Jayne Gest

New lease accounting rules will require all leases to be on corporate balance sheets, even though the Financial Accounting Standards Board (FASB) has yet to circulate the final FASB Exposure Draft, which details the changes.

“Until the dust settles, it’s very difficult to make any kind of strategic decision,” says R. Timothy Evans, president of Equipment Finance at FirstMerit Bank. “Yes, it will have a negative impact on some segments of the leasing business for both lessees and lessors, but it’s not going to signal the end of the equipment leasing industry by any stretch.”

Smart Business spoke with Evans about who will be impacted and how operating leases will function when the new rules take effect.

Where does everything stand right now?

Companies currently report operating leases in the footnotes, while incorporating capital leases on the corporate balance sheet. To create more transparency, the FASB wants all leases on the balance sheet.

In the current draft, only operating leases of less than 12 months are allowed off-balance sheet. However, many organizations are lobbying to have more exceptions included, creating further delays.

The current expectation is an implementation date of late 2016 or early 2017, but that could get pushed back.

What distinguishes an operating lease?

An operating lease has to meet four main criteria, as defined by FASB:

  • Rentals and all guaranteed rents discounted back at the customer’s borrowing rate cannot exceed 90 percent of the equipment cost. 
  • Term cannot exceed 75 percent of the economic life of the lease property.
  • Cannot transfer ownership of the property at the end of the lease term.
  • Cannot contain an option to purchase the property at a bargain price.

If your lease violates any of the criteria, you must characterize it as a capital lease.

Why do companies favor operating leases?

An operating lease offers an extremely low ‘cost of use’ for a company that is capital intensive. As an example, if a company has net operating losses, it cannot utilize depreciation. With a true lease structured as an ‘operating lease,’ the lessor takes the depreciation and prices a residual into the deal, giving the lessee a lower rate.

Operating leases require no down payment and give the flexibility to return the equipment at the end of the term. Companies can upgrade to state-of-the-art equipment without large down payments. 

A point to clarify is that for accounting purposes, a lease is either operating or capital. For tax purposes, it’s either true or capital. There are components of an operating lease that are also components of a true lease — the two aren’t synonymous.  Operating leases are off-balance sheet, but not all true leases are operating leases.

How are companies preparing?

Right now, there’s not enough clarity to develop a strategy. A company with many leases must search through every contract, identify the operating leases and then reconstruct the rent stream in order to report it on-balance sheet. Many may decide to outsource this to accounting firms. 

What’s the anticipated impact?

Companies that just lease to have off-balance sheet treatment will see a major impact. But this change does nothing to modify a lessor’s ability to take depreciation, price residuals and offer creative structuring for the standard equipment financing.

Eight out of 10 companies have some kind of equipment lease, but that doesn’t mean all are operating leases. For most lessors, the operating lease piece of their business generally is less than 20 percent. Some lessors specialize in operating leases.

Almost every bank monitors and restricts the amount of leverage on a balance sheet through covenants. With the accounting change, some businesses’ balance sheets will have too much debt, so covenants and lending agreements will need to be restructured. However, many lenders already look at the operating leases in the footnotes, so there could be other ‘work arounds’ to deal with the new requirements. It’s expected there will be at least 12 months to complete the transition to the new requirements.

R. Timothy Evans is president of Equipment Finance at FirstMerit Bank. Reach him at (330) 384-7429 or tim.evans@firstmerit.com.

All opinions expressed herein are those of the authors/sources and do not necessarily reflect the views of FirstMerit Corporation. FirstMerit is not offering tax or accounting advice. We recommend you consult with your tax or accounting adviser.

Insights Banking & Finance is brought to you by FirstMerit Bank

 

Starting next year, the Affordable Care Act requires individual and small group insurance plans to cover 10 “essential” health benefits. But, these minimum essential benefits go beyond the coverage that many individuals and small businesses purchase today, so plan costs may increase to meet the coverage requirements.

“Regardless of your funding type, whether you’re self-funded or not, your plan is required to provide the minimum essential benefits,” says Mark Haegele, director, sales and account management at HealthLink. “But something that wasn’t really contemplated is the difference by states based on price points from different providers.”

Smart Business spoke with Haegele about the minimum essential benefits and their impact on individuals and small employers.

What are minimum essential benefits?

Starting Jan. 1, 2014, all health insurance policies sold to individuals and small employers must cover a broad range of benefits, setting a standard for all plans and allowing for easy comparison. The 10 categories of coverage are:

  • Ambulatory services. 
  • Emergency services.
  • Hospitalization. 
  • Maternity/newborn care. 
  • Mental health/substance abuse. 
  • Prescription drugs. 
  • Rehabilitative and habilitative services and devices. 
  • Laboratory services.
  • Preventive and wellness/chronic disease management.
  • Pediatric services, including oral and vision.

Plans offered on the insurance marketplaces also must cover these benefits. 

In addition, plans will be separated into tiers, which helps consumers compare plans. Known as the metal levels, there are bronze, silver, gold and platinum plans. Essential health benefit plans must cover at least 60 percent of costs. The only exception is catastrophic plans that target people younger than 30 or otherwise unable to obtain affordable coverage.

How is this different from minimum essential coverage?

Although they sound the same, minimum essential coverage (MEC) only applies to large employers, those with more than 50 full-time equivalent employees. MEC relates to the employer mandate, ‘play or pay,’ that was pushed back to 2015, where employers must at least provide preventive and wellness care or face fines.

Small employers aren’t required to offer insurance. But if they do, the plans they buy must cover the 10 essential categories. 

Large employer group plans do not have to cover the essential health benefits, but there cannot be annual or lifetime dollar limits on the benefits within this set.

How might minimum essential benefits increase insurance premiums?

Plans may now have to cover new areas, such as pediatric vision care coverage as part of the medical benefit for children up to age 19, which could increase premium costs. Like other essential health benefits, there are no annual or lifetime dollar limits allowed. 

According to the U.S. Department of Health and Human Services, many individuals purchasing coverage don’t currently have coverage for maternity services (62 percent), substance abuse services (34 percent), mental health services (18 percent) and prescription drugs (9 percent).

However, the out-of-pocket costs paid by individuals will likely be lower, according to the American Academy of Actuaries.

How might costs vary by state?

If you live in a state with a lightly regulated insurance industry, the minimum essential benefit plans’ more comprehensive coverage will have a greater impact. That’s because insurers previously sold ‘bare bones’ plans that excluded the sick, keeping costs down. Independent estimates of premium impact in the individual market, according to America’s Health Insurance Plans, have large increases in Maine (33 percent), Indiana (20 percent) and Ohio (20 percent). Other states — Rhode Island (0.13 percent), Colorado (2.2 percent) and Wisconsin (6 percent) — will see less of an impact.

To further complicate matters, states can specify benefits within each of the essential categories, at least for 2014 and 2015.

Mark Haegele is director of sales and account management at HealthLink. Reach him at (314) 753-2100 or mark.haegele@healthlink.com.

Insights Health Care is brought to you by HealthLink

 

 

 

In June, a New York federal court decided a case — known as the “Black Swan” case — that should make employers think hard about how to structure internship programs.
The court found that a major movie studio should have paid its interns, and several other companies using unpaid interns are now facing similar lawsuits.

“We’re going to see a lot of people reconsidering their internship programs in light of these cases,” says Gabrielle Sellei, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “Those who decide to stick with it will think about how to structure an internship program to avoid risk.”

Smart Business spoke with Sellei about how employers should structure upaid internship programs.

What are the guidelines for unpaid internships?

There is no definition of ‘intern’ in the Fair Labor Standards Act (FLSA), but there is a long-standing exception for ‘trainees’ to the general rule that workers must be paid. More recently, the Department of Labor issued a fact sheet listing six criteria to help employers determine whether an intern can be considered a trainee under the FLSA:

  1. The internship, even though it  includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment.

  2. The experience must be for the benefit of the intern, not the company.

  3. The intern must not displace regular employees, but must work under the close supervision of the existing staff.

  4. The employer providing training derives no immediate advantage from the intern’s activities, and on occasion its operations may actually be impeded.

  5. The intern is not necessarily entitled to a job at the conclusion of the internship.

  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

However, even compliance with all of these factors is not an absolute safe harbor; employers should consult an attorney familiar with this area of the law to review their internship programs.

What’s your advice for employers deciding whether to pay interns?

Employers contemplating an unpaid internship program should do a quick gut check, asking: ‘Who will benefit?’ If the honest answer is ‘the company,’ you’ll want to think again. Alternatively, you can always pay your interns — just be aware of minimum wage and child labor laws.

If you decide to use unpaid interns, what can you do to protect your business?

For starters, consider the selection process. It should not look like a hiring process, but a component of somebody’s education that just happens to be at a company. In other words, specific skills are irrelevant, a demonstrable interest in the industry or a compatible educational path are not.

Then, put your internship program in writing, emphasizing what the interns will learn and how tasks will be geared to learning. The program should have a purely educational component, such as seminars, instructive lunches with senior staff or speakers, or maybe even a retreat. If possible, one-on-one mentoring with senior managers would be terrific programming.

Operationally, make sure that interns are not providing services that employees would normally provide, and that you are not using interns to reduce your (paid) headcount; this would constitute a clear benefit to the employer.

Finally, a written internship agreement, signed by the intern, should state that the internship is unpaid and that there is no guarantee of a job at its conclusion.  

If the guidelines are so strict, why bother having unpaid interns?

In this economy, internships are popular with employers and interns. Students who anticipate entering the workforce want as much experience as they can get — paid or not. And even though unpaid internships don’t directly benefit the employer, they can be valuable as community relations tools and to expose a new generation to an industry. An internship program that leads to a lawsuit is going to have the opposite effect, so it’s important to get it right.

Gabrielle Sellei is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach her at (215) 887-0200 or gsellei@sogtlaw.com.

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

Business succession is the one thing many companies fail to address for fear of relinquishing control, a lack of time, the feeling that successors aren’t ready or other reasons. But, it’s never too early to start succession planning. 

“Statistically, roughly only 30 percent of family-owned businesses are effectively transferred to the second generation and just 10 percent make it to the third generation,” says Julianne Cruz, managing director of Advisory Services at CB&T Wealth Management. “There are myriad reasons for this, but one recurring issue is a lack of effective succession planning.”

Smart Business spoke with Cruz about how to effectively position your chosen successors for success.

How should business owners get started?

You need to consider the three ‘T’s of successful transition:

  • Transferring management.
  • Transferring ownership.
  • Tax consequences.

In all cases, having a plan that is strategic and well executed is key, but that takes time. The most successful transition plans take place over a number of years, as successors develop the skill sets required to run the business.

How is management transferred? 

It’s important to select an independent adviser who is highly experienced with planning issues to arrive at the best plan for you and the next generation. 

Some areas to consider are: If more than one child is involved in the business, how will contentious decisions be made once you exit the business? If you want certain key, loyal employees to be cared for, as they are likely necessary for a smooth transition, what assurances do you have this will happen? What happens if unexpected health issues force the transition early? A well-developed plan ensures the business will thrive without interruptions, helps the next generation grow into their role at a reasonable pace and promotes future harmony among family members. 

A short-term plan ensures there’s enough liquidity and insurance to hire necessary experts and avoid a fire sale. A mid-term plan must prepare developing successors or key employees to be in decision-making roles initially. It also would have a timeline for family members to step into their new roles with certain targets. The long-term plan is ultimately what you want to happen — the best of all circumstances.

After discussing your plan with advisers and successors, involve your key employees, who may be more satisfied knowing the company’s future.

What are some factors to consider with transferring ownership?

Once the management transition plan is established, plans for transferring ownership can occur. Usually this begins with your retirement plans. How much income will be needed and what’s the timeline? If you need cash from the business, are you willing to bear the ‘investment risk’ of the business as a source of income once you’re not involved? 

Then, consider estate-planning issues. Are all your children involved in the business? If not, do you desire to ensure each child will ultimately receive an equal estate share?

How do tax consequences factor in?

Taxes are the tertiary consideration once decisions have been made regarding the general retirement and estate plans. As is the case with investment portfolios, taxes should never drive the decision-making process. Tax-reduction strategies should only be considered after other issues are decided.

Business owners in general, and particularly family-business owners, should begin now and get an experienced, independent adviser to guide them through the process. The earlier you plan, the better the results. Sound, experienced advice will make the process that much easier, and maybe even bring family members closer. λ

Julianne Cruz is managing director of Advisory Services at CB&T Wealth Management. Reach her at (310) 258-9301 or julianne.cruz@contangoadvisors.com.

Insights Banking & Finance is brought to you by California Bank & Trust

Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), which operates as CB&T Wealth Management in California. Contango is a registered investment adviser, a nonbank affiliate of California Bank & Trust and a nonbank subsidiary of Zions Bancorporation. Some representatives of CB&T Wealth Management are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. #CCA0813-0090

 

When your company sells a luxury product or service, it changes how you should approach the sale. Selling these items is less about price and more about the experience surrounding a luxury purchase. 

“Customers at the highest luxury levels are more interested in having fun and enjoying spending their money while acquiring something they want, something that serves their own passion,” says Llewyn Jobe, Sales Manager at Bentley Beverly Hills. “We don’t sell anything anyone needs — basic transportation can be purchased anywhere. It’s about an experience.”

Smart Business spoke with Jobe about lessons he’s learned selling Bentley motor cars that apply to other luxury products and brands.

What are some challenges that come with selling luxury items?

It’s a challenge to make everything an indulgent, luxurious experience. Customers want to connect and feel at ease when they come in to spend a substantial amount of money, so the transaction needs to go seamlessly without too much anxiety over pricing and negotiating. 

How can you produce good customer service, which is so central to success?

Without good customer service, there are no referrals or repeat business. The people selling the product drive the customer service experience. The sales staff needs to show passion and be informative when selling to clients; it should be fun and exciting for everyone involved. Stay in touch with your customers, or potential customers, and build a relationship by following up and staying current. Maintaining good customer follow-up comes from the productive use of a customer management database. Work through your database and keep clients and prospective clients up-to-date about upcoming model premieres or special leasing promotions. That’s the best way to stay in touch — you’re not bothering people but informing them about something they’ve already expressed interest in. Additionally, giving appropriately branded gifts is a good marketing tactic and shows appreciation to the people spending their time with you, whether they buy or not.

What are some best practices?

Use marketing that’s clever and tasteful to both new and existing customers. It’s easy to reach out to previous customers, but how do you expand beyond your existing client base? The initial customer contact, whether through marketing or customer service, is critical. For us, part of our success derives from our location in Beverly Hills, where luxury is part of the community. However, you cannot take success for granted; you have to ask yourself, ‘How can we become better to surpass our own performance?’

Customers want to feel welcome in a comfortable setting. It’s an art to take people through the numbers of any particular transaction and get them to understand, without being too pushy. Then, it becomes more about sharing the experience and building the relationship.

If a customer asks, ‘Why should I pay so much money for X?’ What do you say?

Customers will say, ‘I can get this same car with similar miles for less.’ Well, yes, that’s commerce. But, here you get a relationship with your purchase that enhances your ownership experience. You may be able to buy this product for less somewhere else, but you’re not getting us with it.

And, that’s only comparing apples to apples. If you’re trying to bring in a new client from a lesser luxury brand, you can tell them, ‘You’re spending this kind of money because you want to be distinguished; you’re looking for an experience that’s above all experiences you’ve ever had.’

The relationship becomes more important the higher a luxury item is priced. People expect it. 

How can businesses overcome post-recession hesitancy to spend money?

In 2009 and 2010, people were worried what others thought. There was caution about spending money and about what that stood for while so many had been hit by the recession. However, we’re pushing past that.

When it does come up, it’s important to let the customer know that it’s OK to spend the money, take action and enjoy their life. There’s nothing bad about it — that’s what luxury is all about.

Llewyn Jobe is sales manager at Bentley Beverly Hills, O’Gara Coach Company. Reach him at (310) 967-7124 or ljobe@ogaracoach.com.

Insights Luxury Autos is brought to you by O’Gara Coach Company

 

 

 

 

 

Open enrollment is when employees review their current benefit elections and compare them to all the options offered by their employer. It can include medical, dental, vision, and ancillary products like supplemental life, long-term care and disability.

“Some employers are unenthusiastic about open enrollment since employees are pulled out for mandatory meetings, but it alleviates a lot of issues during the year for HR,” says Marifel Divinsky, an account executive in the Employee Benefits department at Momentous Insurance Brokerage, Inc. “It’s a time for both the employer and employee to work together.”

Smart Business spoke with Divinsky about best practices for open enrollment that will minimize administration headaches.

Is it helpful to have open enrollment early?

Yes. This strategy usually begins with reviewing the entire benefits plan design and premiums 90 to 120 days prior to the renewal date. The employer works with its broker to review current data from its incumbent carrier and competitive quotes from additional carriers. Carriers are trying to get renewal notices out earlier because the Affordable Care Act requires employers to give notice with a Summary of Benefits Coverage at least 60 days in advance of changes.

The employer should have open enrollment during the month prior to the renewal date. Although not mandatory, open enrollment re-educates employees about benefits and any rate changes, even if the plan structure stays the same. Also, employers need time to prepare communication pieces to notify their active eligible employees, employees who are on leave and COBRA/Cal COBRA participants about upcoming changes. Once open enrollment is complete, employee changes are communicated to the carriers, and fresh ID cards can be generated as needed.

What can employees change during open enrollment?

Employees can make changes to their current benefits elections — add or remove eligible dependents and change plans, from HMO to PPO, or vice versa. They aren’t allowed to make any changes during the policy year, unless they experience one of the following qualifying events:

  • A change in legal marital status, including marriage, death of a spouse, divorce, legal separation and annulment.
  • A change in the number of dependents, including birth, adoption, death and placement for adoption.
  • A change in employment status of the employee, or the employee’s or retiree’s spouse or dependent, including termination or commencement of employment.
  • A dependent ceasing to satisfy eligibility requirements for coverage due to attainment of age, student status or marital status.

Employees are responsible to notify employers of a qualifying event within 30 days of the event. Otherwise, they might need to wait until the next open enrollment period.

If employees understand their benefits, how does that help the company?

When employees understand their benefits, they make good decisions. This helps prevent administrative problems and manage how employees access benefits and deal with billing issues. Employee satisfaction and better use of the plan can improve productivity in the workforce. In addition, benefits education lends itself to an appreciation of the benefits offered by the employer as part of the overall compensation. Ultimately, good benefits help employers retain and attract talent.

How can employers encourage employees to participate in open enrollment? 

Use education and communication, such as posters, weekly emails, or online tools and resources from the carrier. They also can work with their insurance carriers and broker to schedule a mandatory enrollment meeting to help employees understand what benefits are offered and how they work.

However, some employees don’t like discussing their benefits in a group. They need to meet with the broker one-on-one or call directly. Sometimes brokers host quarterly question-and-answer sessions, which may alleviate claim issues and save time. Brokers have great relationships with carriers and can help expedite solutions.

Marifel Divinsky is an account Executive in Employee Benefits at Momentous Insurance Brokerage, Inc. Reach her at (818) 933-2738 or mdivinsky@mmibi.com.

Insights Business Insurance is brought to you by Momentous Insurance Brokerage, Inc.

 

 

 

Franchise owners have some particular obstacles to overcome when thinking about succession. Each one has a manufacturer or headquarters that has conditions for ownership and succession, so it’s critical to plan ahead.

“You can’t forget about dealing with developing bench strength, even when facing an uncertain future,” says Ricci M. Victorio, CSP, CPCC, ACC, managing partner at Mosaic Family Business Center. “It’s your bench strength — the pipeline of multigenerational talent — that drives you into success, even if businesses performance is transforming.”

Smart Business spoke with Victorio, who has helped automobile dealerships strategically plan for 15 years, about how franchise owners can fit the puzzle pieces together to pass their business on to the next generation.

What situation do franchise businesses face today?

Many franchises, such as auto dealers, have gone through massive restructuring to survive. But businesses had to watch for the tipping point — cutting the fat and not the muscle.

As we start to come through the recession, these franchises are carefully picking up the pieces and looking to hire the right people. They also are waking up to the fact that time is passing — no matter what the economy is doing — and strategic planning, team training and succession planning cannot be ignored long-term.

This is important for any business, whether a franchise or not, because even in tough times it’s necessary to keep a strategic eye on how you’re going to navigate the future.

How is franchise succession planning unique?

Any franchise that sells a product has to answer to headquarters or its manufacturer. It’s not like a typical family business, because if you’re holding a franchise there is someone above you dictating what the rules are to own that franchise. And if you don’t have business success or an approved successor, they can take it all away. You can’t even sell your franchise without approval.

In addition, you shouldn’t just focus on the development of the next generation. It’s not just talent. If you don’t have enough market share, if your customer service doesn’t meet standards or even if your building isn’t up to specifications, that may stop you from passing the mantle. Not having these in order upon the death or inability of a dealer to continue running his or her store would give the manufacturer a wedge.

How can franchise owners meet these challenges?

You have to present your succession in a pretty package with a bow on it. The strategic plan, the bench strength of your managers, your service, your sales, customers’ reaction to your culture and environment, and the education of your chosen successor all get scored.

Various manufacturers also have required successor development programs. For example, the National Automobile Dealers Association has an 11-month dealer’s academy where developing successors spend six weeks in training sessions and then have homework back at their dealerships for six weeks before returning for another week at the academy.

It can take five to 10 years to get everything in order. You have to think far out, so you may need to start working with an adviser as soon as your children come into the business. Remember, it’s not about being old and thinking about retiring, it’s about having a plan so you don’t lose the business.

Additionally, in a succession plan, you need a short-term contingency plan — what if you don’t come home tomorrow — as well as a long-term plan, such as your kids growing into the business. In the short-term, maybe ensure your general manager has been approved and certified by the manufacturer as a dealer-operator to protect your long-term legacy for the next generation. However, this may come at a price; if someone has qualified to be a dealer, they will want some ownership. An adviser can help you devise creative ways of bridging this succession gap.

Ricci M. Victorio, CSP, CPCC, ACC, is a managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or ricci@mosaicfbc.com.

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

If your company has 500 employees or less, you want to be in a group rating program to get better workers’ compensation rates. However, some court rulings have decreased the amount of group credits and increased rates for group rated employers.

“It’s still the best thing going for the small to medium-size employer,” says Richard B. Hite, CEO at SeibertKeck Insurance Agency. “The group is a fantastic idea, and an employer can receive much lower workers’ compensation premiums.”

Smart Business spoke with Hite about the advantages of a group rating program and how the landscape has changed.

How does group rating save money?

The Ohio Bureau of Workers’ Compensation (BWC) allows employers with better than average claim histories to join together through a sponsoring organization for the purpose of being rated as a large group. As a standalone business with no losses, you might only develop an experience modification of a 5 to 7 percent credit off your rates. However, when combined with thousands of other companies in a group, your company can earn up to a 53 percent credit to your base rates. The credits can vary for individual businesses, depending on your type of business, whom you are grouped with, final loss figures, total enrollment and reported payroll.

What are other benefits of enrolling?

A third-party administrator (TPA) will manage your claims cost-effectively and aggressively, as well as representing you at Industrial Commission hearings for contested claims. You also have real-time access to claims information rather than trying to obtain it directly from the BWC.
The TPA physically reviews your rates and classifications assigned to your company. Many times the company classifications are wrong because of a change in operations or they were incorrect from the beginning. All of this can result in higher premiums.

The TPA also provides training, education, bulletins, seminars, newsletters, etc. It will help you receive various other credits for safety or a drug-free environment, too.

What happens if you have a large loss?

With a group rating, if you have a shock loss, a death claim or a large medical claim, you can be asked to leave at the end of the policy year. Typically that precludes you from any group for two or three years, as all groups look at your current year and the previous three years of claim history. After you’ve been relatively loss free for two or three years, many groups allow you to re-enroll.

The problem is you might have been enjoying 45 percent credit, but now have a 35 percent debit — an 80-percentage point rate swing. For a lot of small businesses, that creates a financial strain since premiums can double the next year. Extra dollars in premiums could result in a workforce reduction.

If asked to leave, you still can sign a contract with the TPA to help you limit and possibly prevent other losses with the goal of returning to a group plan.

How are recent court rulings impacting workers’ compensation?

Some recent rulings in favor of plaintiffs in Cuyahoga County have hurt the rating structure of group plans. The argument was that if Company A has a bad claims history and pays a $20 rate per hundred, but Company B is in a group rating paying $5 per hundred, that creates an unfair advantage in a public bid situation because of the lower workers’ compensation costs.

As a result, the BWC decreased the maximum group credit to 53 percent and raised classification rates as much as 21 percentage points versus nongroup rates. This action seeks to equalize the playing field, in the court’s opinion.

In addition, on May 3 the governor authorized the release of $1 billion of ‘overpaid premiums’ to private employers and public taxing groups for the 2011 rating year as a result of another court ruling. Employers are receiving rebate checks for 56 percent of premiums paid in 2011.

With the increase in rates for groups and the decrease in the credits, many companies have to decide whether to stay in the group. While it may no longer be as cost-effective, you get extra services — aggressive claims management, hearing representation, rate analysis, etc. — and service means everything to your experience and rates.

Richard B. Hite is CEO of SeibertKeck Insurance Agency. Reach him at (330) 865-6573 or rhite@seibertkeck.com.

To keep up with the latest insurance news and how your company could be impacted, sign up to receive our newsletter at www.seibertkeck.com.

Insights Business Insurance is brought to you by SeibertKeck

If your company has 500 employees or less, you want to be in a group rating program to get better workers’ compensation rates. Some court rulings have decreased the amount of group credits and increased rates for group rated employers.

“It’s still the best thing going for the small to medium-size employer,” says Cliff Baseler, vice president at Best Hoovler McTeague Insurance Services Inc., a SeibertKeck company. “The group is a fantastic idea, and an employer can receive much lower workers’ compensation premiums.”

Smart Business spoke with Baseler about the advantages of a group rating program and how the landscape has changed.

How does group rating save money?

The Ohio Bureau of Workers’ Compensation (BWC) allows employers with better than average claim histories to join together through a sponsoring organization for the purpose of being rated as a large group. As a standalone business with no losses, you might only develop an experience modification of a 5 to 7 percent credit off your rates. However, when combined with thousands of other companies in a group, your company can earn up to a 53 percent credit to your base rates. The credits can vary for individual businesses, depending on your type of business, whom you are grouped with, final loss figures, total enrollment and reported payroll.

What are other benefits of enrolling?

A third-party administrator (TPA) will manage your claims cost-effectively and aggressively, as well as representing you at Industrial Commission hearings for contested claims. You also have real-time access to claims information rather than trying to obtain it directly from the BWC.
The TPA physically reviews your rates and classifications assigned to your company. Many times the company classifications are wrong because of a change in operations or they were incorrect from the beginning. All of this can result in higher premiums.

The TPA also provides training, education, bulletins, seminars, newsletters, etc. It will help you receive various other credits for safety or a drug-free environment too.

What happens if you have a large loss?

With a group rating, if you have a shock loss, a death claim or a large medical claim, you can be asked to leave at the end of the policy year. Typically that precludes you from any group for two or three years, as all groups look at your current year and the previous three years of claim history. After you’ve been relatively loss free for two or three years, many groups allow you to re-enroll.

The problem is you might have been enjoying 45 percent credit, but now have a 35 percent debit — an 80-percentage point rate swing. For a lot of small businesses, that creates a financial strain since premiums can double the next year. Extra dollars in premiums could result in a workforce reduction.

If asked to leave, you still can sign a contract with the TPA to help you limit and possibly prevent other losses with the goal of returning to a group plan.

How are recent court rulings impacting workers’ compensation?

Some recent rulings in favor of plaintiffs in Cuyahoga County have hurt the rating structure of group plans. The argument was that if Company A has a bad claims history and pays a $20 rate per hundred, but Company B is in a group rating paying $5 per hundred, that creates an unfair advantage in a public bid situation.

As a result, the BWC decreased the maximum group credit to 53 percent and raised classification rates as much as 21 percentage points versus nongroup rates. This action seeks to equalize the playing field, in the court’s opinion.

Also, the governor authorized the release of $1 billion of ‘overpaid premiums’ to private employers and public taxing groups for the 2011 rating year as a result of another court ruling. Employers are receiving rebate checks for 56 percent of premiums paid.

With the increase in rates for groups and the decrease in the credits, many companies have to decide whether to stay in the group. While it may no longer be as cost-effective, you get extra services — aggressive claims management, hearing representation, rate analysis, etc. — and service means everything to your experience and rates.

Cliff Baseler is vice president at Best Hoovler McTeague Insurance Services Inc., a SeibertKeck company. Reach him at (614) 246-7475 or cbaseler@bhmins.com.

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Looking to save money and focus on core competencies, business owners are turning to cloud solutions — where someone else hosts their systems and manages their infrastructure. However, by using a third party, companies can lose the transparency they previously had with respect to the security, operations and controls around the technology.

“It’s put a premium on doing due diligence on the provider upfront to set a baseline understanding of what the cloud providers are doing — and ongoing how they deliver their services,” says Christopher Kradjan, a partner at Moss Adams LLP.

Smart Business spoke with Kradjan about cloud services risks, as well as cloud provider audits that are setting industry benchmarks.

What are the concerns with receiving services from a cloud provider?

When businesses self-hosted, they could observe and directly control the systems to understand if the systems were performing as expected, making changes as necessary. Now, they lose a lot of that transparency working with a third party.

With the ongoing cloud-based operations, companies want to see inside the operations to track performance, such as the system’s security and availability, its functional processing integrity, and the practices around maintaining privacy and confidentiality of the data.

What do business owners need to consider before selecting a cloud provider?

First, look at your current methods of using technology to understand the costs, staffing and implications of how you are delivering services now. Then identify the new system’s requirements and how you want it delivered.

Properly screen vendors through the request for proposal and procurement process, including taking time for demonstrations. Once you’ve narrowed it down to finalists, do reference check references to ensure the systems will work as expected, both from a technical standpoint and being able to achieve your expected ROI.

There are large, well-known cloud providers, but more are small businesses in their startup phase or still building out market share. They lack sophisticated infrastructure, raising questions about their long-term financial viability. Also, if they are successful, their ownership could sell the business to another provider.

You want a reliable vendor with staying power, but in order to have a continuity of operations, contractually you need to know who owns the data and have exit strategies if the vendor sells or goes out of business.

How should you monitor cloud services?

You need a good vendor management program that looks at the risks associated with each vendor and benchmarks the complexity of the solutions to determine the level of monitoring required. The sophistication of the data, level of importance, what it’s automating and its criticality to the business drive backward what is implemented.

If a business takes the time to do this properly, it winds up stratifying cloud providers into very low risk all the way up to moderate and high-level impact to create monitoring systems accordingly. High-risk areas may require vetting with a due diligence questionnaire or site visit, as well as regular reports from the cloud provider.

How can external audits help in this space?

Companies often ask cloud providers for insight into their business, and providers are continually filling out questionnaires. Therefore, many cloud providers are using SOC 2 (Service Organization Controls) reports, which are based on standardized attestation standards that measure how well the cloud provider is providing its services. The examination can attest to the security, availability, processing integrity, confidentiality, and/or privacy of the system.

In addition, the Cloud Security Alliance (CSA), a leading organization that evaluates cloud providers, has developed the Cloud Control Matrix (CCM) as part of its best practices for examining cloud providers.

The SOC 2 report can be mapped against the CCM for double value —the value of the independent SOC 2 attestation report, coupled with the depth and questions from the CCM — to create a rigorous benchmark.

With the SOC 2 examination and/or CCM, cloud providers can give answers to customers, while differentiating themselves in the market. These examinations help business owners with their upfront due diligence and ongoing monitoring. It can even be used as a gating function with the cloud providers to assess their quality and dedication to strong business practices.

Christopher Kradjan is a partner at Moss Adams LLP. Reach him at (206) 302-6511 or chris.kradjan@mossadams.com.

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