Jayne Gest

The legal exposures that come with terminating employees are always present. But with a troubled economy continuing, increases in certain types of claims, more publicity in the media about employment discrimination cases, and the Department of Labor and state agencies spending greater resources on investigation and enforcement, it’s more important than ever to take potential legal exposure seriously.

“An employer should absolutely take the time to review all circumstances of the employee’s time with the company prior to terminating the employee,” says Alfredo M. Sergio, member at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Sergio about what to do before, during and after employee terminations.

What considerations need to be weighed before firing someone?

There are a number of questions to ask before terminating an employee. Employers may still choose to terminate, but should proceed carefully. For example, consider whether the employee:

  • Is in a protected class such as age, race, religion, national origin, disability, gender, sexual orientation or veteran.
  • Suffers from a medical condition, disability, is pregnant or is taking care of a family member with a disability.
  • Has ever requested a disability-related accommodation, or taken or requested pregnancy or medical leave.
  • Has ever made a claim of discrimination, sexual harassment or retaliation, or has ever threatened to sue.
  • Is subject to an employment contract, a non-compete, non-solicitation, confidentiality and/or inventions agreement.
  • Needs to cooperate with the company after being separated, e.g., in other litigation or on a project.

If any of these apply, you may want to consult with your attorney before you proceed with termination. Of course, if the soon-to-be terminated employee is violent or threatens anyone, immediate termination may be warranted.  

What else might employers do to prepare before terminating an employee?

Employers should document the decision to terminate when the decision is made, and accurately document employees’ conduct and performance throughout their employment. This will help the company prove its legitimate reasons for termination and put the company in a better position to defend itself.

Before the termination discussion, employers should think about how, where and when they will communicate the termination, and be prepared to answer questions about pay and benefits.  Employers should think about changing passwords, getting back keys, security badges, computers, tools, equipment, customer lists and/or obtaining summaries of current projects.

How should the termination be handled?

Consider whether there are any written policies regarding termination. Treat the employee with dignity and be professional, and keep the meeting brief. The supervisor communicating the termination may also want to have a human resources representative present. At the meeting/in a separation letter, set forth the reasons for termination. Remind the employee of his or her obligations if the employee signed a non-compete, non-solicitation or other agreement. In some instances, it may be appropriate to obtain a release of claims from the employee through a severance agreement, which may provide protection and deterrence against future claims.

What do employers need to do afterward?

Employers should pay the terminated employee’s final paycheck within the required time periods, and should be careful they provide the separated employee any notices required under COBRA. Also, plan how to communicate the termination to other employees, since rumors or gossip can have a negative effect on employee morale.

In the end, reviewing possible legal exposure and practical concerns before firing an employee best positions the employer for a smoother transition.

Alfredo M. Sergio is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or asergio@sogtlaw.com.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

For-hire trucking companies have unique risk exposures, so the right insurance is crucial in today’s environment.

In the trucking industry, it’s important to fully understand the nomenclature, nuances between each industry sector and the differing coverages provided by each policy and each insurance company.

“It isn’t an all-encompassing package that is given to every company. Insurance companies are going to want to limit their exposure, so they won’t offer if it’s not requested,” says Scott Nuelle, vice president at ECBM. “If the company is not insured for what management believes it should be, you might not find out until the time of a loss.”

Smart Business spoke with Nuelle about how transportation firms can determine how much excess insurance to buy.

Why is it necessary to buy excess insurance?

The key reason is to protect your assets. Anytime you’ve got trucks on the road, you don’t have as much control of the environment as you’d like. Regardless of your driver safety programs, driver training methods or vehicle technology, an accident could still occur. And the more trucks and miles traveled, the greater the exposure.

The primary layer of a liability policy is usually only $1 million, so excess insurance may be necessary in many cases. Then, if one of your drivers has an accident and is sued, you’ve protected the business.

How does a transportation company know how much excess insurance to buy?

Cost is a big factor in how much excess insurance to carry. Right now, prices are increasing, making it difficult for smaller companies to carry higher limits of liability. But many companies don’t have a choice because shippers may require the higher coverage limits in contracts.

You want to buy enough insurance to reflect the company assets you are trying to protect. Although many businesses have structured the organization to protect assets, you should at least consider what would happen if plans failed.

Then, measure your level of risk aversion. Some people want to completely cover the company and all assets, referring to it as ‘sleep insurance.’ Others perceive the exposure of not buying excess insurance as minimal, gambling on the outcome.

How do recent court cases necessitate the need for more insurance?

Although legal rulings vary by state, when people are hurt, courts generally seek to compensate them. Increasingly when a truck is involved in an accident, trucking companies are paying, whether the driver was at fault or not. For example, if a third party under its own authority is hauling a trailer with your name on it, your company might still have to pay. The exposure could go well beyond what you believe.

What else has changed with the pricing and underwriting?

The general market hardening is having an impact on insurance prices, and there are fewer carriers offering excess coverage. Therefore, even those with good experience are seeing increases because of the decreased number of players in that market.

From an underwriting standpoint, more underwriters are utilizing the compliance, safety, accountability (CSA) scores from the new grading schedule for trucking companies. It measures things like driver out of service, driver safety and vehicle maintenance. As a result, companies must be very active at monitoring and trying to control their scores, which will very likely impact the premium you pay on the excess and primary liability coverage.

If a company has a private fleet of trucks that delivers its own goods, do these exposures still apply?

These companies face similar issues, especially on the liability side. It is more common for the parent company with a private fleet to buy umbrella coverage. However, the umbrella carrier may hesitate to take on the trucking portion, because of the exposure level. Then you would need to get an excess buffer layer to cover the trucking exposure.

The decision of how much insurance to carry is fluid, but you should have a discussion annually with your broker. Don’t be lulled into a false sense of security because a large loss hasn’t happened. Evaluate your exposure, the legal climate and the state of the market to make an informed decision.

Scott Nuelle is a vice president at ECBM. Reach him at (610) 668-7100, ext. 1387, or snuelle@ecbm.com.

Get more information about risk management, on ECBM's blog.

Insights Risk Management is brought to you by ECBM

Wednesday, 25 September 2013 09:31

SeibertKeck: Insurance marketing 101

Do you hire multiple agents for every renewal and shop for the lowest price? Do you spend countless hours each year reviewing the same business information with several agents? If you answered yes, you may be making simple insurance marketing mistakes.

“Business owners need to have a strategic plan for marketing insurance, part of the plan is a defined marketing and renewal process,” says Parker Berry II, CIC, executive vice president at SeibertKeck.

Smart Business spoke with Berry about common misperceptions regarding the insurance renewal process and how to make better use of your time and resources.

Why not purchase the policy with the lowest price?

Saving money may seem great, but it also could mean gaps in coverage. Every carrier’s policy differs in language and coverage offerings. The variables in the policy language and how the coverage is structured will greatly influence the cost of the policy. Sometimes the least costly policy has the right coverage, but not always.

Many times the least expensive policy has more constrictive language, including warranties that the insured must adhere to for coverage to respond in the event of a claim, such as having certificates of insurance for all subcontractors or that claims notifications have to be made within a specific time period for coverage to be provided. There are a number of other examples where a policy may restrict coverage. These can be removed or adjusted, for a charge, which would vastly improve the claims experience.

Always review the policy to make sure it is complete before switching based on price.

Should you shop insurance companies every year?

In the long run, businesses that shop their insurance every year looking to beat down their cost of insurance are doing themselves a disservice. When an underwriter sees the same submission to quote a business, year after year, from multiple agents, the underwriter will become less interested in quoting it. They assume that if they do write the insurance, they have a great opportunity to lose it the following year because it will be marketed again. It is beneficial to build a relationship with your agent and carrier; this allows them to get to know your business and business practices and can assist at the time of a claim or renewal.

Should you have multiple agents quote your insurance?

You should not use more than two agents to quote your insurance at any one time. When you have three or more agents involved in the quoting process, the amount of time the business owner and staff has to commit to answering underwriting questions, allowing time for loss control visits, etc., becomes overwhelming. By limiting yourself to two agencies to quote your insurance the process should be more manageable and effective. It is helpful to have a market selection between the agents, this helps streamline the quote process.

How can you find a knowledgeable agent?

Industry associations sometimes endorse an agency because of their familiarity with the industry. Sometimes the agency has a program specific to that industry as well.

Also, reach out to people you trust, such as your industry peers or another service provider like your banker, attorney, accountant or payroll provider.

Can I keep my current carrier, but change agents?

Business owners may wish to do a request for services (RFS) to determine who they want to represent their insurance needs. An RFS does not involve the marketing of your insurance. It is a process where the business owner may learn of the services and capabilities of multiple insurance agencies. Upon completion, the business owner will make their choice of agency and assign the policies to them to review, adjust, market and service.

Avoiding common misconceptions of the insurance renewal process can greatly reduce time, costs, and stress spent and created at your annual insurance renewal. Being strategic about selecting your agent and quoting your insurance can help you build a strong insurance team around your business, ensure the correct coverage is in place and provide competitive marketplace pricing.


Parker Berry II, CIC is executive vice president at SeibertKeck. Reach him at (330) 867-3140 or pberry@seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck

Tuesday, 24 September 2013 00:00

SeibertKeck: Insurance marketing 101

Do you hire multiple agents for every renewal and shop for the lowest price? Do you spend countless hours each year reviewing the same business information with several agents? If you answered yes, you may be making simple insurance marketing mistakes.

“Business owners need to have a strategic plan for marketing insurance, part of the plan is a defined marketing and renewal process,” says Ryan Clugston, a client advisor at SeibertKeck.

Smart Business spoke with Clugston about common misperceptions regarding the insurance renewal process and how to make better use of your time and resources.

Why not purchase the policy with the lowest price?

Saving money may seem great, but it also could mean gaps in coverage. Every carrier’s policy differs in language and coverage offerings. The variables in the policy language and how the coverage is structured will greatly influence the cost of the policy. Sometimes the least costly policy has the right coverage, but not always.

Many times the least expensive policy has more constrictive language, including warranties that the insured must adhere to for coverage to respond in the event of a claim, such as having certificates of insurance for all subcontractors or that claims notifications have to be made within a specific time period for coverage to be provided. There are a number of other examples where a policy may restrict coverage. These can be removed or adjusted, for a charge, which would vastly improve the claims experience.

Always review the policy to make sure it is complete before switching based on price.

Should you shop insurance companies every year?

In the long run, businesses that shop their insurance every year looking to beat down their cost of insurance are doing themselves a disservice. When an underwriter sees the same submission to quote a business, year after year, from multiple agents, the underwriter will become less interested in quoting it. They assume that if they do write the insurance, they have a great opportunity to lose it the following year because it will be marketed again. It is beneficial to build a relationship with your agent and carrier; this allows them to get to know your business and business practices and can assist at the time of a claim or renewal.

Should you have multiple agents quote your insurance?

You should not use more than two agents to quote your insurance at any one time. When you have three or more agents involved in the quoting process, the amount of time the business owner and staff has to commit to answering underwriting questions, allowing time for loss control visits, etc., becomes overwhelming. By limiting yourself to two agencies to quote your insurance the process should be more manageable and effective. It is helpful to have a market selection between the agents, this helps streamline the quote process.

How can you find a knowledgeable agent?

Industry associations sometimes endorse an agency because of their familiarity with the industry. Sometimes the agency has a program specific to that industry as well.

Also, reach out to people you trust, such as your industry peers or another service provider like your banker, attorney, accountant or payroll provider.

Can I keep my current carrier, but change agents?

Business owners may wish to do a request for services (RFS) to determine who they want to represent their insurance needs. An RFS does not involve the marketing of your insurance. It is a process where the business owner may learn of the services and capabilities of multiple insurance agencies. Upon completion, the business owner will make their choice of agency and assign the policies to them to review, adjust, market and service.

Avoiding common misconceptions of the insurance renewal process can greatly reduce time, costs, and stress spent and created at your annual insurance renewal. Being strategic about selecting your agent and quoting your insurance can help you build a strong insurance team around your business, ensure the correct coverage is in place and provide competitive marketplace pricing.

Ryan Clugston is a client advisor at SeibertKeck, Best Hoovler McTeague. Reach him at (614) 246-7475 or rclugston@seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck

Technologies such as smartphone apps offer quick access to information, which leads to better decision-making. But technological improvements are only part of a solution to any given problem.

“You don’t start by simply adopting technology. You start by seeking a solution to a problem,” says Keith Stump, vice president of sales at Blue Technologies.

For example, the cost of labor is a business’s most significant expense. The more a company can influence what its employees do, how they do it and the time it takes, the more productive and cost-effective the business becomes, he says. And often technology can help achieve that goal.

Smart Business spoke with Stump about coupling technology and processes to create efficiency.

How do process improvements and technological upgrades intertwine?

Consider the problem you’re trying to fix, and then examine all aspects of the surrounding process to understand it. You should start to see how everything fits together, and if there’s a better solution. For instance, you may have excellent hardware for copying, printing and faxing, but the software managing the information and devices is in need of an upgrade.

Attack the problem piece by piece. Determine your outcome and develop a strategy to work toward that goal. There must be milestones along the way, as well as consistent, structured reviews.

How might technology boost productivity?

It’s common for some technology to be well structured within the business. For example, a company has specific IT help desk procedures, remote monitoring and data backup. However, the print management could be unstructured. Employees may be buying printer supplies from several stores. There’s no typical process for toner delivery. Support comes in a variety of fashions.

Nationally, on average, 19 percent of service calls to internal help desks are related to printers. If your IT department is supporting printers, it means high-paid people are doing a low-paid activity, which isn’t cost-effective. With the right service provider, software can automate your print management with supply alerts and service triggers. Now, toner is automatically shipped. If there’s a problem, the machine notifies the provider to send a repairperson.

How can companies better integrate mobile devices?

Today, there’s a greater proliferation of tablets and other mobile devices in the workplace, especially for employees operating in the field or at multiple locations. However, it’s still necessary to print and scan documents. There are free, downloadable apps that enable mobile devices to automatically sync with the multi-functional scanner/printer as soon as the device is brought into the facility.

What can be done to improve document management?

There are software applications that allow users to search for business documents, similar to how information from the Web can be pulled up through a search engine.

The information is housed within an infrastructure, and a software application allows you to easily access business documents, such as contracts, packing lists, invoices, copies of checks, etc. It’s a huge advantage in terms of speed and efficiency.

Also, when scanning, it’s important that everything ends up in the right place, accessible to the right people. With auto-capture software on multi-functional devices, an employee hits a speed dial button and the machine routes the scan to the appropriate storage place. Documents are more accessible and secure with fewer errors.

What is key to successful change?

Business technology — and the processes it improves — touches many areas. All employees must embrace changes that are implemented to enhance productivity, whether in the IT infrastructure and support, hardware or software applications. Designate champions within your staff to help employees understand why change is necessary. Having C-level support and a well-designed rollout is critical.

Buying hardware, software or managed services is a part of doing business. But the best companies ensure each purchase decision starts with an effort to improve processes and create cost efficiencies.

Keith Stump is vice president of sales at Blue Technologies. Reach him at (216) 271-4800 or kstump@btohio.com.

Insights Technology is brought to you by Blue Technologies

Depending on your circumstances, year-end tax planning strategies can bring multi-year benefits.

“The end of the year is a great time to review for tax planning opportunities because most of the income items for the year are known,” says Geoffrey M. Zimmerman, CFP®, senior client advisor at Mosaic Financial Partners, Inc.

Smart Business spoke with Zimmerman about some tax planning items to consider.

How can big year/little year planning help?

If your income varies significantly from year to year, look for ways to decrease income in the big income year and increase income in the small income year.   Corporate executives with stock options have flexibility as to when they recognize this income. Employees with access to nonqualified deferred compensation (NQDC) plans have opportunities to defer some annual income.

For the charitably minded, a big income year offers opportunities to leverage the use of a donor-advised fund: A larger-than-normal charitable donation is made to the fund in the high-income year when the itemized deduction has more tax benefit, and then funds are disbursed to your preferred charities over multiple, lower-income years. Charitably minded investors over age 70 ½ with IRAs should consider making some charitable donations directly from their IRA.

Households with unusually low income in 2013 may benefit from accelerating income by exercising stock options, or via a partial conversion from an IRA to a Roth IRA. Once in a Roth IRA, the converted amount plus any growth is generally tax free, and is not subject to minimum distribution requirements. This is a powerful planning tool for managing future income tax liability and preserving wealth across generations.

What’s important to know about alternative minimum tax (AMT) planning?

Households in the early stages of AMT should explore strategies involving timing of itemized deductions, particularly AMT preference items like property tax and state income tax payments.  
Households that are deep into AMT have some significant opportunities beginning at the point where Alternative Minimum Taxable Income (AMTI) exceeds approximately $480,000 up until the point where ordinary tax exceeds AMT. In this range, the top marginal tax rate is 28 percent, not 39.6 percent. The opportunity involves increasing income — via exercise of stock options, IRA to Roth conversions, or other means — if such income would otherwise be taxed at a higher rate in the future.

As a starting point, couples with taxable income between roughly $500,000 and $1.2 million — particularly those with large amounts of preference items — should take a close look here.

What else should executives know about stock options?

Incentive stock option (ISO) strategies deserve a close look at the end of the year. If you have ISOs and are not in AMT, consider exercising ISOs up to the point of triggering AMT. If you’ve exercised ISOs during the year then you need to review your ability to meet the qualifying holding periods and the cost of paying AMT.

The AMT event is locked in on Dec. 31, so year-end planning is crucial to avoid the risk of paying AMT in the current year and ordinary tax the following year if the qualifying holding period isn’t met.

How can executives use NQDC plans?

An NQDC plan allows participants to defer a portion of their income to a future date. Salary deferrals typically may be invested and diversified, and distributions and taxation postponed until separation from service.

A tax-neutral planning strategy matches salary deferrals with stock option exercises of a like amount, moving dollars from a position with single stock risk and a distinct expiration date into a more diversified pool of funds with no explicit expiration date. NQDC plans do have risk because these plans are typically considered company assets until distribution occurs.

Geoffrey M. Zimmerman, CFP®, is a senior client advisor at Mosaic Financial Partners, Inc. 
Reach him at (415) 788-1952 or Geoff@MosaicFP.com.

Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.

With a stagnant economy and cautious investors, Simon Caplan, SIOR, a principal at CRESCO Real Estate, says he’s been hearing about deals suddenly falling apart in many industries. However, if commercial real estate buyers and sellers watch for ‘deal-killing’ issues, it’s less likely to happen to them.

“Sellers have to take care of certain issues with their buildings, and buyers may need to do a little more homework before entering into contracts,” he says.

Smart Business spoke with Caplan about how to mitigate real estate problems.

When buying commercial real estate, what if a building has structural or roof issues?

For roofs, get multiple contractor quotes because you’ll get differing opinions. Also, don’t be afraid to climb on the roof yourself and inspect it with your broker.

Structural issues aren’t as obvious. Ask the seller about the building’s history; they must disclose structural issues and prior repairs. Current or former tenants and previous owners are full of good information on the condition of the structure, roof, if there are flooding or drainage problems, etc. It’s your broker’s job to get the most information possible so you can make an educated decision.

How often do environmental issues come up? What do you do about them?

They were a big deal from around 1998 to 2005, then people learned how to handle them. Recently, they are starting to come up more.

When you buy a building today, your lender requires a Phase I environmental site assessment, which is basically research and a walk through. If that’s clean, you’re fine. Otherwise, you’ll need a Phase II report, which includes physical testing.

Sellers should clean up obvious environmental concerns, such as barrels or oil, to avoid buyer concern. If there are problems, the buyer and seller, and their brokers and the environmental company, need to figure out how to address them. Usually the seller pays for cleanup, which can be costly.

If it’s too expensive to clean up, but the buyer really wants the building and the property doesn’t require Environmental Protection Agency cleanup, consider a long-term lease. The buyer/tenant gets use of the property, while the seller puts off the cleanup.

What about boundaries and access issues?

When you buy commercial real estate, get an American Land Title Association survey, which shows just about everything, including property lines, the building, sidewalks, curbs, driveways, big trees, parking spaces, fences, encroachments, easements, etc. It also identifies all neighboring properties.

One problem may be a building that’s on a lot that’s too small. If trucks need to turn around in someone else’s parking lot, for example, you can try to secure easements from neighbors.

With encroachments and easements, be aware of the situation. Let’s say you find the building is over the property line — legally it’s a problem, but physically it’s not. Then, you’d just need special title insurance. I have revamped easements to make properties more usable to finalize a deal.

How can you deal with inadequate utilities?

It’s usually a case of not enough electrical power, no gas or a gas line that’s too small. It’s also vital to calculate your future needs, so you only address this once.

Electrical issues are problematic, and expensive to upgrade. In Cuyahoga County, even discovering the cost is complicated, and takes time and persistence. A new transformer and wire may cost $50,000 to $300,000, or more.

Gas is cheaper to upgrade and more straightforward. After you identify your gas needs, the gas company will determine where it’s best to upgrade the system and what it will take to do it.

What do you tell a seller who’s building is in rough condition?

You only get one chance to make a first impression on a buyer. Clean and fix issues that are immediate turnoffs. A well maintained building adds value. Your broker should make suggestions to improve value that will provide a positive return.

Simon Caplan, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1472 or scaplan@crescorealestate.com.

Insights Real Estate is brought to you by CRESCO

Monday, 02 September 2013 15:37

How corporate retirement plans must be managed

The world of retirement plans has transformed during the past five years, but the majority of companies sponsoring employee retirement plans have yet to catch up with the changing times.

"It is no longer acceptable to take a wait-and-see approach with your plan unless you are willing to accept the risk and the consequences of that decision, which in many regards could be very costly on a corporate and personal level," says Drew Gracan, Vice President of the Retirement Plan Advisory Group at First Commonwealth Financial Advisors.

Smart Business spoke with Gracan about what employers need to be aware of to modernize their retirement plans with the current environment.

What has changed with retirement plans in the past five years?

For the past 40 years, the Department of Labor (DOL) and the Employee Benefits Security Administration (EBSA) has largely focused on the rules governing the proper management of a retirement plan when plan fiduciaries were either fraudulent or grossly negligent in their decision-making processes. That's changed in the past five years.

The government has stepped up its efforts to ensure decisions are being made prudently and for the sole benefit of plan participants and their beneficiaries. This can be attributed to the demise of the defined benefit plan, the increased burden of savings, fees and investment decisions being borne by the individual employee, and the reality that 401(k) plans are now a significant part of an individual’s retirement savings. At the same time, there are widespread participant-based lawsuits against employers for imprudent decisions, bad publicity from the press and the government about the viability of the 401(k), and increased employee/plaintiff council scrutiny of fees.

What might plan sponsors not fully understand about their retirement plans?

The five questions employers/fiduciaries need to answer are:

  • Do you fully understand your fiduciary responsibilities to plan participants and the requirements under the Employee Retirement Income Security Act?
  • Do you fully understand the roles of your service providers, whether or not they are assuming any fiduciary liability for their actions, and if there are any conflicts of interest that may affect their recommendations?
  • Do you know all of the direct and indirect costs of your plan, and how your service providers are compensated in relation to the value of services received?
  • Do you have a formal process in place to make sure you are documenting your decisions?
  • Are you consistently measuring participant behavior and the likelihood of success for them in their pursuit for a successful retirement?

How can retirement plan risk be mitigated?

The first step in mitigating risk is really understanding your service providers' roles and how they are compensated for their services. The main question fiduciaries need to ask their service providers is whether or not they are assuming any fiduciary liability for their rendered services. This would include record keepers, administrators, financial consultants/advisers, trustees and custodians, and third-party administrators. Once you know if service providers are assuming any liability for their services, you can then determine which aspects of risk in the decision-making process you want to mitigate through the hiring of a co-fiduciary.

In addition to hiring a co-fiduciary, it is extremely important to have a formal decision-making process for the plan and thoroughly document all retirement plan decisions to ensure you have the necessary proof to defend those decisions.

What coming regulations deserve attention?

In the immediate future, there are two areas that seem to be the focus of regulators. The first is the requirement that retirement income projections be provided to participants on account statements. The second is a broadening of the definition of a fiduciary to ensure service providers that are performing fiduciary functions — advising participants, investment menu recommendations, etc. — take liability for their advice and don't exonerate themselves in the fine print of their contracts.

Drew Gracan, ChFC®, AIFA®, is a vice president, Retirement Plan Advisory Group, at First Commonwealth Financial Advisors. Reach him at (412) 690-4592 or agracan@fcbanking.com.

Insights Wealth Management  is brought to you by First Commonwealth Bank

Business research incentives come in so many forms across various jurisdictions that they apply to more companies than you think. Although the bulk are used in manufacturing, consumer products, biotech or pharmaceuticals, they are available to anyone developing or creating something, whether a product, process, technique, software, new technology or a new application of an existing technology. 

“A lot of people are aware that these incentives exist, but often they don’t make the leap that it applies to their company,” says Trisha Squires, director of tax at SS&G’s Chicago River North office.

A company could make nuts and bolts for 100 years using similar equipment, but if it has improved its cost margins by changing development, it could still qualify for certain research incentives, she says.

Smart Business spoke with Squires about how to ensure your company’s research and development (R&D) qualifies for available incentives.

What research incentives are available?

It’s typically a tax savings — either a credit or a deduction. Sometimes, it’s a refundable credit, so you don’t have to pay taxes in that jurisdiction. Certain global or state incentives are super deductions where, for example, you get 150 percent of the cost. You also might get tax abatements.

The federal research credit is essentially 6.5 cents on the dollar, depending on the method of calculation. You are rewarded for increasing the amount spent on R&D at a greater rate than you are for increasing your gross receipts. The credit expires and is reinstated so often that companies don’t pay attention.

The IRS spends a lot of time fighting these credits with an array of qualifications and substantiation arguments. Evidencing what you’re doing with R&D is extremely important. You must spell out the new functionality or improvements. This typically is not documented for any other reason. You have to look at the credit, and then align your facts and documentation to match the requirements. 

How do state and global credits work?

State and local incentives vary. They can be as easy as in South Carolina, which is 5 percent of qualified research expenses, or as complex as California, which has its own formula. Ohio’s tax credit for research and experimentation expenses was extended through 2013. The majority of businesses figure out their federal credit, then state. 

Globally, research incentives are less reactive. Canada has similar qualifications to the U.S., but it qualifies projects and dollars prior to the filing of returns. Europe is very friendly to R&D. In the Asia-Pacific region, companies often have tax abatements and incentives may not apply. 

Has anything recently changed in this arena?

In 2005, the IRS came out with its Tier 1 Program as an attempt to bring consistency in application to normally contentious areas, such as the R&D credit and transfer pricing. However, the initiative required more documentation and accounting on a project-by-project basis. Creating a nexus between the activity and the dollar spent on that activity was very onerous. 

The IRS got rid of the program at the end of 2012, but how it thinks about the credit and what’s required hasn’t changed.

What’s your advice for business owners?

Most companies and their people are very comfortable gathering the dollars that qualify. It’s gathering the qualitative documentation — the text that describes why they qualify for the credit — where companies fall short. These are details about who was working on the project, what their role was and what kinds of experimentation were involved. The tax department, engineering group or both have to put this documentation together, and many are not getting enough substantiation. 

You may need outside help with this, especially if it’s new to you. If your tax year is still open, you can go back three years to claim prior credits. When an adviser gathers data for one year versus four, it’s not that significantly different, so you could be looking at some worthwhile savings. 

The credits and other R&D incentives are vast and can provide substantial savings that affect your bottom line. It’s also likely that your competitors are taking them.

Trisha Squires is director of Tax at the Chicago office of SS&G. Reach her at (312) 863-2300 or TSquires@SSandg.com.

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During a merger and acquisition (M&A), both the buyer’s and seller’s retirement plans have ramifications on the deal and its aftermath.

“Make sure you get the right people involved in advance of any acquisition, whether you’re a buyer or seller,” says Don Dalessandro, QPA, QKA, Vice President of Finance at Tegrit Group. “It can be difficult because some people are not privy to this information, but if the CEO, CFO and others doing the deal don’t understand the plan, they should involve somebody that does before it comes back to haunt them.”

Smart Business spoke with Dalessandro about handling retirement plans in an M&A.

Why involve a plan administrator early in the M&A process?

A plan administrator can help with the financial and fiduciary due diligence, laying out the costs and liabilities associated with both retirement plans and how they match up. For example, if your company provides a 4 percent match, but the seller only gives a 1 percent match, you may need to calculate the extra cost of bringing newly acquired employees into the plan.

Retirement plans also have notification requirements. If a buyer or seller plans to merge or terminate a plan, it must follow Employee Retirement Income Security Act (ERISA) regulations. Examples are 30-day participant notifications prior to certain plan changes or a ‘blackout’ period where participant access to plan features may be curtailed. Also, if you terminate a plan, all participants must be 100 percent vested in all plan accounts, which could be an additional cost.

As a buyer, what else should be considered?

Think about whether it’s going to be a stock or asset purchase. If it’s a stock purchase and you absorb the selling company’s plan, you take on many of the risks and liabilities from previous years. In many cases, the buyer may request that the seller terminate its plan prior to the sale. This takes time and coordination, and may adversely impact participants’ retirement goals — as much of the plan participants’ money may be spent or used for other purposes.

With an asset purchase, even though you are not taking on liabilities, you still must consider the companies’ cultures and how to best integrate by comparing plan provisions, such as eligibility, matching contributions, vesting, etc. Whether you merge plans or not, you will likely change certain provisions of your plan as your company is growing and changing as a result of the acquisition.

You will want to understand who the decision-makers are, such as trustees, plan administrator, custodian, record keeper and others who may be making fiduciary decisions. Making a change to the decision-makers may require committee resolutions and amendments, which may be beneficial prior to the acquisition.

How should due diligence be conducted?

As a buyer, make sure the seller has administrated the plan according to ERISA regulations. Ask for prior Form 5500s. Companies with 100 or more plan participants are generally required to have audited financial information as part of the Form 5500 filing. Also, ensure that timely contributions have been made. There is appropriate fiduciary liability bonding, and an investment or retirement committee with meetings and written minutes. The company should be following proper procedures and policies, and all documents are in compliance and signed.

A possible deal breaker is an underfunded defined benefit plan, which promises to pay certain monthly benefits. If the liabilities are too high, it becomes difficult to terminate the plan. Additionally, it may require that you continue to fund and contribute to the plan, which can be expensive going forward.

After the sale, what’s critical to know?

In addition to following ERISA, if you maintain two separate plans by the last day of the plan year following the year in which the two companies merged, a coverage test runs on both.

If the plans have different matching structures, eligibility rules or provisions, they must meet the ‘benefits, rights and features’ test as a single entity. This ensures you don’t discriminate in favor of highly compensated employees. Many people forget, and then two years later realize they never did the testing. Like many of these decisions, it takes careful planning.

Don Dalessandro, QPA, QKA, is Vice President, Finance at Tegrit Group. Reach him at (330) 983-0527 or don.dalessandro@tegritgroup.com.

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