Saving money on insurance sounds good to any business, particularly one that may be struggling. But going with a policy that includes a self-insurance retention (SIR) can be risky, especially if you become involved in a lawsuit.
“Companies that are struggling to stay in business and accept a larger SIR than they probably should can be put in a very bad position because they may be without insurance protection if they are not able to satisfy the SIR,” says Michael T. Ohira, a partner at Ropers Majeski Kohn & Bentley PC.
Smart Business spoke with Ohira, whose practice includes advising insurers in construction defect lawsuits, about how SIRs work and when they make sense for businesses.
What are the key differences between SIRs and deductibles?
The differences are pretty profound. SIRs and deductibles are both forms of risk assumption by the policyholder and are traditionally for a set amount, generally referred to as the retained limit. The policyholder basically agrees to be responsible for paying losses or claims within the retained limit, although there are differences regarding when the insurance company’s duties begin.
With an SIR, the insurance company essentially has no duties unless and until the retained limit is paid. Many times SIR endorsements provide that only the insured can satisfy the SIR, and the payment obligation is not excused by the insured’s insolvency or bankruptcy. So an insured is at its peril — if it cannot satisfy the condition of paying the SIR, it is not entitled to the benefits provided under the insurance policy.
SIRs are common in construction. Many insurers have left the market because of the proliferation and cost of defending construction defect lawsuits. Subcontractors can be in a difficult situation because general contractors require their subcontractors to have liability insurance and to add the general contractors as additional insureds under the subcontractor’s liability policy.
Typically, the reasons to have an SIR are about cost and the availability of insurance. A large corporation that is financially strong can reduce its insurance costs by electing to purchase a policy with an SIR, which commands a lower premium.
What are the benefits of deductibles over SIRs?
The biggest benefit of a deductible is that, unlike an SIR, the deductible does not need to be paid upfront and is not a condition to receiving insurance benefits. That’s important when you have a liability policy, get sued and need a lawyer. With a deductible, the insurance company will provide a lawyer and provide a defense immediately, as opposed to requiring the insured to pay its own attorneys’ fees until the amount of the retained limit is satisfied.
Where do companies make mistakes in deciding which route to go?
Some companies will assume an imprudently large SIR. If the business is in decline and gets hit with a liability claim, then paying for a defense lawyer on top of normal operating expenses can push the company into a precarious financial condition. I’ve seen retained limits as high as $250,000. Businesses that assume a large SIR, that they cannot later pay, can find themselves without insurance coverage.
That can be an issue for general contractors. If a subcontractor has an SIR that allows only the subcontractor to pay the SIR, then the general contractor would be without coverage as an additional insured under that subcontractor’s policy, if the subcontractor fails or is unable to pay the SIR. This is because the insurance company’s obligations are not triggered until the subcontractor pays. So, general contractors and developers need to carefully review the insurance policies of the subcontractors they hire to ensure that the subcontractor either doesn’t have an SIR or that the policy allows the developer or general contractor to pay the retention if the subcontractor is unable.
When deciding whether to have an SIR, take a hard look at your financial situation. Do you have the financial wherewithal to comfortably absorb that initial share of risk? It’s a business decision — weigh the cost savings against the benefit of being able to get insurance benefits more immediately, and from dollar one. ●
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Related-party transactions have played a significant role in accounting failures and frauds. In a study of Securities and Exchange Commission fraud allegations by the Committee of Sponsoring Organizations of the Treadway Commission, 18 percent of companies alleged to have committed fraud were accused of using related-party transactions to hide misstatements in financial reports.
“Yet the rules on accounting for these transactions have remained stagnant, and very little accounting guidance exists to assist preparers of financial statements,” says Wayne Williams, a partner at Crowe Horwath LLP.
Smart Business spoke with Williams about how related-party transactions can pose reporting problems.
What transactions are prone to errors?
Three that create the most confusion are:
1. Owner’s debt converted to equity. In these cases, there is little accounting guidance. When a business owes debt to an owner and the owner converts it into equity, the fair value of the equity often doesn’t equal the remaining balance of the debt. That means a gain or loss, or some other type of transaction, needs to be recognized for the difference. For example, if a company exchanges $50 million in debt outstanding to its owner for $80 million in equity, the business could make a credit to equity for $50 million or recognize a loss representing the fact that $80 million of equity was exchanged for only $50 million of debt.
The concept of recognizing expenses from certain transactions with related parties is widespread within U.S. generally accepted accounting principles (GAAP). However, what if the entity exchanged $50 million in debt for $40 million of equity? Unlike expenses, gains from capital-type transactions have little support within GAAP. In this scenario, the business should derecognize the carrying value of its debt, which would include elements such as a discount or premium on debt, with the offsetting credit to equity.
2. Related-party forgiveness of debt. An entity shouldn’t recognize a gain when forgiving related-party debt because assumption of debt ordinarily doesn’t result in a loss. When a business borrows from a related party, the business gets cash or other assets. To later recognize a gain from these assets provided by a related party would create an unusual result where invested funds could be treated as income, which appears to contradict existing GAAP on capital contributions when the transaction is considered as a whole. The holder of related-party debt is in effect changing the nature of its investment in the entity from debt to equity, so no gain should be recognized in net income.
3. Related-party forgiveness of other liabilities. An owner or other related party might provide goods or services to an entity and subsequently forgive the entity’s obligation to pay. For example, an owner/manager could have deferred compensation that has been accrued as an expense. If forgiven, should the business recognize a gain, or is forgiveness of the liability a capital transaction? GAAP does not prohibit either.
When deciding the appropriate accounting approach, consider how the original transaction was recognized, the nature of the relationship and the underlying economics of the transaction. In the example of deferred compensation, the arrangement had been recognized as an expense, so a gain might be appropriate. In other cases, the nature of the relationship dictates the answer — owners are more likely to engage in capital transactions because they generally benefit from the risks and rewards of ownership. Related parties are more likely to engage in transactions that would result in gain recognition when the underlying liability is forgiven.
What best practices remove risks involved with related-party transactions?
Know the related parties. Otherwise, you run the risk of failing to identify a transaction, allowing it to bypass internal controls established to evaluate and capture information about related-party transactions.
It’s also important to document related-party transactions as if they involve unrelated parties. Often, rights and responsibilities in related-party transactions are ‘understood,’ but not clearly expressed in documents.
Proceed with caution, maintain a vigilant watch for related-party transactions and you can reduce the chance of errors. ●
Insights Accounting is brought to you by Crowe Horwath LLP
Mobile game company BonusXP found the perfect place to grow in the Watters Creek development in Allen, Texas.
The game studio was started in April 2012 by three industry veterans of titles such as “Age of Empires,” and now has 15 employees. That growth meant finding a larger office space that would appeal to employees and set the stage for future expansion.
“A lot of the decision was based on the development of the area where we’re going to be located. There’s a really nice live/work/play atmosphere in the area. It’s a nice, subtle perk to have an office in a cool location,” says Dave Pottinger, founder and CEO of BonusXP.
Smart Business spoke with Pottinger about BonusXP and the company’s new offices in Allen.
Was the office decision based on location or assistance from the city and the Allen Economic Development Corporation?
It was mutual. It’s a good location that’s near home, and we were introduced to the development corporation, which was able to provide some economic incentives and help us get involved in the community. They were able to connect us with technology staff at the Allen school district for assistance in getting interns.
Even for a city with a population of 90,000, Allen is still able to provide unique services to companies relocating here. The economic development corporation tailored its help to what we needed. Once we get bigger we’ll receive some economic incentives.
Was it important to be around similar companies?
Although there are small tech corridors nearby, that really wasn’t a factor in the decision. Dallas has a thriving tech culture, but there aren’t really any within walking distance.
What types of games does BonusXP develop?
We’re up to two teams now and recently launched ‘Cavemania,’ which is available on iTunes for iPhones and iPads and Google Play for Android devices. It’s more original than a lot of games. We’re known for strategy games, like ‘Age of Empires.’ When you develop a game, it needs to be familiar enough so people understand how to play, but with new elements to capture their interest. ‘Cavemania’ is kind of a mix of ‘Candy Crush’ and ‘Age of Empires.’ You move around the board and gather resources, which are spent on characters used to fight dinosaurs and save your town.
We take an old-school approach to games. We build our games without any monetization — make a fun game and then try to figure out what people would be willing to pay to make the game better or customize their character.
What are the plans for BonusXP’s future?
Reaching 15 employees was a big goal because it enabled us to have two teams. The next step would be getting to 20 or 25 employees.
We’re in a difficult industry. People want downloadable games to be free. The barrier to entry is very low, but it also creates a simultaneous low barrier to exit. When people pay $60 for a game, they give it time to decide if they like it or conclude they wasted their money. When a game is free, they move on if they don’t see something new in 15 to 20 seconds. It’s a hit-driven business where the top 10 games make most of the money. Then there’s a big dropoff.
We’ve been lucky enough with some of our previous jobs to be able to self-fund the company and build it. We’ve been fortunate and now we’re trying to build a studio that works the way we’d like it to.
Would you recommend Allen to other companies looking to relocate?
Definitely. It’s a nice area and has a little bit of everything. This location is in a medium-sized development, but there are about 15 restaurants you can walk to for lunch. We were able to build out an office that was simpler because we didn’t need things like a café — employees can walk out the door and get better items than what we would have in the studio.
The Allen Economic Development Corporation also was very helpful and that certainly was a factor in deciding to come to Allen.
Dave Pottinger is founder and CEO of BonusXP. Reach him at (214) 616-8771 or email@example.com.
Reach the Allen Economic Development Corporation at www.allentx.com or call (972) 727-0250.
Insights Economic Development is brought to you by the Allen Economic Development Corporation
When employees are hired or leave a company, the process typically involves HR staff inputting or changing information in a variety of places.
“HR is adding them or removing them from payroll, typing in information and sending it to the insurance provider, and using seven to 10 different systems to handle the various tasks,” says Liz Howe, director of Business Development at Benefitdecisions, Inc.
Companies are alleviating that burden by automating processes through benefit administration systems.
“They recognize the burden that HR people face. And employees are becoming more technologically savvy and want information at their fingertips,” says Howe.
Smart Business spoke with Howe about benefit administration systems from both employer and employee perspectives.
What are the advantages of benefit administration systems?
From an employer standpoint, HR personnel can easily see who is enrolled in benefit plans. These systems help eliminate errors because the plans are entered into the system once, along with employee and employer contributions. So when an employee enrolls, there’s no question as to whether he or she has a dependent or not, for example. Because everything is computerized, that also eliminates paperwork.
Once employees are enrolled, HR can reach out to carriers with information about who has enrolled and at what level — employee and spouse, employee and family. With a benefit administration system, all those characteristics are readily available.
For employees, they can point and click to find out exactly what will be deducted from their paychecks and the coverage available in their plans.
How detailed is the information provided?
It varies. You can have one focused solely on benefits, with employee information, plan description, plan summary, deductions, and employee and employer contributions. Other systems can have a total compensation statement built in, showing employees how much their benefits cost the employer.
Benefit administration systems also can house HR information such as designation, education, paid time off — anything typically tracked by HR. These systems are scalable to the company’s size and needs.
Have there been any recent developments?
The big push at the moment is toward having mobile apps to allow employees to enroll and make changes online through their smartphones. They can enter the system from home, or if they’re at the doctor’s office and need a group number, they can retrieve that on their phone.
Health care reform, and the state insurance exchanges, will probably lead to some other advancements.
What would keep a company from implementing a system?
Security is a concern that makes some companies hesitant. But companies use the Internet already, so they just need to ensure their connections are safe.
There also may be employees who don’t have access to a computer on a regular basis, although many of them do have a smartphone. Employers can place a computer kiosk or iPad station in a centrally located area for employees to enroll and check information.
Of course, there are always people who don’t want to use an electronic system. Those cases can be managed the old-fashioned way, although it’s not recommended. If you move to an electronic system, it’s best to make a complete switch.
What training is involved?
Every company does it differently. Usually, HR has specific training on the administrative aspects. Supervisors are trained so they can educate their staffs on how to use the system. Employees who need extra help can get one-on-one sessions with instructors, although sometimes that isn’t necessary. Benefit administration systems tend to be very user-friendly and easy to understand from an employee perspective.
Implementation can be a bit tricky. However, over time you’ll see how many errors are eliminated and how much time is saved. No one ever says they were disappointed in the results, they say they can’t believe they didn’t do it sooner. ●
Insights Employee Benefits is brought to you by Benefitdecisions, Inc.
Customer Service Week, set for Oct. 7 to 11 this year, provides a good opportunity to recognize the efforts of those employees who regularly serve as the face of your company when dealing with the public.
“When my dad and I started this company in 1984, one of the things he said to me was, ‘These are the people who make the company run and profitable. If you don’t take care of these people, you’re not going to have a company,’” says Rick Voigt, president of Today’s Business Products.
“Our customer service staff and delivery drivers have more day-to-day interaction with the customers than salespeople or managers,” he says.
Smart Business spoke with Voigt about ways to show customer service employees that they are appreciated.
How can companies show appreciation for their customer service employees?
Some ideas include putting caramel apples on desks with a sign ‘you’re the core of our business’ and mints thanking employees for their ‘commit-mint.’ Little trinkets can help put smiles on their faces, and that translates into happier workers when they’re dealing with customers.
The customer service team is an extension of the sales team, so the salespeople also should take part through some activity that shows their appreciation.
You could have salespeople answer phones when the customer service team is treated to a lunch. That helps show appreciation because the sales staff gains a better understanding of what customer service employees do by actually doing the job during that time.
What are some ways customer service personnel go above and beyond to provide a superior experience for clients?
You never want to say ‘no’ to clients. We have actually gone out and picked up a product not available through regular distribution channels in order to accommodate a customer.
One time, a customer placing an order mentioned being in trouble because there was no coffee in the office. An employee pulled it off the shelf and delivered it within 15 minutes. That customer was thrilled that someone went out of his or her way to bring him or her the coffee.
Personality is the most important quality to have in customer service. A male receptionist could seem strange at first to some customers, but may be the most qualified person, with a very pleasant, outgoing personality. If he’s doing his job, your customers will appreciate how they are greeted, regardless of who it is.
How important is it to have customers be able to call a live person rather than reach a directory?
Callers do not like getting a phone tree. A human being should answer the phone during business hours. Even if it’s outside normal business hours, if someone is in the office, they need to answer the phone. They may not be able to assist the caller directly, but they should at least transfer the call to the correct person’s voice mail, which in turn takes one more thing off of the caller’s plate.
People need to be confident that when they hang up the phone that their order, question or concern will be handled properly. That means providing proper training and giving employees authority to make decisions that are in the best interests of the customer and the company. If they are unsure about something, they can talk to a manager or supervisor and get right back to the customer.
Customers who call should not get the experience that you get with many 800 numbers — you don’t know if you’ll be on the phone for 30 minutes or longer. People want human interaction, so that’s what they should be given when they call.
When you give employees the proper tools to do their job and show appreciation for them, they’ll be happier and you’ll have satisfied customers. ●
Save the date: Oct. 7 to 11 is Customer Service Week. Show your customer service employees how you appreciate them.
Insights Customer Service is brought to you by Today’s Business Products
With juries awarding multi-million dollar verdicts, primary liability insurance policies don’t always cover the entire cost. That’s when umbrella liability, also known as excess liability, can help.
“Experienced business professionals understand that the litigious nature of our society combined with monumental liability judgments can be financially devastating to their organization,” says Peter Bern, CEO of Leverity Insurance Group.
“You can find several examples of those types of verdicts, and many companies don’t have liability limits that cover the entire loss. It’s not unusual for individuals or companies to be sued for more than $1 million. To assist with the financial burden of a claim, many business owners purchase umbrella insurance in addition to their primary liability insurance policies,” he says.
Smart Business spoke with Bern about how umbrella insurance works and why companies and individuals might want to consider coverage.
Why not increase existing coverage rather than purchase umbrella liability?
Primary liability contracts typically have limits of $1 million per occurrence, and $2 million total for a policy year. Some policies are available with double those limits, but that’s usually as high as they will go. Most liability policies have an aggregate limit that, once exhausted, will not cover any other damages or legal expenses.
How do umbrella policies work?
They sit on top of primary liability policies and apply to claims where the aggregate limit of the underlying policy has been met, so there are not enough funds available in the policy to cover the entire claim. For instance, if your liability policy has a $1 million limit and a loss is incurred for $1.5 million, the primary liability policy will cover the first $1 million and the umbrella policy will cover the remaining $500,000.
Are there particular exposures in which companies and individuals should consider an umbrella policy?
For the most part, umbrellas cover large, severe events that can cause exponential damages. Without coverage, these events — as few and far between as they may seem — would be financially devastating to many companies.
The umbrella extends the limits of a company’s commercial liability, business auto, employer’s liability, professional liability, environmental liability and management liability policies, to name a few. If your product, service or operating environment is particularly hazardous, or the limits of your underlying policies won’t cover the worst of your possible losses, an umbrella policy is a must.
With respect to personal insurance, an umbrella policy will sit over your personal auto and home liability exposures. For example, if you have teenage children driving, what if someone gets hurt and you don’t have enough insurance? Chances are your limits are $100,000 per person and $300,000 per accident. If you get sued for $2 million and are found negligent, the insurance company will pay up to your $300,000 limit at the most. The balance is due from you. Do you have an extra $1.7 million lying around? Without an umbrella, your personal assets and future earnings are at risk and, in the worst-case scenario, can push you into personal bankruptcy. Can you afford this exposure?
Is there a way to figure out how much coverage you need?
There are a number of factors to consider, including how much risk tolerance you have, the severity of your exposure, the amount of assets you stand to lose and how much you are willing to pay in premiums. The umbrella market is often erratic and requires the guidance of a trusted insurance adviser to find competitive premiums that address your specific risk categories. ●
Insights Business Insurance is brought to you by Leverity Insurance Group
Help has arrived for small and midsize businesses burdened by preparing financial reports according to generally accepted accounting principles (GAAP). The American Institute of Certified Public Accountants (AICPA) released the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) to provide some relief.
“This has been an ongoing concern of privately-held companies for a long time,” says Jim Suttie, CPA/ABV, a principal with Skoda Minotti. “There’s been talk about separating what they call ‘big GAAP’ and ‘little GAAP,’ but no one knows when that will happen. So the AICPA stepped up to supply a new framework that saves owner-managed companies from a lot of compliance requirements.”
Smart Business spoke with Suttie about the new framework and the benefits it provides for small and midsize businesses.
Are GAAP standards too cumbersome for small businesses?
They can be, depending on the situation. For a small to midsize business that is owner-managed, the cost and complexity of GAAP compliance can be quite a burden. What the FRF provides is an alternative, principles-based framework that can provide meaningful financial statements, while reducing unnecessary complexity and costs.
What makes GAAP reporting costly?
The cost comes from two places — gathering the information and complying with the standards.
Take the example of an operating company that leases a building from an entity that is set up for tax purposes or estate planning purposes. The building is under a separate entity, but with common ownership. Under GAAP, those would need to be consolidated, so it adds a layer of complexity.
Another example is if there is goodwill on the books. Under GAAP, goodwill must be assessed for impairment — the difference between book and implied fair value — on at least an annual basis. With the FRF for SMEs, goodwill is treated the same way as it is for tax purposes; you amortize it over the life of the goodwill, which is 15 years.
Is there a size requirement for businesses to use this new framework?
It’s not necessarily based on size; the AICPA intentionally did not set a quantitative limit. Typically, SMEs are owner-managed businesses. The preface of the FRF outlines characteristics of SMEs, including:
- For-profit businesses.
- No regulatory requirement to use GAAP.
- Users of the financial statement have direct access to the entity’s management.
- The entity does not operate in an industry involved in transactions that require highly specialized accounting guidance.
- The entity is owner-managed.
The FRF is not applicable to companies that are public or have plans to go public.
Are there potential problems in switching from GAAP to the FRF?
One challenge is that the framework is not authoritative — although it has been subjected to public comment and professional scrutiny. In the AICPA’s words, it has not been approved, disapproved, or otherwise acted upon by the AICPA or any authoritative body. There’s also the challenge of third-party users, like banks and sureties, which require GAAP financial statements in their documentation. Accounting firms and others are trying to inform them that this is a viable alternative that may provide more meaningful information. In some instances, the FRF can give clearer information about a company’s cash flow, liquidity and financial position than GAAP, which can sometimes muddy the waters with its complexity.
In the case of a variable interest entity in which a real estate company is consolidated with the operating company, the consolidated financial statements are given to the bank, which may separate the information on the real estate entity. So FRF can make the process more direct for third-party users.
But the biggest advantage of the new framework is with the company itself in the reduction in cost of compliance with GAAP. It just makes it easier to prepare financial statements. ●
Insights Accounting & Consulting is brought to you by Skoda Minotti
Businesses and individuals managing employee retirement plans need to understand their Employee Retirement Income Security Act of 1974 (ERISA) obligations and the liabilities associated with plan mismanagement.
“Plan fiduciaries must act prudently. They must do things such as diversifying investments to minimize risk, and they must always act in accordance with plan documents, as long as those plan documents comply with ERISA,” says Kerri L. Keller, a partner at Brouse McDowell.
“There are certain actions that plan fiduciaries must never do. These include using plan assets for personal gain or for business purposes,” she says.
Smart Business spoke with Keller about the role of a plan fiduciary and how to comply with ERISA requirements.
Who is a plan fiduciary?
A plan fiduciary can be any business or individual who exercises discretion, control or authority with respect to plan management. It can also be any business or individual who manages plan assets or exercises discretion or control with respect to the disposition of plan assets. An ERISA fiduciary also can be those businesses or individuals who provide investment advice to a plan, or are responsible for plan administration.
Examples of plan fiduciaries are the named fiduciary or plan administrator, such as the employer or plan sponsor. But sometimes third-party service providers, investment managers and advisers, insurance brokers, and officers of the employer or plan sponsor can be deemed plan fiduciaries.
What are the responsibilities of a fiduciary?
Every plan fiduciary has a duty of loyalty, a duty of prudence, a duty to diversify and a duty to act in accordance with the plan documents. Plan fiduciaries should know that they could incur personal liability for breaching any of their ERISA-imposed responsibilities, obligations or duties.
This personal liability can require a plan fiduciary to pay back to the plan any losses that result from a breach of fiduciary duties, and to give back any profits that the fiduciary may have made from using plan assets. Fiduciaries must act solely in the interest of the plan participants, and for the exclusive purpose of providing plan benefits and defraying reasonable plan expenses.
Are all employer actions considered fiduciary actions?
No. Certain business actions are not considered fiduciary actions, such as the employer’s decision to establish a plan, what features to include, and the decision to amend or terminate a plan. In other words, when an employer acts on behalf of its business, it is generally not acting in its capacity as a plan fiduciary.
However, actions taken to implement these decisions can transform a business or individual into a plan fiduciary. Fiduciary actions generally include exercising discretionary functions over the management of a plan and its assets.
What are the obligations and liabilities associated with plan mismanagement?
For starters, ERISA fiduciaries can be liable — even personally — for breaching any of the responsibilities, obligations or duties imposed by ERISA. If a fiduciary breaches a duty to the plan, he or she may be required to personally pay back any losses to the plan and restore any profits made by the use of plan assets. A court also can order any other relief that it deems appropriate.
What would be an example of a breach?
A breach would occur if a business owner used plan assets to finance a purchase of equipment to open a new division. The business — and the owner in his or her personal capacity — would likely be required to pay the plan back and disgorge any profits that were made by the improper use of the plan’s assets. As previously stated, a plan fiduciary must act in the best interest of the plan and its participants — not in the best interest of the employer or owner.
The IRS, the Department of Labor, and the Department of Justice all have a role in ERISA oversight. These are the agencies that will generally perform compliance investigations and enforce penalties against the plan or plan fiduciaries. ●
Insights Legal Affairs is brought to you by Brouse McDowell
With more than 3 million people set to retire this year, one significant component of retirees’ cash flow is top of mind: Social Security. Yet the staggering options of how and when to claim benefits can be overwhelming.
“That creates a need in the private sector for someone to look at those options and determine what makes sense based on personal circumstances,” says Roy H. Kramer, CPA, CDFA, CDS, NSSA, a member of Tax Services at Brown Smith Wallace.
Kramer, a certified National Social Security Advisor, says it’s important to review Social Security benefits in the context of overall retirement funds, and with a qualified independent adviser.
Smart Business spoke with Kramer about myths and mistakes people make when it comes to Social Security benefits.
Should Social Security be included as part of an overall retirement strategy?
It’s an important component of your entire financial planning and retirement structure. A lot of people think it’s not going to be around for their retirement, so they don’t factor in Social Security, which is a mistake.
The federal government has projected that 100 percent of current benefits are funded through the year 2033, and then at 75 percent for subsequent years. So we know Social Security has sufficient resources to pay benefits through 2033 and retirement planning should reflect that. Clearly, there also will be some discussion about what to do post-2033 because that reduction would be devastating to retirees who worked so hard and paid into Social Security their whole lives.
What’s the first step to figuring out when to take benefits?
Go to www.ssa.gov and set up an account. It’s the only way to access Social Security statements that previously were mailed. There may be mistakes, and correcting them can be a time-consuming process made more difficult if years have passed and documentation may not be readily available.
A common error may be a Social Security number improperly transcribed when a person is married, and years can go by before it’s caught. Most people don’t keep copies of W-2 forms and tax returns after the statue of limitations has expired. So it’s important to review the information on the website to ensure there are no glaring errors.
What are some often overlooked strategies?
One option, which has been available since 2000, is called file and suspend. If you are married, typically one spouse is a high-income earner and applies for benefits at the retirement age of 66. But he or she suspends receipt of those benefits until age 70. That provides what is called a delayed retirement credit, which increases the benefit by 8 percent a year for a total of 32 percent more at age 70. Applying for benefits allows the other spouse to claim spousal benefits of half of the applicant’s Social Security benefit, without reducing the first filer’s benefit amount. So the family can collect Social Security earlier while increasing the benefit received at age 70.
There’s also a rule that allows you to collect benefits on an ex-spouse if your benefits are less. You have to be at least 62, been married at least 10 years and not currently married. You can apply for spousal benefits if the ex-spouse is eligible for benefits, regardless of whether he or she has applied. Overall, Social Security benefit decisions are more effective when considered in conjunction with tax planning.
How are benefits determined?
It’s an indexed average of the 35 highest-earning years of work history. But in order to qualify for Social Security, you must have paid into the system for at least 40 quarters.
When deciding whether to take early retirement at age 62, collecting benefits at the established retirement age of 66 — for those born in 1954 or later — or waiting until age 70, you have to consider your personal situation.
One couple with both spouses in poor health needed the money and filed at age 62. The thought of them living to the average age expectancy of 84 for a woman and 81 for a man was not a realistic possibility.
But if you can afford it and have a family history of longevity, you can wait until 70 and enjoy that 32 percent increase in benefits for a long time. ●
Find out more on this and other tax topics at Brown Smight Wallace.
Insights Accounting is brought to you by Brown Smith Wallace
The Kaiser Family Foundation recently released a study that stated premiums available on state-based health insurance exchanges would be lower than expected. In Ohio, rates cited were even lower than the national average, with costs for the second-lowest silver tier plan at $249 compared to $320 nationally.
However, Ohio Lt. Gov. Mary Taylor had earlier announced that individual premiums were expected to increase by 41 percent.
Smart Business spoke with William F. Hutter, CEO of Sequent, about whether the Patient Protection and Affordable Care Act (ACA) will succeed in driving down health insurance costs.
Do the rates cited in the Kaiser study mean costs are going down?
Possibly for a couple of years — we’ve still not seen the community rating prices for small group coverage, and just maybe the lowest prices were illustrated in the Kaiser study. The rates indicate a very low and attractive premium structure. It’s unlikely these rates will be sustainable after 2016 because carriers don’t know the real cost of insuring this group yet.
In addition, the paper didn’t address complex tax implications for both the company and employees that must be considered for total cost. For example, the new taxes on insurance premiums paid by carriers, but collected from employers, are a protection for the carriers. The tax will be set aside to help carriers offset the real cost of coverage for the first two years. After that, the exchange carriers will be on their own, with no government subsidy.
What impact will these rates have on businesses and their health care plans?
One of the leading actuarial firms, Milliman, has an analysis tool to help any company dig through the ‘play or pay’ considerations. Having completed more than 250 separate analyses, Milliman reported it made sense to ‘pay’ for only two of those companies. However, it’s difficult to access the individual total costs relative to plan designs.
What do the delays mean for 2014?
This is a practice year for everyone; 2014 is a penalty-free zone. With the rollback in enforcing penalties and a delay in reporting incomes for the affordability test, people think they are off the hook regarding ACA requirements. But everything else is going forward, including a big increase in taxes.
Unfortunately, the early testing on the exchange, scheduled for early September, was delayed. The Department of Health and Human Services also delayed the deadline to sign final agreements on health plans that will be available to consumers on the exchanges, which might have occurred because some insurers have been hesitant to sign up.
Many people anticipate there may be massive technology glitches relative to the exchanges, including a brewing concern in the technology arena about confidentiality and Health Insurance Portability and Accountability Act (HIPAA) compliance. The system is going to be large and unwieldy.
Who is going to buy insurance from the exchanges?
Even with the individual mandate — which still could be delayed by the government — beginning next year, most people will not be making changes regarding their health care, whether they have insurance or not. If you haven’t purchased coverage because you’re young and invincible, you’re not going to purchase coverage now with minimal individual mandate penalties in the first year.
The people who will be truly interested in participating are the most needy — those who cannot afford other coverage because they are ill and not working.
As for businesses, depending on the average income per worker, some might drop plans and let employees go to the exchanges. Businesses with fewer than 50 full-time equivalent employees will not be penalized when penalties are assessed in 2015. So, they could drop coverage, give everyone a $4,000 raise and let employees buy their own insurance. But companies need to remember that giving a raise to buy exchange coverage causes everyone’s taxable income to increase. Therefore, the employee pays more in taxes, the company pays more in taxes and the increase might bump income over the subsidy limits.
It’s still very difficult to predict what exactly is going to happen because there are so many unknowns. ●
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