In February, the IRS issued some final regulations relating to the Affordable Care Act (ACA), basically delaying full implementation. One major change was allowing employers with 50 to 99 employees until Jan. 1, 2016, to comply with the mandate to either provide health insurance or pay excise taxes in certain circumstances.

“In effect, smaller employers have another year to determine how they are going to approach this,” says Ted Ginsburg, CPA, J.D., a principal at Skoda Minotti.

Smart Business spoke with Ginsburg about the recent changes to the ACA regulations and how they affect small and midsize companies.

What significant changes have occurred?

For companies with 100 or more full-time equivalent (FTE) employees, the IRS diminished the level of coverage required. If you have 100 or more FTEs, instead of having to cover 95 percent of your full-time employees, you only have to offer health insurance to 70 percent of your full-time employees in 2015. So companies still have to comply with the ACA effective Jan. 1, 2015, but this helps them begin to get into compliance with the law.

There also were minor changes on how you count FTEs and hours to determine if an employee is full time. A person who is a FTE might not be a full-time employee — so that person would count in the calculation of whether you are subject to the ACA, but might not be a person who you would need to offer insurance to.

But employers have to recognize that they need to deal with this — the ACA is not going away. The issues remain the same — do you offer what is deemed affordable health insurance that provides a minimum level of coverage? If you don’t, you might be subject to an excise tax of $2,000 per employee, subject to some limits.

If you provide coverage, but it doesn’t meet ACA minimum standards and/or isn’t affordable, you face a $3,000 excise tax for each employee who goes to the exchange, purchases insurance and receives a government subsidy.

What steps should employers be taking now?

If you have fewer than 100 FTEs, make sure that’s correct and you will not be subject to the employer mandate on Jan. 1, 2015. Companies with 100 FTEs or more need to realize that the decision about whether to offer health insurance needs to be made well ahead of Jan. 1. The decision date is really when you start open enrollment for health insurance, usually in September or October.

What strategies are companies formulating?

There are many, but they all revolve around two issues — finances and HR.

On the numbers side, some are deciding not to provide insurance, letting employees purchase it through a broker or the exchange, and maybe providing some wage increases to compensate. The problem with that approach is that it’s not tax-effective because the money goes on employees’ W-2 forms before health insurance premiums are paid, so they pay additional taxes. The employer also pays additional FICA and other payroll taxes. That approach is a knee-jerk reaction of frustration with the ACA.

Other employers are evaluating using a professional employer organization (PEO) to handle payroll and benefits. PEOs have buying power with insurance companies and can negotiate for better rates. This strategy generally works for companies with 30 to 200 employees. After that point, it’s more cost-effective to have an internal HR group.

We also see clients trying to change employee’s schedules and cut back hours so they don’t have to provide insurance. For companies facing the mandate in 2015, that needs to be done now because the ACA looks back to what was done in 2014.

But this approach also gets into HR issues. A client planning to cut employees back to 29 hours would have to add 33 percent more employees to have the same number of hours worked by the employee group, making it difficult for management, and risk losing employees who can’t support themselves on reduced pay from a shorter work week. Some employers want to avoid the ACA at all costs, but don’t consider costs of an operational nature such as employee turnover.

Most large employers are already ACA compliant. But many smaller ones, those with less than 500 employees, haven’t started thinking about it and need to be prepared.

Ted Ginsburg, CPA, J.D., is a principal of Skoda Minotti. Reach him at (440) 449-6800 or tginsburg@skodaminotti.com

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Published in Cleveland

Companies are getting away from the old IT model of purchasing an on-site solution and having an internal staff working to solve problems. Instead, many companies are utilizing a professional service provider to handle tasks that are not directly related to core company business.

“That allows staff IT to focus exclusively on their lines of business — specific applications and training programs rather than a phone not working, a locked password, or more extreme, the data center/network being down,” says Karl Seiler, president of DataServ.

Smart Business spoke with Seiler about why companies are taking this approach and how professional IT service providers work as partners with businesses.

What IT services should be contracted to service providers outside of a company?

Things that are common to every organization: support, infrastructure, network, wireless, smart devices, collaboration architecture, security, help desk and inventory.

These needs are common across almost any organization and can be done from a professional service provider perspective rather than at an internal level. It allows for higher efficiencies and lets your team focus on its core business rather than solving remedial issues.

How does partnering for IT differ from building IT?

Building IT is the old approach. It’s slow to move and internal people may not have the skills to do a proper evaluation of return on investment or assess the real business fit within the environment. IT is often based on a person with a single mindset who provides the only view. And because CEOs and CFOs are often not the technology experts, that leaves critical decisions to one person who might not always have the knowledge or passionate team around them to proceed down the best path.

With IT as a service, a team of experts complete a comprehensive assessment for the organization. There are engineers who specifically understand infrastructure, applications, networks or collaboration. All that information is reviewed and analyzed to determine the best solution.

A professional IT provider knows how to partner with an organization and learns and develops an understanding of the company’s objectives, allowing them to build appropriate solutions. They become a trusted partner — not a vendor.

How can you tell if an IT service provider would make a good partner?

That’s part of the due diligence process. Vet companies and get a sense of how they work. Talk to references. Visit their workplace, talk with the leadership and see how they utilize the collaboration tools and other technology in their environment to grow their business.

Studies show huge challenges for businesses in terms of collaboration tools in the workplace. Millennials coming into the workforce are naturally collaborative and organizations are not structured effectively for that. Webconferencing, video technology and other services allow you to conduct business in real time. We provide a dashboard interface that shows who is available in our organization so we can connect with that person, see them on video, and effectively share information and data.

The workplace is everywhere now and technology needs to allow for collaboration whether someone’s at home, school, work or Starbucks. You have to build the architecture for your organization so that team members can collaborate from anywhere. Most businesses don’t understand how to architect a network — it’s just not their area of expertise. They have obsolete phone systems that do not work efficiently and are not connected to other company communication tools.

Another area of importance is your data. How do you organize the data (analytics) and build business intelligence tools in real time so you can make informed decisions and implement them faster? Applications have to allow for that level of integration.

Everything starts with finding a trusted partner and beginning the journey of unifying your technology. Effectively building a collaboration architecture begins with equal parts of culture, process and technology. That’s the most important area to address when growing your organization and business.

 

Karl Seiler is president of DataServ, a Skoda Minotti Technology Firm. Reach him at (440) 449-6800 or kseiler@dataserv.tv.

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Published in Cleveland

Results of the Skoda Minotti annual survey of the construction and real estate industries looked good in 2012, indicating the most positive response since the initial poll in 2007. The 2013 numbers, however, reflect that the local market hasn’t completely recovered from the recession.

“Things started to look positive, but it appears we’ve taken a step backward,” says Roger T. Gingerich, CPA/ABV, CVA, CCA, partner in charge of the Real Estate Construction Group at Skoda Minotti. “Business owners are sitting on cash and holding off on capital investments because they’re uncertain whether we’re in a long, slow cycle of recovery or if we’re dipping back into a recession.”

Smart Business spoke with Gingerich about the 2013 survey results and the status of the Cleveland-area construction and real estate marketplaces.

What is construction reform and how has it impacted contractors?

Under a 2012 Ohio law, rules for government contracts changed and there is no longer multi-prime bidding — breaking a project into different packages for mechanical, electrical, etc. Instead, the process went to single prime construction, with one general contractor responsible for hiring any subcontractors.

Reform has made it more difficult for smaller contractors to bid for work because they don’t have the bonding capacity; they don’t have the net worth or capital that a bonding company prefers. They may be able to get a bond for a $3 million project, but not for a larger project, even if they have subcontractors doing the majority of the work.

The concern is that subcontractors have another company — the general contractor — between them and the customer and it takes two or three weeks longer to get paid. There also could be more out-of-state competition because larger contractors see opportunity when there are only so many companies that can bid.

Despite problems, construction companies surveyed were positive about opportunities in the next three years — 43 percent expect more opportunities, 41 percent said the same amount and 16 expect to have less business. Although that’s the second best result since the survey started, it is somewhat discouraging that 49 percent of respondents in the 2012 survey saw more opportunities. So we took a small step backward.

Why is securing credit continuing to be a problem with commercial real estate?

When asked about which obstacles prevent closing a deal, credit was the top response and is tied to property valuations. Banks tightened up in 2007 and 2008 and exited the real estate market. As a result, there was more supply than demand for real estate. Properties that were worth $1 million, for example, might now be valued at $750,000, and the owner still owes $800,000.

Loans are still available for businesses that operate out of their buildings; it’s the investment real estate that is not being financed. Retail businesses have struggled and companies were going out of business or couldn’t pay rent and, if leases were up, wanted to renegotiate for significantly less than what had been paid. As a result, developers are having problems securing loans to get projects off the ground. We’ve seen some improvement, but there still are challenges when it comes to credit.

Overall, what do the survey results suggest for 2014?

The results weren’t surprising. Respondents said healthcare reform would have a negative impact; however, healthcare is going to be a challenge for everyone. The survey also indicated that while everyone seems concerned about green construction and sustainability, it’s not changing many developers’ minds about how they build.

The fact that we took a step back from 2012 in terms of optimism shows that it’s still an uncertain market. That wasn’t surprising, although lending restrictions appeared to be lessening.
However, interest rates remain low and it’s a great market for business owners with cash. Those people will see opportunities. If you don’t have access to capital, you will continue to face challenges and that will slow the area’s recovery.

Roger T. Gingerich, CPA/ABV, CVA, CCA, is a partner in charge of the Real Estate Construction Group at Skoda Minotti. Reach him at (440) 449-6800 or rgingerich@skodaminotti.com.

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Published in Cleveland

At this point last year, Congress was debating a “fiscal cliff” deal that included the elimination of Bush-era tax cuts and several tax provisions favorable to businesses. Many of those provisions, extended for 2013, are now due to expire unless further action is taken.

“Based on what has occurred in Congress recently, I can’t say I’m optimistic that a lot will be accomplished,” says Terry Silver, CPA, J.D., a partner at Skoda Minotti.

Smart Business spoke with Silver about expiring tax provisions that affect owners of small and midsize businesses.

What key tax provisions are set to expire?

From a business standpoint, most are related to depreciation. Other changes impact individuals, but for businesses the important one is the Section 179 deduction for tangible personal property. For 2013, you can expense up to $500,000 for property placed into service during the year. That starts to phase out if you have property additions of more than $2 million, and basically doesn’t apply once you reach $2.5 million. At that point, you must capitalize purchases of property and equipment and depreciate them over a period of years. That taxpayer-friendly treatment is substantially reduced in 2014 to $25,000, with the phase-out limit falling to $200,000.

Taxpayers can claim Section 179 write-offs for qualified real property as part of that $500,000. You can write off up to $250,000 in qualified leasehold improvements.

Another favorable provision in 2013 is bonus depreciation, which doesn’t contain the taxable income limitations and phase-out provisions attached to Section 179. This 50 percent bonus depreciation allows half of the cost to be expensed without limitations. The only restriction is that it has to be original use with the taxpayer; it doesn’t cover used equipment. Bonus depreciation also is going away in 2014, except for certain aircraft and long production period property.

One other tax provision extended through 2013 is the research tax credit. If your business spends money on research and development (R&D), there’s a tax credit for increasing expenditures related to that activity.

Any chance these might be extended?

Section 179 and bonus depreciation have been extended a number of times in recent years. Given the concerns about the economy, there’s some likelihood that something will be accomplished. While it doesn’t seem likely to happen by the end of the year, it is possible an extension could be put in place in 2014, retroactive to 2013. The most apt to return is the R&D credit, which has been extended numerous times.

Is it too late to take advantage of these expiring provisions?

With some of these, a business may be looking at equipment purchases planned for 2014 and accelerate a purchase to the end of 2013. It is important to note that the property must not only be purchased, but placed in service before the end of the year.

There also are other strategies business owners can follow to reduce their tax burden. Many small business owners, for whatever reason, don’t have a retirement plan. If you put in a profit-sharing plan with a 401(k) feature, careful planning can allow a significant amount of the employer contribution to be skewed toward the owner.

Depending on the nature of your business, you might consider paying out bonuses. But be careful to remember the new additional 0.9 percent Medicare tax related to earned income over $250,000 for couples filing jointly, $200,000 for single taxpayers.

If you’re the owner of an S corporation with a $250,000 salary and have substantial profit for the year, you may want to consider taking distributions in lieu of additional salary. Although the shareholder will still pay income tax on the profits, the 1.45 percent Medicare tax paid as an employee, the 1.45 percent paid by the company and additional 0.9 percent Medicare tax can be avoided. However, the IRS may look at distributions relative to the salary you’re taking — the salary has to be reasonable for the services you provided.

Overall, as 2013 winds down and we head into 2014, owners and executives in the highest tax brackets will face higher tax rates on taxable income, qualified dividends and a 3.8 percent tax on net investment income. Whether Congress passes legislation to provide tax relief and spur the economy will no doubt be a topic of much debate.

Terry Silver, CPA, J.D., is a partner at Skoda Minotti. Reach him at (440) 449-6800 or tsilver@skodaminotti.com.

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Published in Cleveland

A few simple steps you can take now will pay dividends when tax time rolls around next April, says Steve Gross, CPA, a partner at Skoda Minotti.

“Start now as opposed to waiting until late December and rushing to accomplish your goals. There are some very simple strategies you can follow now to reap the benefits when tax time arrives,” Gross says.

Smart Business spoke with Gross about tax tips, including a credit that is scheduled to expire this year.

What are some basic things to consider to reduce tax liability?

A few things you might want to look at are:

  • Charitable contributions. Make any donations before the end of the year — you can put the donation on a credit card, even if the card payment isn’t due until January 2014, and still list the deduction in 2013. If you aren’t an itemized taxpayer, you may consider accelerating your 2014 pledges, whether that is one or several, to reach the totals needed to itemize and take advantage of the deduction. This also applies to pass-through entities; if you’re an owner of a partnership or shareholder in an S corporation, donations are deducted as a separate line item.

    Another opportunity to realize charitable contributions is to donate unused or unwanted — but still in usable condition — household items and clothing to a qualified charitable organization. By doing so, you’ll get a deduction for the fair market value.

  • Estimated tax payments. While fourth quarter estimated federal and state taxes are not due until Jan. 15, you could pay the state estimate by Dec. 31 and get the deduction this year.

    You may also consider accelerating payment for your real estate taxes. Some taxpayers who don’t itemize every year because they don’t have enough in deductions can pay the entire real estate tax bill for one full year in January, and then again in full in December of the same year. This may help you reach the limit to itemize.
  • Capital gains and losses. If you’ve sold stocks and had capital gains, it might make sense to look at your portfolio for any loss positions you might want to sell to offset the gains. The capital gains tax increased from 15 to 20 percent in 2013, and gains may be subject to the 3.8 percent additional Medicare tax on excess passive income.
  • Energy credits. The residential energy credit, which technically expired at the end of 2011, was reinstated through 2013 and provides up to 10 percent of qualified expenses, up to a $500 lifetime limit, for the installation of energy-saving exterior doors, windows or air conditioners.
  • Business property. Under Section 179 of the tax code, you may elect to deduct the cost of qualified business property purchased and placed in service during the year. The maximum deduction allowed for 2012 was $500,000, subject to a phase-out for acquisitions above $2 million.

Under the American Taxpayer Relief Act of 2012 (ATRA), these limits are extended through 2013. Absent new legislation by Congress, the maximum allowance will plummet to $25,000 in 2014. The ATRA also preserves 50 percent bonus depreciation on any remaining cost of qualified property your business places in service this year.

The bonus depreciation tax break is generally scheduled to expire after 2013.

Are these things you should be reviewing every year?

Yes. In addition, pay careful attention to the fair market value of the non-cash charitable contributions. Many organizations provide guidelines for establishing the fair market value of used property.

Tax rates are not changing in 2014, but when there is a major change in rates, depending on which way they’re going, that might influence what you do in a particular year. Your tax adviser should be in-step with the changes in tax law and if they will affect you. It would be impossible for any taxpayer to fully understand the variety of scenarios, given the complexity of ‘if/then’ situations surrounding deductions.

Steve Gross, CPA, is a partner at Skoda Minotti. Reach him at (440) 449-6800 or sgross@skodaminotti.com.

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Published in Cleveland

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.

Jim Suttie, CPA/ABV, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or jsuttie@skodaminotti.com.

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Published in Cleveland

Companies that have looked into using the IC-DISC (Interest-Charge Domestic International Sales Corporation) provisions of the tax code, intended to help U.S. companies compete internationally, might remember that the incentive essentially reduces the top federal tax rate on income from certain qualified goods and services from 39.6 to 20 percent.

“Partly because it is thought of as a manufacturing and export incentive, many companies have dismissed the IC-DISC. Many more have misinterpreted the rules, which actually do not require manufacturing or exporting,” says Amit Mathur, CPA, director at WTP Advisors.

Pete Chudyk, head of the tax consulting practice at Maloney + Novotny LLC, says “We have helped many companies realize that the definition of ‘qualified export’ sales for IC-DISC purposes is explicitly based on use outside of the U.S., and does not literally require the exporting of goods.”

Smart Business spoke with Mathur and top accounting firms about five IC-DISC myths that lead to business owners missing or underutilizing the valuable government incentive.

Myth 1: Products must be exported.

Perhaps the most widely held IC-DISC misinterpretation is that a company must export a product and sell to a foreign customer to qualify for benefits.

While the product generally must be ultimately used outside of the U.S. — without being further manufactured by another party inside the U.S. — there is no requirement that the product be exported, or that the customer be foreign. In some cases, the product may even return to the U.S. For example, an Ohio auto parts maker that sells to General Motors Co. can claim benefits if the parts are incorporated into a car GM builds in Mexico. A special component rule allows these parts to qualify after being incorporated into another product abroad that returns to the U.S.

Mike Trabert, a partner at Skoda Minotti, says “Any closely held manufacturer or distributor should examine where the ultimate use of their products occurs. While they may not consider themselves ‘exporters,’ significant and easy to implement tax benefits may be available.”

Myth 2: The taxpayer must manufacture the product.

Closely held distributors and brokers, as well as the final manufacturers, of any U.S.-made product are eligible for IC-DISC benefits for any given qualified sale or lease. Unlike the Domestic Production Activities Deduction often enjoyed in tandem with the IC-DISC — both benefits can be claimed — manufacture by the taxpayer is not required.

Myth 3: Business operations will be disrupted.

A popular misconception is that using an IC-DISC will require a new entity to sell qualified exported goods in order to obtain the tax savings. This fear of having to alter contracts, logistics, payments, etc., is totally unfounded. There is actually no effect on cash flow or any other business operations from using an IC-DISC. Other than receiving a commission from the related operating company and immediately paying a dividend back to the company, or its owners, the IC-DISC typically does not perform any activities whatsoever.

Myth 4: IC-DISC benefits are limited to $10 million of qualified sales.

No limitation exists on the amount of qualified export sales that can generate IC-DISC benefits. Originally, the IC-DISC provided a deferral benefit, and the amount that could be deferred was related to only $10 million of qualified export sales.

Myth 5: IC-DISC commission is 4 percent of export sales or 50 percent of export income.

IC-DISC savings result from allowable commission paid to an IC-DISC, generating an expense at ordinary rates (39.6 percent) with the same amount typically being paid from the IC-DISC to its shareholders as a dividend, taxed at dividend rates (top rate 20 percent). Many believe this commission amount is limited to 4 percent of export sales or 50 percent of export taxable income.

In reality, each qualified export transaction can use either of these basic methods, or a host of other methods explicitly encouraged in the regulations that can be more beneficial. Some methods even allow loss transactions to generate a commission.

Amit Mathur, CPA, is a director at WTP Advisors. Reach him at (216) 292-6732 or amit.mathur@wtpadvisors.com.

Learn more about the IC-DISC

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Published in Akron/Canton

Much attention has been given to the fees and expenses of qualified retirement plans. Many questions are being asked about the reasonableness and quality of the current 401(k) landscape.

For decades, service providers have been charging excessive, and often hidden, fees to a countless number of plan participants. Similarly, plan investment options came under fire shortly after the 2008 financial crisis, which saw millions of workers lose significant portions of their retirement savings. This unfortunate combination — excessive fees and poor returns — was the driving force behind the recent regulatory changes.

Smart Business spoke with Eric N. Wulff and Christopher D. Bart, managing directors and principals at Aurum Wealth Management Group, about the Department of Labor’s (DOL) plan to address these issues.

What are some of the company’s fiduciary responsibilities relating to their retirement plan?

The three main concerns revolve around fees, service and investments.

On Feb. 3, 2012, the DOL issued a final regulation under the Employee Retirement Income Security Act of 1974 (ERISA). This regulation requires a 401(k) plan’s service providers to disclose all fee and compensation arrangements, effectively known as ‘full fee disclosure.’

From a service perspective, companies are required by the DOL to determine the reasonableness of fees. Industry best practices indicate the most effective means by which you can evaluate the reasonableness is to place the plan out to bid. Conducting a request for proposal process allows you to compare not only the cost and compensation arrangements, but also the nature and level of the service. If the service provider does not provide a level of service commensurate to its fee, it is the company’s fiduciary duty to terminate the provider.

As for investments, companies are required to maintain a documented process on the selection and monitoring of the investments in the 401(k) plan. Specifically, the DOL recently put out an advisory bulletin on target date funds requiring them to evaluate the absolute risk of these types of investments. Target date funds became a popular investment strategy because plan sponsors were given fiduciary relief if they offered them as a qualified default investment alternative. This turned out to be somewhat problematic when the market crashed in 2008 and 401(k) participants saw their investments drop by 20 percent or more.

How can companies minimize their fiduciary responsibility?

There are different types of advisers companies can engage to assist them with their responsibilities, and companies can do a better job understanding those options.

The two most common levels of fiduciary status under ERISA are 3(21) and 3(38). As a 3(21) fiduciary, the adviser serves as a co-fiduciary to the plan; in this role, the adviser monitors plan investments and makes investment recommendations to the plan sponsor, but does not have discretionary control of plan assets. As a 3(38) fiduciary, the adviser takes control of plan assets, makes all investment decisions and insulates the plan sponsor from fiduciary liability as it relates to plan investments. Hiring a 3(38) fiduciary is the highest level of fiduciary protection under ERISA.

Where do participants stand in all of this?

With most retirement plans, a big problem is that participants are not allocating assets correctly. So, many 401(k) plans are starting to implement more help features for participants. Studies show the average participant can earn an additional 2 or 3 percent per year by getting professional help. Unfortunately, the average participant tends to chase performance when determining their investment allocation.

Hopefully, these increased responsibilities on plan sponsors will continue to bring much needed change to help fix the nation’s structural problem with retirement savings.

Aurum Wealth Management Group is an affiliate of Skoda Minotti.

Eric N. Wulff is a managing director and principal at Aurum Wealth Management Group. Reach him at (440) 605-1900 or ewulff@aurumwealth.com.

Christopher D. Bart is a managing director and principal at Aurum Wealth Management Group. Reach him at (440) 605-1900 or cbart@aurumwealth.com.

Insights Accounting & Consulting is brought to you by Skoda Minotti

Published in Cleveland

A job change can be a stressful, busy time, which is why many people forget about 401(k) funds and simply leave them in a former employer’s plan.

“I can’t emphasize enough that people need to properly educate themselves about their options,” says Robert D. Coode, a principal at Skoda Minotti Financial Services. “Most people we encounter are hesitant to rollover old 401(k) funds because they aren’t aware of their options.”

There also is a tendency to think amounts aren’t significant enough to warrant attention. The average person holds 11 jobs between the ages of 18 and 44, according to the Bureau of Labor Statistics, so each 401(k) account might not be substantial.

“But when you start consolidating plans, they become more meaningful,” says Bob E. Coode, CSA, a partner with Skoda Minotti Financial Services.

Smart Business spoke with Robert and Bob Coode about options available for 401(k) plans when you leave a job.

Why shouldn’t you leave 401(k) funds with a former employer’s plan?

Many people wind up with up to seven retirement accounts during the course of their careers. That poses a problem with record keeping. But the bigger problem is not having anyone to help you manage these accounts. It makes sense to consolidate them into one IRA.

Some people think that having multiple plans makes them diverse. But, if there’s significant overlap among the accounts, it actually defeats the purpose.

When leaving a job, what options are available regarding 401(k) plans?

The options are:

  • Leaving funds in the old plan.

  • Transferring funds to the new employer’s plan.

  • Directly rolling over money into an IRA.

  • Taking a taxable distribution.

Taking a distribution is not recommended; too many people see old 401(k) accounts as found money. While some people don’t have a choice, many will regret taking the money early and having less money set aside for retirement. The distribution could drive up a person’s tax bracket, cost more in federal taxes, and impose a 10 percent penalty if the participant is under 59½ and there is no hardship, such as medical expenses or an impending foreclosure.

Usually, the recommended option is a direct rollover into an IRA, which provides freedom of choice. In employer-based plans, the employer or the company managing the plan makes all the decisions about the number and types of investments. Typical 401(k) plans offer 15 to 20 investment choices. An IRA rollover gives access to a much wider array of investments.

Every IRA account should have a combination of equity, bonds and fixed income, and alternative investments to varying degrees, depending on the person’s age and risk appetite.

What are alternative investments?

Examples are long/short mutual funds, managed futures, real estate, commodities and currencies.

People may be wary of the word ‘alternative,’ but these are simply investments that don’t necessarily correlate with the market. Alternative investments are favored primarily because their returns have a low correlation to the three traditional asset types — stocks, bonds and cash.

These investments have been available to large endowments and high net worth investors for a long time and worked so well that fund companies made them available to retail investors.

With a traditional equity mutual fund, all investments are long term. Managers are required to keep 85 to 95 percent invested in equities at all times. If the market is due for a correction or a bear market is anticipated, they can’t short a stock or move into cash to protect the investor. A long/short mutual fund, which can be considered an alternative investment, has the ability to hold stocks for a long time or short the market if a correction is due.

Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.

Robert D. Coode is a prinicipal at Skoda Minotti Financial Services. Reach him at (440) 605-7119 or rdcoode@smcofinancial.com.

Bob E. Coode, CSA, is a partner at Skoda Minotti Financial Services. Reach him at (440) 605-7182 or recoode@smcofinancial.com.

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Published in Cleveland

The IRS has a complicated set of guidelines for determining whether a worker should be treated as an employee or independent contractor for payroll tax purposes. It may be tempting for business owners to just classify people as independent contractors and save payroll taxes, but it’s not worth the risk, says Jim Forbes, CPA, a principal with Skoda Minotti.

“The IRS is conducting more payroll tax audits of small businesses, but the risk is always there with any audit. No matter what triggers the audit, the IRS will ask for all of your W-2s and 1099s and will be suspicious if a contractor is being paid like an employee,” Forbes said.

Smart Business spoke with Forbes about the process of determining whether a person is an employer or an independent contractor and why it poses such problems for businesses.

How do you determine if a worker is an employee or independent contractor?

The IRS uses 13 factors; some employers will look at a couple and think a person is clearly an employee or a contractor, but you have to look at all 13. Even then, there’s no set number you have to pass, it’s all a matter of facts and circumstances. That’s why it’s tricky for companies to figure out how to classify workers.

The 13 factors are:

• Type of instructions given. An employee is generally subject to follow instructions about when, where and how to work.

• Degree of instruction. The key consideration is whether the business retains rights to control details of a worker’s performance.

• Evaluation system. If the system measures details of how work is performed, that points to the person being an employee.

• Training. On the job training indicates a particular way of performing the job is desired and is strong evidence the worker is an employee.

• Significant investment. Independent contractors often have invested in the equipment used for work. However, that is not required for independent contractor status.

• Unreimbursed expenses. Independent contractors are more likely to have unreimbursed expenses.

• Opportunity for profit or loss. Having the potential of incurring a loss indicates a worker is an independent contractor.

• Services available to market. An independent contractor is generally free to seek out business opportunities.

• Method of payment. An employee is generally guaranteed a wage for hourly, weekly or other period of time. Independent contractors are usually paid a flat fee for jobs.

• Written contracts. The IRS is not required to follow a contract stating that a worker is an independent contractor; how the parties work together determines how the worker is classified.

• Employee benefits. Insurance, pension plans and other benefits are generally not given to independent contractors. However, absence of benefits does not necessarily means the worker is an independent contractor.

• Permanency of the relationship. If a worker is hired for an indefinite time, that is generally considered evidence of an employee/employer relationship.

• Services provided as a key activity of the business. Companies are more likely to have the right to control activities when the services are a key aspect of the business.

Why would companies attempt to classify employees as independent contractors?

With smaller companies, there is a greater impact from the additional payroll taxes. If the person is an employee, you have to pay 7.65 percent payroll taxes for Social Security and Medicare. There are other taxes, including unemployment, but that is the primary motivation.

There could be more incentive in 2014 with the employer mandate under health care reform. A business with 49 employees that needs to add two more people might want to bring them on as independent contractors to avoid the rules that kick in when you reach 50 full-time equivalents.

Still, most companies will try to do the right thing; it’s just difficult sometimes to figure out what that is. You can meet 10 of the 13 tests, but there’s no guarantee that means the person is an independent contractor. Ultimately, that answer rests with the IRS.

Jim Forbes, CPA, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or jforbes@skodaminotti.com.

Follow up: If you’d like to schedule a confidential consultation regarding employee classification concerns, call Jim at (440) 449-6800.

Insights Accounting & Consulting is brought to you by Skoda Minotti

 

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