plans?
The Department of Labor was concerned that 401(k) plans with underlying investments of different types and the related providers — investment managers, brokerage houses — that maintain the investment accounts take out revenue from the various funds to pay fees without sharing or disclosing the information to plan participants. The disclosure requirements hold the investment managers accountable and educate participants about the costs in the underlying investments within the retirement plans.
The new fee disclosure requirements have been established for a while, with additional retirement expenses being reported on many retirement plans’ Schedule C as part of Form 5500 reporting to the DOL. They were brought to the forefront more expeditiously because of how the economy plummeted a few years ago. Several interim regulations were passed, with final regulations taking place in 2012.
What does disclosing these fees entail?
There are two parts to the disclosure. Under the first part, the covered service provider that manages your retirement funds was required to begin disclosing to you, as plan sponsor, all the plan costs as of July 1, 2012. These included items such as name and type of investment, performance data, benchmarks, ratios used in calculating expenses and the allocation of all fees — to a third-party administrator, the adviser or licensed dealer, or the company that maintains the fund. The formulas used with those amounts also had to be disclosed.
As of Aug. 30, 2012, the plan sponsors of qualified plans had to start disclosing this information to participants in the plan, explaining what the fees are and how they work. The plan’s statements had to be updated to comply with the regulation.
How much do plan sponsors and their accountants need to understand about the disclosures?
Ultimately, as the plan sponsor, you bear what is called fiduciary responsibility. Therefore, you need to work closely with professionals, advisers and vendors who know how to interpret these disclosures. Take time to read the disclosures and understand how the investment provider is complying. Then make sure your participants are truly being informed and will continue to be so on an ongoing basis.
It’s a good idea, for example, to appoint your HR manager, internal accountant and CFO to an internal 401(k) committee with the responsibility of reviewing the data, educating themselves and then sharing their knowledge with participants. Does this committee have to be experts? No, but they have to make a reasonable effort and know where to go if they don’t have the answers, such as to an attorney familiar with the Employee Retirement Income Security Act of 1974 or a third-party administrator.
Your employees, once they get their third quarter statements, will be coming to you with questions. You need to be able to connect them with the right experts so employees can receive the necessary answers.
If a company’s provider fails to properly disclose its costs, will the company be held accountable?
Failure to comply with the regulation is considered a prohibitive transaction that can be subject to fees and penalty impositions from the DOL. But there are further ramifications beyond the DOL coming after the plan sponsor for improper disclosures.
A participant might leave your company and be unhappy with the funds or platform that you, as the plan sponsor, chose, because he or she lost money. That former employee could seek out the DOL and get an attorney. Then you could have to prove that you took every precaution to ensure the plan ran smoothly and made smart investments. If the plan did not, you might be held accountable.
It’s too soon to say what the short- or long-term ramifications will be, but as a plan sponsor the first thing you need to do is arm yourself with the right expert advisers. Then make inquires to be forearmed; the preparation phase will help curtail a lot of negative fallout that could potentially happen.
How do you think this will affect the retirement planning industry?
Third-party administrators will be needed more than ever for their expert advice. This disclosure law also brings visibility to the industry, which opens doors for discussion that sets up additional chances for education and awareness about retirement plans.
Despite more costs being in the open, employers should still take a comprehensive approach to retirement planning. Looking at service, benchmarking and longevity, as cheap is not always better. A company might have the highest number of new plans each year because of the low costs, but it also could have low retention rates because of service
Kimberly Flett, CPA, QKA, QPA, is the director of retirement plan design and administration for SS&G. Reach her at (330) 668-9696 or KFlett@SSandG.com.
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The Pennsylvania Wage Payment and Collection Law (WPCL) allows employees to bring a civil legal action against an employer if they are not paid for work performed and wages earned.
“The law, which has the aim of making sure employers are paying employees what is due when due, provides tough consequences for employers who don’t comply,” says Alfredo M. Sergio, an attorney with the Employment Law and Commercial Litigation groups at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Sergio about what employers need to know about the Pennsylvania law, including possible individual penalties for noncompliance.
What are the highlights of the Pennsylvania Wage Payment and Collection Law?
The WPCL requires employers to notify employees at the time of hire of their rate of pay, the time and place of payment, and the amount of wage supplements and fringe benefits. Employers must pay wages on regular paydays designated in advance, and must pay non-salaried employees semimonthly or more frequently, unless stipulated in an employment contract. The statute has a fairly broad definition of wages, and includes all earnings of an employee, such as regular wages, overtime and commissions.
Employers are also responsible for keeping accurate records of hours worked and wages paid to each employee. If an employer is separating or terminating an employee from the company, the business must pay any wages due by the next regular payday.
If not, the employee can file a claim with the Department of Labor and Industry (which can take up the action on behalf of the employee), or the employee can file suit against the company.
What penalties can an employer and its personnel face for failing to comply?
Penalties for failing to pay wages can have a substantial impact on an employer, whether resulting from a private civil action or action by the Secretary of Labor and Industry. If an employee files a claim for unpaid wages, the employer must immediately pay any undisputed portion of wages.
If the employer or former employer fails to pay the claim or provide a satisfactory explanation of the failure to do so within 10 days after receipt of a certified notification (or ultimately, if the explanation is deemed unsatisfactory), the employer will be liable for a penalty of 10 percent of the portion of the claim found to be justly due, in addition to the principal. If the employer goes 30 days past the regularly scheduled payday without paying wages due an employee, the penalty increases to 25 percent of what is owed, or $500, whichever is greater, plus the principal.
Additionally, the WPCL provides for mandatory attorney’s fees in the event a lawsuit is filed to recover wages. The court has some discretion regarding the amount, but if an employer has violated the law, the employer will end up paying the principal, the penalties and some degree of the employee’s attorneys’ fees, which can be significant. While criminal penalties are not always imposed, the law provides that an employer can be fined up to $300 or for imprisonment of up to 90 days, or both, for each offense. The nonpayment of wages to each individual employee constitutes a separate offense.
Can company personnel be held personally liable for noncompliance?
In addition to general and criminal liability, the WPCL provides for individual, personal liability for violations. This surprises many employers, as they generally think of the corporate structure as providing protection from individual liability or debts of the company.
The WPCL defines ‘employer,’ in part, as including a company’s agent or officer. An agent or officer who has been involved in the decision to withhold wages can be found individually liable for violations of the law. This can even include the company CEO, president or CFO.
Employees often file wage claims not just against the company but also against individual officers of the company to place additional pressure on the employer and its principals to recover unpaid wages.
In what situations do employers most often violate The WPCL?
Among the biggest missteps to avoid are not paying an employee’s wages when due and making deductions from the last paycheck when the employer is not entitled to do so.
Wage payment and collection issues often arise when an employee is separated from an employer, either because he or she quits or is terminated. These issues are arising more often in recent years in a difficult economy. A company might be closing, contemplating bankruptcy or laying off employees, but employers need to pay employees what is owed.
When a company files for bankruptcy, employees often seek to hold corporate officers personally liable for unpaid wages. Even short of bankruptcy, if an employer thinks it will not have enough funds to continue the employment of certain employees, it is dangerous to fire them and not pay what is due.
Wage payment and collection issues also often arise when an employee owes money to the company at the time of separation. While certain enumerated deductions from wages are permitted by the law, it is easy for an employer to think it is justified in making a deduction from a paycheck, only to run afoul of the WPCL (for example, the employer might want to deduct from a separated employee’s final paycheck the cost of a missing piece of equipment or unreturned laptop).
In general, the employer needs to pay the full amount of wages owed to the employee and can pursue the disputed sums separately. The WPCL needs to be foremost in employers’ minds because the consequences — including the danger of individual liability — can be severe.
Alfredo M. Sergio is an attorney with the Employment Law and Commercial Litigation groups at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or email@example.com.
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The Medical Loss Ratio (MLR) mandate, within the Patient Protection and Affordable Care Act, requires insurance companies to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement. This provision just started in August, but how will it impact the insurance industry and employers?
“The MLR Legislation has a perverse incentive; when utilization and costs increase, an insurance company makes more money,” says Mark Haegele, director, sales and account management, with HealthLink.
Smart Business spoke with Haegele about what MLR does and the ramifications for health insurance companies, brokers and, ultimately, employers.
How does the MLR mandate work?
Medical loss ratios refer to the percentage of premium dollars an insurance company spends on providing health care and improving the quality of care, versus how much it spends on administrative and overhead costs and, in many cases, salaries or bonuses.
In August, health insurance companies paid $1.1 billion in total rebates to customers when less than 80 percent (for individual and small group markets) to 85 percent (for large group markets) of premiums were not used for health care costs. Approximately 31 percent of Americans with individual insurance got the rebate, with an average check of $127, according to the Kaiser Family Foundation. Rebates went directly to businesses that sponsor their own plans and they decided whether to distribute them or put the funds toward lowering future premium costs.
Why does MLR create a problem for insurance companies and, subsequently, employers?
Many insurance companies have had to make up a gap of up to 10 percent by balancing their administrative costs in order to pay for overhead, employee salaries, etc., and to run their business. In the individual market, for example, typically 70 to 85 percent of a premium is used to pay for the claim, according to a 2010 report by the American Academy of Actuaries.
Now, if you are an insurance employer, suddenly you have to spend 85 percent of the premium that you take in on claims. That means that 15 percent is the only bucket of dollars that you have for profit, administration, overhead, etc. So, logically, there are only two ways that insurance companies make more money year over year and increase their profits. They can either reduce their administrative overhead by cutting staff or have a claims increase.
For instance, if your premium was $1,000, $850 goes back to claims and $150 goes to profit and overhead. Let’s say next year your premium is $1,500; now the insurance company has increased its potential for profit by 50 percent — to $225 rather than $150. Artificially increasing utilization isn’t good for our health care system, and increasing premiums wasn’t part of the reform game plan.
The more realistic and impactful method is reduction. Insurance companies are in it to win it; they are not going to sacrifice profits. With insurance companies facing huge budget constraints, what does that mean for employers and their employees? It means a lower level of service because there are fewer people answering phones and less staff to handle claim issues as insurance companies are forced to squeeze their administration expenses.
In addition, employers will want to know if their group is subsidizing other employers. Insurance companies will need to provide information about the cost of claims, how much is being spent administratively and where are the funds going, and how groups compare. The president of an insurance company recently received a call from an employer who was very upset about the payment of his rebate check because he knew that his premiums were artificially high for many years and that he’s been subsidizing other employers.
How have insurance brokers been negatively impacted by MLR?
The U.S. Department of Health and Human Services has decided that agent commissions are not exempt from the administrative calculations. This creates a difficulty because brokers rely on incentives/bonuses from insurance companies to sell their business.
With the MLR mandate, the broker’s commissions have been cut considerably, if not all together. The National Association of Insurance Commissioners recently released a study that reported that a significant number of health insurance companies have reduced commission levels, particularly for the individual market. Brokers and agents are worried that this will run them out of business.
In the era of health care reform, it is important for employers to have consultants to ask questions, which often is the broker’s role and where that person earns his or her 6 to 10 percent fee. This will be even more vital if insurance companies themselves are giving lower service.
Are there other health care solutions not affected by MLR?
Self-funded programs are not held to the MLR and other PPACA mandates. Therefore, consultants who work off commissions could be suggesting self-funding more frequently. If business owners feel their group is not benefiting from MLR requirements, they also could look at self-insured models.
There’s no doubt that the MLR is clearly another driver to push employers to look at alternative methods of health care, including self-funded insurance. This already has been demonstrated by more interest from brokers and others entertaining a self-funded solution; they are not all buying it, but they are all looking at it.
Mark Haegele is a director, sales and account management, with HealthLink. Reach him at firstname.lastname@example.org or (314) 753-2100.
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Cloud computing may invoke images of an abstract technological force floating in the atmosphere, but the term itself is misleading. The term originated because on technical diagrams, a cloud was drawn around any mixture of resources that made a particular application work, says Pervez Delawalla, president and CEO of Net2EZ.
“Cloud computing means so many different things to so many people, and there is a lot of confusion,” says Delawalla. “It’s cloudy out there in the cloud. An easier way to explain it is by using the utility computing concept. This resonates the most with people because they can compare to how they use gas or electricity as a utility, so now can you use computing power as a utility.”
Smart Business spoke with Delawalla about what cloud computing is and how to apply its advantages to your business.
How does cloud computing work?
You have to envision that the physical architecture itself is vast. Data centers all over the world house servers, and each server or set of servers is designated for a certain type of application or resource. Servers, routers, switches and security devices combine with network connectivity and an operating system to form the cloud. You could compare it to an electrical grid, in which power comes from substations and power generation points before electricity goes over wires to provide power to households or businesses.
Some examples of cloud computing include Apple products that back up data to their iCloud, and Microsoft products with which data is backed up on SkyDrive, Google Drive, Salesforce.com or Dropbox. A business may approach a data center for complete automation of its infrastructure and take care of the software itself.
The data center is then responsible for ensuring that all of the hardware pieces are working in harmony with each other and have different versing capabilities within that physical layer.
What are the advantages of cloud computing?
A major advantage of cloud computing is time. As a startup business you can get up and running online reasonably quickly and with minimal investment because you are not buying servers, routing or switching equipment. Instead, you are plugging into a utility that doesn’t require any setup, that is already functioning, and you simply pay for it on a monthly basis.
Cloud computing also offers more versatility and capacity. For example, say your company has a new e-commerce site and a product becomes an overnight sensation. If your website is on a cloud computing platform, you can scale up and sustain a high volume of traffic without having a performance degradation for users of your site.
Cloud computing can also improve your ability to be agile and nimble because the monthly fee for service includes taking care of your hardware and resources. As a user of the cloud, you don’t need an army of IT personnel or consultants, freeing you up both financially and staffing-wise to concentrate on your target business.
Additionally, a minimal amount of software is installed on the personal computer or path, so instead of downloading the entire Microsoft Office suite, for example, you can sign up for Microsoft Office 365, which allows you to subscribe to the cloud-based service on a month-to-month basis to access all Microsoft Office products.
What is the difference between public and private cloud services?
On a public cloud, you don’t know where your data is stored or who has access to it, but you are able to increase your capacity more quickly. An example is Amazon Web Services, which hosts websites on hundreds of thousands of servers which allows users to increase capacity as needed.
A private cloud can be established for businesses that know their growth plans and that want extra security. The business can then control who has access to that data and knows that it is stored in a secure location.
How are security and privacy handled with cloud computing?
Security and privacy are the main reasons businesses are hesitant to go over to the cloud. However, with a private cloud, you manage your environment so closely that the security is as good as with conventional computing. Because of privacy issues, HIPAA-compliant and PCI-compliant credit card companies will always have to use private cloud services.
For extra security, you can do an automation deployment with a private cloud, but that will result in higher costs because you have dedicated resources just for your company. For data that isn’t as sensitive, a public cloud offers more versatility and nimbleness.
What should businesses think about when considering cloud computing?
Ask yourself exactly what it is you want out of the cloud. What are your needs and what do you want to accomplish? With so many different products, you have to ascertain what you will use it for. If you require word processing or Excel, you could use Google Drive, Microsoft Office 365 or Google App. For massive data storage needs, there’s Box.com or Amazon Web Services.
For private cloud service, you need to find a data center company to meet those requirements. Examine what the various companies are providing as their feature set for cloud computing, then choose which company best suits your business needs.
If your focus and expertise is not in IT, the more you can outsource to a cloud computing environment, the lower your costs will be for computing needs and data storage. Then your company can focus on its strengths, knowing that the rest is being taken care of up in the cloud.
Pervez Delawalla is president and CEO at Net2EZ. Reach him at (310) 426-6700 or email@example.com.
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Productivity losses related to personal and family health problems cost U.S. employers $1,685 per employee per year and $225.8 billion annually, according to the U.S. Centers for Disease Control and Prevention. So what is creating these problems with health care claims and insurance, which ultimately lead to poor health and lower productivity?
“It is the delivery system, administration and billing,” says Danone Simpson, founder and CEO at Montage Insurance Solutions. “I have no doubt about this, as our firm battles away at claims that take hours, weeks, months and sometimes years to sort through.”
Smart Business spoke with Simpson about what she sees as the problems with health care, how carriers are coping and what employers can do about it.
What is the problem with health care today?
From wait times for approvals to multiple bills being sent to carriers, carriers are denying needed PET scans, MRIs and other tests so doctors can determine care — partially because of what they deem as ‘abuse’ from doctors who overtreat or analyze treatment. Approvals can sometimes take two months when patients need major surgery to remove cancer.
The real issue with health care is not only who is paying what premiums, fines or co-payments, it’s more about the overall cost of health care and billing complications. Doctors desperate to earn more may overbill, even though they know the contracted amount they agreed to. However, that may be a different amount with each carrier, which makes the administrator’s job a nightmare.
How will private exchanges and mandated health care impact the system?
It’s likely that health care insurance exchanges won’t necessarily lead to better health care pricing. In addition, private health insurance carriers will be forced to offer coverage on the exchanges and compete with themselves.
Surveys prove that employers are angry about being forced to pay for coverage, even if they already cover 100 percent. They expect employees to ask for more coverage of dependents, and some employers who stretch to pay a portion of dependent coverage are feeling backed into a corner. It’s not required to cover dependents, but most plans today do.
What are carriers doing to help with costs?
With expensive fines that can account for more than the actual premium amounts, carriers are helping form Accountable Care Organizations (ACOs) to hold doctors and hospitals responsible. These organizations use incentives to cause providers to work together when treating a patient across care settings such as doctors’ offices, hospitals and long-term care facilities, according to HealthCare.gov. For example, the Medicare Shared Savings Program rewards ACOs that slow health care cost increases while meeting performance standards on quality of care and putting patients first. Patient and provider participation in an ACO is purely voluntary.
What can employers do to lower health insurance costs?
Offering a wellness program is one way to truly impact the heart of the problem of the country’s health care costs. An unhealthy work force is a major issue for businesses large and small. For example, 20 million Americans — 7 percent of the population — have diabetes and 30 percent of this population remains undiagnosed, according to Katz. Moreover, a recent Newsweek article states that two-thirds of adults and one-third of children and adolescents are overweight or obese.
The law might require an employer to buy an insurance policy for employees, but it causes anger and rebellion on the part of many employers. The more proactive approach is to dive down into the parts of the reform that assist in either lowering premium costs or aiding in the retention and well being of your employees.
There are a number of tax credits available to help you with this proactive approach, if they are available to companies of your size.
- The Patient Protection and Affordable Care Act includes a variety of provisions aimed at encouraging wellness and disease prevention. As shrm.org reports, effective Jan. 1, the ‘law will permit rewards or penalties such as premium discounts of up to 30 percent of the cost or coverage. Existing wellness regulations permit incentives of up to 20 percent of the total premium, provided that the program meets certain conditions. The law increases the amount of the potential reward/penalty to 30 percent of the premium.’ There is also the possibility of an even higher amount after national studies are performed.
- Another option is the Small Employer Health Insurance Tax Credit. The U.S. GAO states, ‘Fewer small employers claimed the Small Employer Health Insurance tax credit in tax year 2010 than were estimated to be eligible.’ Calculators are available on the National Federation of Independent Business, www.nfib.com and many other websites.
Employers also can ask their carriers about the Medical Loss Ratio reimbursement, which was just issued for the first time.
Take care to avoid fines and earn tax credits on wellness incentives. Many employers are starting to offer a carrot approach to motivate employees, and then a stick with some sort of penalty for not participating to truly see employees take advantage of a wellness-based plan.
Danone Simpson is the founder and CEO at Montage Insurance Solutions. Reach her at (818) 676-0044 or firstname.lastname@example.org.
Insights Business Insurance brought to you by Montage Insurance Solutions
Employers have a sacred, fiduciary duty to treat benefit plans as if they were their own nest eggs. Therefore, such plans are heavily governed by the Department of Labor with numerous expectations, communication needs and filing rules.
“The dilemma today is that so many plans are underfunded,” says Bertha Minnihan, national leader, Employee Benefit Plan Services, at Moss Adams. “People have worked hard for their retirement, and if a sponsor should screw that up, they have nothing to fall back on.”
An aging population that needs its money to go further compounds the problem. When benefits aren’t administered properly, society struggles to care for the older generation, she says, and the younger generation suffers when older workers stay on the job longer.
Smart Business spoke with Minnihan about how to properly administer your benefit plan to help employees and how to avoid common regulation pitfalls.
What is the typical reporting structure for employee benefit plans?
There are several disclosures and reporting that are required to go to the participants, as they are the first consideration, and all entities are working to ensure that plans are administered properly for them. Additionally, plans must file a tax return annually to the DOL and the IRS, and those meeting additional requirements must be externally audited, as well. The Pension Benefit Guarantee Corp. also monitors benefit plans that have gone defunct or become underfunded by a certain percentage. The system is quite complex.
Who are the service providers in this space?
Internally, there may be the company sponsoring the plan and a committee delegated to oversee the day-to-day operations, as well as HR and payroll. Externally, benefit plans have investment custodians holding the funds and investing them at the participants’ direction and record keepers tracking plan activity. Record keepers can be a separate entity, or they can be an arm of the investment custodian. Other players include auditors, plan attorneys, actuaries for defined benefit plans, investment advisers and trustees.
What DOL hot button areas do sponsors need to consider when administering benefit plans?
One of the more common pitfalls is the timeliness of deposits into the trust. The DOL wants employee deferrals put into participant accounts quickly because employees deserve to start earning. It’s problematic when companies are careless or feel payroll taxes and other items are more important so they withhold withholdings and play cash flow games.
Compensation is another challenging area, especially when different types of bonuses are paid. The DOL’s hot button is whether the deferrals are being calculated on the correct costs and whether the right components are eligible. If you are missing income components and deferrals are understated, your company could be offering an understated match.
Then, if the employee is shorted, the employer has to make up the entire shortfall, which often surprises people. Some Fortune 500 and 1,000 companies in Silicon Valley have miscalculated compensation and now owe their plans millions of dollars from deferrals, earnings and unfunded matches.
The DOL is also very concerned with educating employees, whatever their demographic. As a business owner, you need to make an effort to get your employees to participate and to maximize their retirement savings.
What are some best practices for plan administrators?
Here are some best practices that could help mitigate risks, concerns and challenges.
- Appoint an oversight governing committee. If your board does not delegate, it is automatically the fiduciary, and the board is often not up to speed on the plan, HR, payroll and/or the Employee Retirement Income Securities Act (ERISA), the law governing benefit plans. Additionally, in private companies, a third-party trustee who is an internal officer is also at fiduciary risk, and a class-action suit could be brought against both the board and the trustee at a risk of personal liability.
- Have your oversight committee be timely with sending funds to the trust.
- Review your census data regularly and ensure databases are accurate. Changes, such as a termination date, reporting someone’s death or a wrong age need to be communicated to different departments.
- Ensure your personnel understand how the plan works. For example, if you hire a new payroll person, make sure that he or she has read and understood the summary plan description.
- Benchmark your fees and look at them regularly. With new federal disclosures, there is transparency by law, so pay attention and ask questions.
How should merger and acquisition groups approach benefit plans?
Whenever companies — small or large — fold or change ownership, a number of items can be missed, so keep this in the back of your mind as you go through the process. Have an ERISA expert advise you early on, as this is not just a matter of merging benefits. The acquired company could have a 401(k) plan that needs to be terminated, a defined benefit plan that is unfunded and frozen, or a deficient benefit plan that must be cleaned up before it can taint your plan on contact. M&A committees should have checklists to ensure employees do not lose their benefits and that the company is still protected and reporting in a timely manner.
How are governing entities dealing with work force globalization in this area?
Globalization is affecting benefits plans without businesses realizing they are possibly being sloppy. If you have U.S. employees working abroad or foreigners coming to your company to work, you need to consider how this will affect benefits. How is your plan written? Are employees still accruing benefits in a timely manner? What does your plan include or exclude, and is that what you intended to do? There is a lot of interest on the subject, and the IRS is working with other governments to ensure that documents are in order, that they understand what the U.S. is doing and that they know what to tell their citizens who come here.
Bertha Minnihan is the national leader, Employee Benefit Plan Services, at Moss Adams. Reach her at (408) 916-0585 or email@example.com.
Insights Accounting is brought to you by Moss Adams.
It is a buyers’ market right now for real estate, and the same holds true for middle market companies.
“At most banks, the middle market portfolio is the heart of what drives the commercial banking earnings,” says Steve Cobain, senior vice president and middle market manager at First Commonwealth Bank.
As part of such a crucial economic sector, middle market businesses have the power to choose a bank that suits their needs.
“Some banks differentiate by being very easy to deal with, making their credit terms very loose and their pricing extremely inexpensive,” Cobain says. “Other banks accentuate the fact that they are a full-service provider, are very consultative, work with clients, understand the business from the owner’s perspective and are going to be a very dependable financial partner for the client, rather than just compete on price alone.”
Smart Business spoke with Cobain about the general market conditions in middle market lending and how businesses can take full advantage of them.
What is the definition of a middle market company?
There are multiple definitions, but the most prevalent is that a middle market company has sales that range in annual revenue from $20 million to $500 million. They are usually privately owned — a large number of them are family owned — and have rapid growth. There are a high number of companies that fit that category; in Pennsylvania, there are probably 6,000 companies fitting that definition.
What are the typical financial needs of middle market companies?
The middle market is one of the more complicated sectors, where companies need a full array of banking products. There’s a need for credit, treasury management services and other products, such as manufacturing companies that need trade letters of credit for both the sale of their goods and the import of raw materials.
There is no segment of the economy that the middle market doesn’t touch, but there are different underwriting standards, credit structures and treasury management products depending upon the business. For example, a service business might not have many assets for collateral, so banks take a harder look at the cash flow that a company can generate, while a manufacturing company uses inventory, receivables, equipment and real estate to secure credit.
In addition, there are a number of factors that come into play for middle market companies trying to secure a loan agreement, such as whether the owner needs to personally guarantee the company’s debt, the number of times a company has to cover its debt service, how much leverage the bank will allow a company and the types of advance rates available for lines of credit based upon inventories and receivables
What is the current situation for middle market lending, and what does this mean for businesses?
From a small community bank all the way through to the largest banks in the country, there are dedicated business practices for the middle market. From a bank’s perspective, it is one of the most profitable of the corporate sectors. Because businesses are reliant on their primary bank for the bulk of their services, there are a lot of cross-sell opportunities, and middle market companies are typically loyal.
On the whole, there’s still a perception that banks are not actively lending money, but that’s not the case for the middle market. If you’re a strong middle market company that is profitable and financially stable, you are going to find that virtually every bank in your geographic area will be trying to attract you as a client. Other middle market companies might be going through working capital challenges because growth is rapid and you haven’t fully demonstrated your profitability yet, so you should find a bank that can be a true financial partner.
What should middle market companies look for in a banking partner?
Look for a bank that will invest the time and effort to understand your business and support you through your working capital cycle. Your banker needs to be able to see your business from your perspective, as an owner. Many middle market companies are privately held with little regulation, so look for a bank that can help you find a balance between distributing excess capital back to yourself and keeping the company’s balance sheet strong and stable for the foreseeable future.
Middle market employers should expect a high level of service from their banking partner. Typically, the bank designs a portfolio of products, assigns a relationship officer who meets with the company at least four or five times a year and makes sure the company is aware of all the products available. In addition, the employers themselves are put into a private banking group for personal banking needs.
How can businesses determine the right time to switch to a different middle market lender?
In the early stages of a middle market company, with sales of $20 million to $30 million, the business can be with a smaller community bank. However, as revenue grows, you might need a bank with a higher hold limit.
It’s important for a middle market employer to know how much credit any one bank can provide and work with banks to ensure there is enough financial backing to accommodate anticipated growth. Therefore, in a period of rapid growth, it might be necessary to change or add banks to your portfolio.
Also consider switching if you’re not getting some combination of a high level of service, a good understanding of the business, solid consultative advice, and fair and competitive pricing.
Insights Banking & Finance is brought to you by First Commonwealth Bank.
When the iconic “Got milk?” campaign was translated into Spanish, Hispanics wanted to know why asking someone if they were lactating was so funny. Language and cultural misunderstandings in the business world could cost you a contract or block your entry into a new market unless you take the time and have the foresight to do your homework.
While a language barrier isn’t easy to fix overnight, even learning a culture or just knowing there are cultural differences can make an impact.
“A language is a lot of investment, not just for the employer but for the employee as well. However, people are more forgiving about a language barrier than if you’re perceived as rude,” says Victoria Berry, program manager of Business and Performance Development with Corporate College.
Smart Business spoke with Berry about some of the pitfalls business owners face when working with those from another culture.
What is the value of learning a new language or culture in the business world?
It has tremendous value in a global marketplace. Even as a U.S.-based company, you have employees who are dealing with overseas customers, clients and partners. There also are more than 3,000 foreign-owned companies in Ohio, 275 of which are in Northeast Ohio and employ more than 30,000 workers. Even within your own company, you can have people from different cultures working together on high-functioning and cross-functional teams. The U.S. is an anomaly when compared to the rest of the world in that having more than one language under your belt isn’t part of our culture.
On top of the more visible language barrier, cultural misunderstandings can be just as dangerous. For example, in the U.S., a high-quality brochure typically has high-gloss or thick-stock paper, but in China, that comes across as cheap; you should use a thinner paper with a no-gloss shine to it.
People tend to overlook the fact that other cultures have different expectations, especially regarding business etiquette or meetings. For instance, in China, it’s considered discourteous to take someone’s business card and not look at it, or at least pretend to read the title. As another example, you wouldn’t want to call a Mexican company between noon and 3 p.m. when businesses are closed, or discuss business during lunchtime. Following these kinds of protocols will impress people from another culture and show you at least did some background work.
What is crucial to know when dealing with foreign businesses?
It’s crucial to know the greeting and how to approach a business situation. In the U.S., we tend to be demanding and quick, assuming people are in a hurry, and therefore, we sidestep some of the formalities. In most other cultures, the friendly bonds that business executives build with others weigh heavily on whether or not they decide to do business you. This is true especially in China and many Latin American countries, where personality and whether or not they feel like they can trust you are essential factors.
Another consideration to remember is that in American culture, we’ll work through breakfast, lunch and dinner. We often have the expectation that you’re going to work until this project gets done. In many other cultures, they work from 9 a.m. to 5 p.m. and then the lights go off. Family and personal time is coveted. In the U.S., we might say, ‘Family comes first,’ but how many of us miss a Little League game to be at work?
How do you know when learning new languages and cultures is worth the resources?
Any time you can foresee that you may be doing business either out of the country or in the country where you know there’s a large population of a specific culture, you probably want to get the employees you know will be in contact with these individuals acclimated.
Which employees might benefit the most from learning a new language or culture?
Depending on the situation and business, it could be your customer service, sales personnel, human resources and/or marketing professionals. Managers and executives who are making the decisions might not need to speak the language but definitely will need to know the culture.
What should employers be looking for to help employees understand other languages, cultures, customs and etiquette?
Some have a tendency to go for the free programs that you find online, but those programs are not always worth your time. A free program, for example, might leave you without the natural fluency and dialect you need. You get what you pay for; this program might cost $200 less but you’re just getting a PDF that someone copied.
Instead, focus on programs with quality instructors and a good reputation in the education/training field. The instructors should be fluent in the language and have teaching experience. Research the organization to find a program that has a history of providing good service.
Remember, even a little knowledge will keep you from inadvertently offending someone from another culture, which brings stress and tension among team members — whether it’s a long-term team or if you’re just trying to get the contract signed so you can do business together.
Victoria Berry is program manager of Business and Performance Development with Corporate College. Reach her at (216) 987-2906 or firstname.lastname@example.org.
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When there’s a strong, open partnership between an employer and its temporary staffing agency, both parties can realize profits and cost savings. The goal for both sides is to determine the right value and form a relationship that makes it more cost effective to hire a staffing firm than it would be for the employer to perform those duties, says George Thomas, senior vice president of Everstaff.
“It is our job to make sure that the client understands all of the costs, liabilities and exposure that they defer when using a staffing agency for temporary and temporary-to-permanent placement,” he says.
Smart Business spoke with Thomas about how to maximize your savings by partnering with a staffing firm.
How does the cost relationship between a business and a staffing agency work?
There’s a common misperception that a company isn’t realizing savings when paying for the services of a staffing firm. Two significant costs are along the lines of direct and indirect liabilities. These are the insurances that the staffing company covers as part of payroll, including workers’ compensation and unemployment. There are also additional liabilities and sometimes very significant costs associated with workers’ compensation and unemployment claims, which are passed directly to the staffing firm.
The employer also gains significant savings through the indirect costs of marketing and recruiting. Businesses will ultimately spend more time, money and resources when recruiting seasonal and permanent staff due to the fact that most HR departments are smaller and too busy dealing with day-to-day employee issues to focus efforts on sourcing and recruiting candidates. This is where the staffing agency can use its expertise in recruiting and placement to sort through resumes, bring people in for interviews and ensure the employer gets an employee for the job who has both the hard and soft skills necessary to be successful. In addition, recruitment is becoming more costly today, with many employers requiring background checks and drug screenings, even for low-wage jobs.
How can using a staffing agency help with employee retention?
A lot of temporary staff turnover occurs in the first two to three weeks, especially in manufacturing. When a business doesn’t use a staffing firm, it incurs the front-end costs of recruiting — bringing people on board and training them — only to end up losing many of them in the first few weeks or months. When using a staffing agency, though you will lose productivity when there is turnover, you will not lose the up front costs associated with sourcing, screening and placement.
As far as retention, a good staffing firm will know the client and be involved in proper orientation, pre-employment screening and ‘after-placement’ coaching to reduce turnover. When the staffing firm plays a key role in the coaching of the temporary work force, retention always improves.
How can employers maximize cost savings through a staffing firm?
You and your staffing firm need to have a clear understanding about what resources you require for your type of business, where your gaps are in productivity and what your short- and long-term visions are to build a strong strategic partnership.
Next, you will want to make sure that the value proposition for you and the staffing service is such that both parties are happy and that the service can provide the resources you expect to be successful. Many times a company will go with the lowest price it can possibly get and then realize after a few months that the agency has moved its resources to more profitable accounts. Make sure the price is not only fair to you and your company, but also for the staffing firm.
Once you’re in a relationship with the staffing agency, you need to continue to work with it on developing the relationship. For example, in manufacturing, a staffing company may get feedback from temporary employees that a certain line has a potential danger or it may learn that there is turnover on a certain shift because of training issues, a particular supervisor, leadership style or operation tempo. Working together to minimize potential workers’ compensation and unemployment claims will help the staffing agency with its costs and minimize your productivity loss.
How should companies set pricing when using a staffing firm?
Don’t be afraid to ask the staffing company what the insurance burdens are for a particular state, realizing that those costs vary year to year. Understand that, depending on the department and the job the temporary employee will be filling, those burdens can differ even within a facility.
It’s up to the staffing company to inform you of the direct costs and insurance burdens, as well as the costs for payroll, recruiting, recruiting support and corporate overhead. Many times a company will assume that if the state and federal insurance burdens come out to 24 percent and the staffing agency markup is 41 percent than the difference is all profit for the firm, which is never the case. When everything is completely transparent, everyone knows where they stand and can find a fair price for each party.
You should always ask for the detailed breakout of burden from the staffing company so you can see exactly what the cost savings will be for you to use temporary staffing or temporary-to-permanent staff instead of expending the resources to do it yourself.
George Thomas is a senior vice president with Everstaff. Reach him at (216) 369-2566, ext. 104, or email@example.com.
Insights Recruiting & Staffing is brought to you by Everstaff
What you paid for your assets and how the Internal Revenue Service values them are not the same considerations, but taxpayers often don’t know the difference.
“This is not the kind of thing you run into every day,” says Thomas H. Ahlbeck, CPA, managing director at SS&G’s Des Plaines, Ill., office. “Some people might only run into this complexity a couple of times in their lifetime.”
However, the wrong basis can add thousands of dollars to your taxes, so it’s important to understand how this can happen, especially as your net worth grows and affairs become more complicated.
Smart Business spoke with Ahlbeck about how to get a handle on this important, but nebulous, accounting concept.
What is basis?
Basis is what the IRS uses as your asset value for determining your gain/loss or taxability of a transaction. For example, if you bought a common stock but don’t know or cannot prove your purchase price, you might have to enter the basis as zero even though you paid significantly more. You’ll pay more taxes on the proceeds you receive — or not be able to write off a loss if the security is worthless.
What is the biggest problem area for figuring basis and how can it be detrimental for your taxes?
Taxpayers are losing a small fortune with nondeductible individual retirement accounts. IRAs can be problematic because you pay thousands of dollars into an IRA and the basis is not easy to track. When people put in after-tax contributions to their IRAs, they might not be keeping track or telling their accountant as it doesn’t have anything to do with their current taxes. Later, unless you can prove those were after-tax contributions, you’ll have to pay taxes on the money again when you take it out.
Once you’re making withdrawals from the IRA, the nondeductible contributions are taken as a percentage of every withdrawal. So, if you put in $100,000 of after-tax dollars originally and the account grows to $150,000, then only two-thirds of that is not taxable and a third of each withdrawal will be taxed.
How is real estate another area where basis is often wrong?
Real estate is another neglected area for basis — particularly primary and secondary residences where accountants aren’t completing a depreciation schedule. Today, many homeowners look at the current market and assume their home will never appreciate. Therefore, they don’t keep records of improvements, which should be added to the basis to narrow any gains when it comes time to sell in 10 or 20 years. This is even more critical for a vacation home because you don’t get the $500,000 exclusion of taxable gain that you might get on your primary home.
Real estate transactions, by their very nature, are held for a sizeable length of time, making it difficult to keep all the records. Your basis can be further complicated because the land and building are held as separate values and the land’s original value is often forgotten when configuring basis for a sale years later. If a property goes through a bankruptcy or debt forgiveness, those also will change the value of the basis.
Another problem is when inheriting or gifting occurs because, again, records can be lost. If someone inherits real estate, the basis value is stepped up to the current market value, which is why an appraisal needs to be done at the time of death. The idea of the increased value, which can happen for no other reason than inflation, is to counteract estate taxes.
However, if a property is gifted, the value of the basis is what the original owner paid for it. Therefore, if a couple jointly own property and one spouse dies, half of the basis will stay at the original purchase price, while the other half will be stepped up to the date-of-death value.
What can you do to prevent some of these difficulties?
The simple rule of thumb is to know the basis of all your assets at all times, meaning what you can use as value against the selling price in the eyes of the IRS. Know what will change the character of an asset, such as when a personal residence becomes rental property. There’s a lot of logic to basis, but with fair market value of property, the contract cost, debt involved, after-tax dollars, inheritance and gifting, the original basis can be confusing and even change without you realizing it.
You also might not recognize the tax consequences of your actions. For example, if you bought a stock for $10,000, you also need to keep track of the reinvestment because it becomes part of the cost to give you a higher basis.
Don’t assume your financial adviser or accountant is tracking basis. If they are, keep an eye on it to ensure they are doing so correctly. Many financial advisers now are tracking basis for stocks and mutual funds, especially with new rules from the IRS, but there can also be basis issues and related loss limitations with a closely held corporation or a partnership.
Know what records you need to have and how long to keep them. When someone gifts you a vacation home, you might not think that you’ll need the paperwork stating what the home originally cost. A lot of people think they only need to save three years of tax records before they throw them out. But as long as the transaction hasn’t been completed, it needs to be tracked.
Thomas H. Ahlbeck, CPA, is a managing director of SS&G’s Des Plaines, Ill., office. Reach him at (800) 869-1834 or TAhlbeck@SSandG.com.
Insights Accounting & Consulting is brought to you by SS&G