In concept, FAS 159 tracks with recent trends in accounting principles. By allowing companies to value certain liabilities and assets at current market value — even though they haven’t been sold — investors are provided with a real-time financial representation of the company. Also on the plus side, FAS 159 may enhance a company’s ability to borrow funds by providing information on appreciated values. However, as with any change, CEOs should be aware that there are advantages and disadvantages associated with a move to reporting under a fair-value standard, says Diane Wittenberg, partner of Audit and Business Advisory Services at Haskell & White LLP.
“For certain companies this may be a better way to report because it is more reflective of current values,” says Wittenberg. “However, there is a certain element of subjectivity in how the assets and liabilities are valued, so it may make it more difficult to track consistency from company to company for comparison purposes. Also, because the election decision is irrevocable, it’s important to anticipate any future negative ramifications from switching to a fair-value reporting standard before making your decision.”
Smart Business spoke with Wittenberg about what CEOs should know about reporting assets and liabilities on a fair value basis.
Are these changes mandatory and what impact will these standards have on my company’s financial statements?
FAS 159 offers companies the option of reporting certain items on a fair value basis, but doesn’t require it. Because you estimate the fair value of your assets and liabilities, your financial statements may reflect a higher value for your company even though no transaction has taken place. The accompanying standard, FAS157, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP),and expands disclosures about fair value measurements. This statement does not require any new fair value measurements.
Do you foresee widespread adoption of these standards?
It is yet to be determined if, or how fast, companies will get on board with this new concept. For some, it’s a big change from historical reporting. For the time being, it is still an option, but it does seem that the Financial Accounting Standards Board is moving toward fair value accounting and away from historical cost accounting.
What benefits are afforded to CEOs by fair value accounting?
If your company has appreciated assets, you may be able to obtain greater lines of credit or more favorable borrowing terms given the more current information under these provisions. Also, if you’re looking to sell your company or a portion of it, a current valuation of assets may improve your return and, at least, set the stage for negotiations. As CEOs consider acquisitions, it will be much easier to see the prospective business at its present value rather than having to extrapolate the numbers. Private equity investments or debt securities that are classified as held-to-maturity are examples of financial assets that can be updated to reflect their current values, and loans or notes are examples of liabilities that can be affected in a change to fair value accounting.
Of what drawbacks should CEOs be aware?
There is uncertainty inherent in all estimates and fair value measurements, and there’s the risk that financial statements will be seen as more arbitrary with fair value because management has even more ability to affect the financial statements. Financial professionals coming into the workplace need to be trained on recognizing biases with respect to accounting estimates and fair value measurements so they can help CEOs with acquisition evaluations. They also need to be able to explain to prospective lenders and investors how they developed the company’s asset and liability values. It will be important to demonstrate consistency in how you’ve applied the fair value principles and developed your valuations to enable you to maintain credibility with investors, lenders and auditors. Although CEOs may select which assets and liabilities they wish to value under the standard, outside parties will be looking for consistency in how the standard was applied.
Last, CEOs need to consider the future. Once you go down the fair value path, there’s no turning back. Today, fair value standards may provide a great financial advantage for your company, but circumstances and market conditions change. Anticipate that change, estimate how long you will hold any asset and run predicative models to see if fair value will provide an ongoing advantage for your company.
DIANE WITTENBERG is a partner of Audit and Business Advisory Services with Haskell & White LLP. Reach her at (949) 450-6334 or firstname.lastname@example.org.
It’s been just a little over one year since the Securities and Exchange Commission (SEC) amended its disclosure rules around executive and board pay packages. The new rules require specific and more extensive reporting of prequi-sites, pension benefits, equity, non-qualified deferred compensation and compensation-related performance measures than have been reported in the past. While these new rules go further than ever before in revealing just how and how much executives are paid, making more transparent previously hard-to-find information, it’s only now that the first year of proxy statements have been filed that the SEC can make their reviews of the rules’ effectiveness. Recently, the SEC began by issuing more than 300 letters to companies requesting further information.
CEOs and boards can now begin to anticipate some of the likely changes that the SEC will require going into year two, says Ann Costelloe, San Francisco office practice leader of Executive Compensation for Watson Wyatt Worldwide.
“Certainly the results from implementation of round one of the new disclosure rules is that we’re getting a much clearer understanding of the process around executive compensation, including who’s involved and how the plans operate,” says Costelloe. “But the proxy filings fell short of actually establishing the relationship between pay and performance for the executives, and when we look to measure the pay of executives against peer companies with a similar performance, the link just isn’t clear.”
Smart Business spoke with Costelloe about what CEOs can learn from the results following the first year under the new reporting regulations and what changes to expect going into year two.
Which disclosure areas scored the worst following round one?
You can look at the proxies and see that less than 50 percent of the companies reported what the executives’ compensation-related performance goals actually were. For example, when you review the section of the proxy that describes the amount of bonus that the executive was granted in relation to the firm’s performance objectives and results, it becomes clear that, in many cases, the companies simply didn’t want to state the specific performance measurements and goal benchmarks.
Many of the proxy statements weren’t written in plain English and I think, because the process was new, many authors erred on the side of caution and included more information to the detriment of clear, concise explanation. Also, many of the proxies failed to consolidate all of the key information in one single place where the reader could easily access it. After this first round, the SEC is going back to ask for more information about the performance thresholds that are tied to executive compensation pay-outs and a more reader-friendly format.
What were some of the best elements from the proxies?
The best proxies included an executive summary that clearly listed what the executive was paid and how the pay-out tied back to performance in a condensed easy-to-read format. Also, I think after reviewing the first year’s proxies, the best proxies resulted from the cumulative work effort of HR, the legal department and finance. When the document is created solely by the legal department, it starts to take on the characteristics of a legal document and can become overly wordy and hard to understand from a layman’s perspective. Investors want to see a straightforward and transparent approach to providing the required information that is easy to understand.
What other trends have emerged in the areas of plan changes, change in control provisions, retirement or other executive benefits as a result of the new disclosure rules?
What’s really interesting is that we are definitely starting to see companies take a harder look at the business rationale for these programs. Many companies took a proactive approach in anticipation of the new disclosure rules and eliminated some of the traditional perks, like country club memberships, post-retirement perquisites and extra travel benefits. In relation to change of control provisions, we saw some organizations begin to make or consider changes (reductions) to existing arrangements, although generally companies are holding fast to the contracts that have already been executed. I think on a go-forward basis, as new contracts are negotiated or new plans are implemented, you’re going to see a more conservative approach to severance payments and elimination of some of the kickers in supplemental executive retirement plans.
What other changes should CEOs expect around reporting and what else should CEOs do to prepare for next year?
I think to prepare, companies should expect to fully explain the link between executive pay and performance. Many people think that the SEC will have higher expectations and will demand more rigor around the metrics that are used to measure executive goals and detail about how the compensation was actually earned and how the executive’s performance ties back to the compensation payment.
It will be important for the proxy author to understand the differences between the pay opportunity and the pay that was actually realized by the executive and be able to articulate it. Most importantly, start early, involve numerous members of the team in completing the metrics for the document and exercise the utmost transparency in providing the necessary information to comply with the regulations.
ANN COSTELLOE is the San Francisco office practice leader of Executive Compensation for Watson Wyatt Worldwide. Reach her at (415)733-4244 or email@example.com.
Politicians argue about it, unions strike over it, and CEOs pick up most of the tab for it. The rising cost of providing health care coverage to employees poses challenges for CEOs, but many feel powerless when it comes to changing or influencing such a complex system.
Understanding how the health care system works will help CEOs initiate cost-saving measures within their own company, says George “Jody” Root, partner and head of the health care practice group at Procopio, Cory, Hargreaves & Savitch LLP. Root also says that CEOs can influence cost-control efforts outside of their own companies by supporting firms that offer health care coverage to the county’s uninsured population. Support from CEOs is vital because the cost of health care for the uninsured is one of the external factors that exacerbates the rise in health care premiums for companies.
“Think of our health care system as a table with four legs,” says Root. “Every time something happens to one of the legs, the others have to adjust. The opportunity for CEOs to achieve cost management lies in their understanding of how the four parts of the system impact one another.”
Smart Business spoke with Root about how CEOs can manage internal and external health care cost drivers.
What are the factors that influence the cost of health care?
Our health care system has four separate parts:
- Two provider groups, which are the hospitals and the physicians
- The payors, which are usually insurance companies and the businesses that pay for the insurance
- The patients
These are the table legs, and they all must be level in order for the system to work properly. Frequently, something happens to one leg and the others strain under the excess weight.
In addition, there are two other factors that impact the cost of health care: One is the pervasive employee belief that health care is an entitlement, and the second factor is the cost of coverage for the uninsured population. A huge population group, almost 24 percent in certain geographic areas, has no coverage at all. When they seek treatment in an emergency room, the providers pass along those unreimbursed costs to the insurance payors in the form of higher fees, and subsequently, the insurance companies raise their premiums. This shifts more weight onto the company payors who have to pay those higher premiums for employee health coverage.
How can CEOs reduce their company’s cost of providing health care to employees?
First of all, you need to understand what coverage is available outside of your company’s health plan to make certain that every payor is doing their part. For example, in San Diego County, 25 to 26 percent of the population is Medicare-eligible. In California, there is no age ceiling for retirement, so it’s important that employers coordinate their company’s medical benefits with Medicare.
Also, some employees may qualify for Medicaid coverage for their children. Identify those employees and let them know that coverage is available for their children.
Last, encourage employees to use clinics instead of emergency rooms for nonemergency situations. Using lower cost clinics will reduce the company’s costs, and it also keeps the table level by not throwing too much weight onto the provider leg.
How is insurance coverage impacted by the four parts of the system?
Companies can provide coverage to workers three different ways:
- Indemnity plans: These plans, such as PPOs, provide more traditional coverage. Employees like PPOs because they control when and how they use the benefits; providers also favor PPOs, but employers don’t like the cost.
- HMOs: Employers like HMOs because they’re less expensive, but the other legs of the table don’t favor HMOs. New payment plans are coming that will compensate providers based upon the quality of the care they provide. This will motivate CEOs to purchase coverage based upon the quality of the plan’s providers if they want to realize the cost savings afforded under this new payment philosophy.
- HSAs: These high-deductible plans are not always popular with employees because the plans don’t measure up to their health care entitlement beliefs, but payors like them because they are less costly.
What actions can CEOs take to influence the other factors that drive health care costs?
Employee education is one of the best ways to help combat employee entitlement mindsets. Also, there’s a new plan coming to San Diego called Healthy Kids, designed to provide coverage for the kids of working families who don’t have coverage elsewhere. This will help reduce the indirect financial burden that gets placed on employers from treating uninsured children.
Also, CEOs should consider supporting two nonprofit groups in San Diego that were organized by employers to provide coverage for the uninsured population. San Diegans for Healthcare Coverage and the San Diego Business Healthcare Connection collect donations and grant money and use the funds to pay medical costs for the uninsured.
These are longer-term solutions designed to keep the weight of the table from shifting onto the business payors.
GEORGE “JODY” ROOT is a partner and head of the health care practice group at Procopio, Cory, Hargreaves & Savitch LLP. Root represents health care providers across the U.S. Reach him at (619) 238-1900 or firstname.lastname@example.org.
Most executives are familiar with the privilege that applies to conversations between themselves and their attorneys, the so-called “attorney-client privilege” frequently portrayed on television, in the movies and in novels as protecting one’s communications with one’s lawyer. But confidentiality is actually a legal principle that extends far beyond conversations you have with your lawyer.
The duty of confidentiality in California is as strong as any in the professional world. A California lawyer must protect client confidences at "every peril to himself or herself," says Bob Russell, partner with Procopio, Cory, Hargreaves & Savitch LLP and chair of the firm’s Professional Standards Committee.
“Everyone in the law firm who has access to client records, e-mails, memos or letters must hold the information contained in those documents and all communications confidential,” says Russell. “Even if the information is a matter of public record somewhere, unless the information is generally widely known, the client information that comes into the firm must be treated as confidential.”
Smart Business spoke with Russell about what CEOs should know about an attorney’s duty of confidentiality.
What does the attorney confidentiality duty cover?
Every bit of information has to be treated confidentially, even if it’s public information. For example, if your company completes a study that is released to other parties, but is not generally available to the public, and then you subsequently submit that report to your lawyer for litigation purposes, your lawyer and the law firm’s employees must treat the study’s contents as confidential. This is also true if the executive simply has a consultation with his or her lawyer about the possibility of filing a lawsuit, filing for bankruptcy or a potential merger or acquisition documents submitted to the lawyer as part of that consultation must be kept confidential even though those documents may already have been shared with other parties. The same duty that applies to your lawyer extends to all of the employees of the law firm. So a paralegal, an associate or a secretary who works on your case must keep all information confidential, including even the identity of the client.
How does a law firm assure that its employees uphold the firm’s duty toward client confidentiality?
Many firms, like Procopio, conduct continuing legal education seminars emphasizing the duty of confidentiality and require employees to sign an agreement acknowledging their responsibility with respect to client information and agreeing that they will not breach the confidentiality of the firm’s clients. In addition, law firms have a responsibility to secure their files and must ensure that vendors they hire understand the need for security. For example, law firms frequently rely on off-site records storage vendors or document shredding firms. Law firms are required to contract with vendors who know how to handle the storage and shredding of secure legal documents, because outsourcing doesn’t waive the requirement for maintaining client confidentiality.
What should CEOs ask a prospective law firm about its client confidentiality practices?
First of all, be sure to ask the tough questions about how the firm will ensure confidentiality when you are interviewing a lawyer prior to representation. I also wouldn’t hire a lawyer who seems more interested in feathering his or her own nest than representing you. Any time a lawyer goes public with information about representing a client, whether it’s simply a reference on a Web site or speaking to the media about the case, that communication needs to be approved by the client. Sometimes it’s the right strategy for a lawyer to come forward during a press conference and make certain representations about you or the case, but the strategy and content of such a public communication needs to be approved by the client in advance.
To convey very sensitive information, consider requesting that your attorney communicate with you in ways other than e-mail. Unfortunately, accidents do happen and sometimes an attorney can hit the wrong e-mail command or address and send your information to another party with no way to retrieve it. Also, it is not unusual for an executive to give others (such as an assistant) access to his or her email, and sometimes communications are too sensitive, even for assistants.
Lastly, consider asking that all of the documents pertaining to the matter be returned to you once the case is concluded. This is particularly important if you wish to maintain the files, since most firms destroy client files after a set number of years established in the engagement agreement.
How does a lawyer representing a client in court deal with the duty of confidentiality?
Once you are in the courtroom, the information that is presented is governed by a different set of standards, and confidentiality is waived to the extent the lawyer is required to present the information necessary to the client’s case. However, communications between the client and his or her lawyer are still privileged; therefore, except in exceptional cases or upon approval by the client, discussions between the lawyer and the client remain confidential, may not be inquired into and won’t become part of the public record.
BOB RUSSELL is a partner with Procopio, Cory, Hargreaves & Savitch LLP and chair of the firm’s Professional Standards Committee. Reach him at email@example.com or (619)515-3244.
Concerns about excessive executive compensation, backdated stock options and earnings restatements have sent shockwaves of new regulation and compliance requirements, like Sarbanes-Oxley, crashing into companies.
Yet, despite the strong performance of many CEOs in the past two years, the pendulum has swung away from a “let my numbers speak for me” mindset to a new environment where CEOs must play the role of chief corporate communicator.
CEOs may be able to benefit from this new role by delivering truthful, consistent messages to all constituents, a practice that will restore trust in the C suite and bring control back in house, says Rick Beal, managing consultant for Watson Wyatt Worldwide. “Nobody likes surprises,” says Beal. “Communication transparency takes away the surprises and brings control back to the CEO. In fact, there’s a huge opportunity for CEOs to tell the story behind their numbers hidden within the compliance requirements.”
Smart Business spoke with Beal about how CEOs can use transparency in their communications to win back trust and control from stakeholders.
What are the best practices for communicating executive compensation compliance?
The Securities and Exchange Commission (SEC) mandated a new format for disclosing compensation information for public companies. It says that compliance is meeting the letter of the rules but not the spirit of the intent. Although companies have made good-faith attempts to provide data, many company disclosures fail to provide the ‘how’ and the ‘why’ questions and merely articulate the ‘who, what, where and when.’
We recommend that CEOs take the disclosure issues completely off the table by using an executive summary to tell the story of the executive compensation program. This executive summary should include pay strategy, the company’s labor market for executive talent, and pay and performance levels relative to peer companies.
Wherever possible, without making disclosures that would cause true competitive harm, CEOs should disclose incentive plan goals and their link to incentive payments. They should quantitatively evaluate and describe the difficulty of achieving incentive performance goals.
What are the best practices for communicating with investors and shareholders?
In public companies, the primary constituents are major shareholders, but too often CEO communication is limited to presentations to board members and stock analysts rather than building personal relationships with key shareholders. There is ample room for building a shared understanding of business objectives and governing principles with key investors without divulging insider information through one-on-one meetings.
The key is having consistency and accuracy in your message, and not letting your advisers dissuade you by advocating a no-risk position to the point that not enough information is shared. There is a middle ground, and you can utilize a good media relations team to help develop your talking points and messaging that will tell the broader story of your company’s strategy and goals.
Should CEOs be more transparent when communicating with employees?
Yes. There are huge benefits for letting employees know what’s going on in the company. Utilizing internal resources to establish a direct line of communication to employees about the philosophy, business strategy and desired culture is critical to success. More engaged employees who understand their role in achieving organizational objectives drive a 20 percent increase in performance as measured by increases in total shareholder returns.
Senior management needs to communicate at least monthly via messages that are aligned with corporate strategy and that information should be available in multiple formats, including print, electronic and face-to-face communications.
Are you advising CEOs to increase their transparency in customer communications?
CEOs have a real opportunity to carry their message and to differentiate their brand and their company with customers by letting their customers know what the company’s mission and vision is all about. You can also lead by example by demonstrating the importance of customer commitments, and you can enhance the expectation that all employees carry the organizational messages to the customer.
How does community involvement potentially reduce bureaucratic compliance for CEOs?
A positive company image can be transmitted through a good solid community relations program and through community involvement by CEOs. Getting beyond compliance requirements to build an environment of trust with all stakeholders is critical to reducing bureaucratic costs. The real opportunity begins when the improved conversation yields unexpected opportunities and raises the level of engagement among all of the constituents.
RICK BEAL is the managing consultant for Watson Wyatt Worldwide in San Francisco. Reach him at (415) 733-4100 or firstname.lastname@example.org.
The saying that an ounce of prevention is worth a pound of cure is especially true when it comes to delivering a healthy baby at the end of a high-risk pregnancy. Diabetes, infections or other complications greatly increase a pregnant woman’s chances of delivering a premature or sick infant. Fortunately for expectant mothers and fathers, proactive care from an experienced perinatologist can significantly improve the odds of delivering a healthy baby. For employers who bear the financial burden and social responsibility of providing health and disability insurance coverage to workers, this is good news.
A perinatologist is an obstetrical subspecialist concerned with the care of the mother and fetus that are at higher-than-normal risk for complications both during the pregnancy and up to one month after delivery. A high-risk baby might be cared for by a perinatologist before birth and by a neonatologist after birth.
“One really sick baby can incur hundreds of thousands of dollars in insurance costs,” says Dr. Patrick Walsh, director of neonatal intensive care at Western Medical Center Anaheim. “So having healthy babies is good for business leaders and the community.”
“We are able to treat many of the conditions that lead to premature births,” says Dr. Nandi Wijesinghe, medical director of obstetric services at Western Medical Center Anaheim. “The earlier a patient seeks treatment, the less likely it is that the baby will have complications at birth.”
Smart Business spoke with Walsh and Wijesinghe about these concerns.
What constitutes perinatal services?
Walsh: Perinatal services are provided by a highly specialized team, including a board-certified physician and a trained nursing staff. This type of care is critical because it’s difficult for premature infants to recover, and if things go wrong at birth, they go wrong very quickly. So it’s imperative to have specially trained personnel who attend to the patient over the course of her pregnancy and who will be on the premises of the medical center ready to step in, if needed, during labor and delivery.
What should patients consider when selecting a medical center and physician for peri-natal care?
Walsh: I would evaluate the level of staff interaction and how staffers respond to your questions, because you really want to be treated like a person not a number and you want answers to all of your questions. Also, it’s important to ask who will be attending the delivery. You don’t want a situation where the perinatologist or an anesthesiologist is on standby waiting for a call to come to the delivery room, because time is of the essence under these circumstances. Frequently, I wait outside the delivery room door just in case I’m needed when one of my patients is delivering. Also, mothers-to-be and fathers-to-be should ask which physician will be on call just in case the mother delivers when the perinatologist is on vacation. Also, ask how the doctor will transfer the information about the case to another doctor, should delivery occur while the patient’s regular perinatologist is away.
Wijesinghe: At large medical centers like tertiary medical centers and teaching hospitals, patients frequently are cared for by a team of physicians or an intern with limited hands-on experience. It’s important to have a continuum of care, from the physician’s office all the way through delivery. I believe that patients and infants fare better with a greater level of one-on-one attention that is afforded by a private practice perinatologist.
What are the positive outcomes that result from early treatment by perinatologists?
Wijesinghe: The likelihood of a baby having complications at birth is greatly reduced when high-risk obstetrics patients are under the early care of a perinatologist. This can reduce infant morbidity and mortality rates. The best outcomes are achieved by doctors who deal with these types of complications on a daily basis.
Walsh: New knowledge and practices improve the treatment for patients with high-risk pregnancies and premature infants. Patients need to be under the care of a specialist who is constantly focused on implementing new techniques in order to benefit from the resulting improved outcomes.
How do Orange County businesses benefit from this availability?
Walsh: Newborn intensive care is one of the most expensive forms of medical treatment available. The impact of caring for a sick infant can last for years, decades or even a lifetime. So having a preventive program available locally can make a huge difference in direct costs to businesses and help employees stay worry-free and productive.
Wijesinghe: In many areas, patients have to be referred out for this kind of medical care, which further increases the cost to employers and the anxiety level for patients. In poorly managed medical situations, the welfare of the mother and the infant can be compromised quickly. When we do our job effectively, the frequency of complications is reduced, and everyone benefits. For more information about prenatal care, contact Western Medical Center Anaheim.
DR. NANDI WIJESINGHE is medical director of obstetric services at Western Medical Center Anaheim. Reach him at (714) 774-8870.
DR. PATRICK WALSH is director of neonatal intensive care at Western Medical Center Anaheim. Reach him at (714) 502-1144.
When launching a new business venture, you must decide what form of business entity will provide the greatest tax savings and the best return to owners and investors.
An initial public offering (IPO) is often regarded as the coveted prize at the end of the rainbow for many entrepreneurs, so the firm is structured as a C corporation. But upon reaching success, many businesses are sold before going public. Structuring as a C corporation might eliminate some of the tax advantages that could be realized in the short term as an S corporation or a partnership, and it may result in double taxation when the business is sold, says Brad Graves, partner-in-charge of the Tax Group at Haskell & White LLP.
“Many entrepreneurs are leaving benefits on the table when they assume that an IPO is the endgame they seek, when a partnership structure might provide the best tax benefits today without diminishing the end result tomorrow,” says Graves.
Smart Business spoke with Graves about the tax advantages of the various business entities.
How do C corporations, S corporations and partnerships differ in flexibility?
For C corporations, income and losses are reported and taxed at the corporate level and profit distributions are generally characterized as dividends. There’s no deduction for profit distributions at the corporate level, because dividend income is allocated to the shareholder who recognizes the dividend at fair market value when reporting it for individual income tax purposes. Any noncash distributions trigger a gain at the corporate level.
As S corporations, a business’s income and losses are passed through to the shareholder level and allocation is equal for all shares. Noncash distributions trigger a gain at the corporate level that is then passed through to the shareholders. However, this increases the shareholder’s stock basis, which will eventually offset future income or generate a loss when the stock is sold.
As a partnership, a business’s income may be allocated among the partners with various preferences, guarantees and tranches in order to reflect the agreed upon economic sharing of the partners, as long as certain safe harbor provisions are met. In addition, noncash distributions do not generally trigger a gain.
What are the differences in taxation of operating income between the three?
C corporations are taxed on operating income at the corporate level, which can climb up to the maximum federal rate of 35 percent, and the lower capital gains tax rate does not apply for corporations. Capital losses are allowed up to the level of capital gains and can be carried forward five years or backward three years.
In S corporations and partnerships, all income is passed through and reported and taxed at the shareholder or partner level. Capital gains and losses are taxed at the shareholder’s or partner’s capital gain rates and subject only to the limitations at the shareholder or partner level.
What is the difference in how business losses are treated?
If you think that the business will be generating losses, at least for a while, it’s important to consider how they will be treated for tax purposes. For C corporations, losses may only be carried over at the corporate level. While S corporations pass losses through to the shareholders to the extent of stock basis, plus basis in shareholder loans to the corporation. However, if the firm will be heavily leveraged, a partnership may be preferable. Partnerships can utilize losses in much the same way as S corporations. Losses pass through to the extent of basis in partnership interest (capital account plus allocable share of debt, including debt from banks and other third parties) with one caveat that ‘at-risk’ limitations will limit losses funded by nonre-course debt unless it is ‘qualified.’
How do the three entities differ in the tax implications resulting from the sale or liquidation of the business?
A sale or liquidation of the assets by a C corporation results in double taxation. The corporation realizes gain or loss from the sales of the assets, pays corporate income taxes and distributes the remaining assets to the shareholders, who will be taxed on the proceeds they receive.
The S corporation is regarded as a ‘single-taxation’ entity when the business is sold, so gains or losses resulting from the sale are passed through to the shareholders, who report the income and losses and pay the taxes. Stock basis is increased, thereby reducing gain on stock redemption.
In the event of a liquidation of a partnership by distribution of the assets to the partners, no gain or loss is generally recognized so there’s no tax. In the event of a sale of the partnership’s assets, gains and losses at the partnership’s level are passed through to the partners, who report the income and losses and pay the taxes. The partners’ bases in their partnership interest receive a corresponding increase or decrease, thus ensuring only a single level of taxation.
BRAD GRAVES is partner-in-charge of the Tax Group at Haskell & White LLP. Reach him at email@example.com or (949) 450-6200.
After decades as a dormant, little-understood employee benefit, retirement plans are having a profound impact on businesses nationwide. The Pension Protection Act of 2006 (PPA) and the continued escalation of the so-called global war for talent has accelerated the need for companies to review how their retirement plan dovetails with their business plan.
“The PPA provides clarity around the rules for defined-benefit and defined-contribution plans, and that has created many new opportunities for companies,” says Christine Tozzi, Retirement Practice Leader with Watson Wyatt Worldwide. “In the last 18 months, most employers have made certain that their retirement plans have financial characteristics that manage risk, and benefit designs that help them attract, retain and motivate workers as well as enhancing their ability to retire employees at the right time for the business.”
Smart Business spoke with Tozzi about how CEOs can maximize the business value of employee retirement plans.
What are the current trends around retirement plan design?
Most CEOs are familiar with two types of pension plans: defined-benefit (traditional pension) plans and defined-contribution plans such as 401(k) plans.
A defined-benefit plan typically promises the participant a specified monthly benefit at retirement. The plan sponsor funds the program in a tax-advantaged trust and is ultimately responsible for the investment outcomes of plan assets. In a defined-contribution plan, the employee, the employer, or both contribute to the employee’s account. The ultimate value of the account will vary, based on the performance of the investment vehicles used for the funds.
One trend is a continued shift toward defined-contribution plans. Additionally, there have been many plan design changes to the traditional 401(k) that reflect opportunities from the new pension law. For example, companies install automatic enrollment features in their 401(k) plans. These plans increase employee participation by providing a default decision to participate in the plan, with a positive election needed to withdraw from the plan, which, in turn, encourages them to save more.
The second trend is that companies that sponsor pension plans are making changes to investment strategy and program design to capitalize on new approaches for minimizing financial risks. Risks such as interest rate, inflation, investment return and longevity can be mitigated with the right investment strategy and design. This explains the movement toward hybrid pension plans, a type of defined-benefit plan that offers various blends of defined-benefit and defined-contribution characteristics. They can ultimately offer substantially decreased financial risks to the company.
How can CEOs align retirement plans to the business plan?
If your business model relies on experienced employees, your retirement plan should pay greater dollars for tenure. Certain types of pension plans are effective in attracting mid-career workers and retaining older workers. If, on the other hand, the business model supports employment stays of five years or fewer, you should consider more of a portable hybrid defined-benefit plan or a defined-contribution benefit to attract those types of workers.
How can CEOs obtain ROI from pension plans?
Labor is frequently a company’s largest expense. Retirement plans can act as ‘levers’ in controlling the flow of people into and out of your company. Having a well-designed retirement plan will not only help attract and retain workers, but will also create more predictable retirement patterns among the company’s work force.
Studies show that installing a combination plan that offers a 401(k) coupled with a core-level pension can provide more predictable retirement patterns and increase the efficiency of providing retirement benefits. There are also links between retirement benefits and worker productivity. Also consider investing in education that improves employees’ retirement plan management skills so they actually can retire when the time comes.
How can management help employees manage their retirement plans?
- Communication and education are the best ways to help employees become effective managers of their own retirement funds.
- Provide targeted retirement plan statements to employees.
- Provide modeling tools so employees can track the performance of their retirement funds and forecast the amount of money available for retirement.
- Make advisory services available to employees that assist with asset allocation and projected retirement incomes from investments.
- Educate employees about updated life expectancies and projected changes in Medicare and Social Security.
CHRISTINE TOZZI is Retirement Practice Leader with Watson Wyatt Worldwide. Reach her at firstname.lastname@example.org or (415) 733-4346.
Hospice was originally envisioned to be a noninstitutional benefit that would provide end-of-life support for patients and their families. Because hospice care was primarily designed to be administered in an in-home setting, many people may not be aware that patients in acute care facilities can also receive the benefits of hospice.
Patients who are too frail to go home or who enter an acute care facility when the end of life seems imminent can qualify for hospice services. Medicare provides coverage for hospice, including the cost of the hospital stay and limited medications. Hospice not only offers hospice-trained nursing staff but services for the patient’s emotional needs, including scheduled visits from case managers, social workers and bereavement counselors, who extend their services to the entire family.
“Sometimes, it’s not best to transfer the patient to a long-term care facility, and it may not be feasible to send them home. That’s when extending their stay in an acute care facility like a hospital might be the best decision for the patient and his or her family,” says Dr. Raj Menon, medical director with Hospice Care of the West and staff physician with Coastal Communities Hospital.
Smart Business spoke with Menon about the benefits of hospice, and when patients are eligible for in-patient hospice care.
What is general in-patient hospice care?
Traditionally, when a terminally ill patient was hospitalized and death was imminent, that patient was discharged, returning home or to a nursing home or freestanding hospice unit for end-of-life care.
With in-patient hospice care, we are able to keep the patient in the acute care environment and extend the hospice continuum of care for 48 to 72 hours until either death occurs or the patient has a change of condition that permits his or her transfer to a long-term care facility.
When is in-patient hospice care appropriate?
If the patient is too frail, either physically or emotionally, to permit transfer to another location, or if the patient doesn’t have the immediate support of caregivers who can provide 24-hour care at home, it often makes sense to keep the patient in the acute care facility.
Frequently, the patient is initially admitted into emergency and then into the intensive care unit, where he or she is fully evaluated and the prognosis becomes clear. It isn’t uncommon to see a patient in the end stages of cancer develop other medical conditions, like infections, that require hospitalization for treatment. Often, the perception is that patients don’t receive any treatment for their conditions once they enter hospice. In this case, we can still aggressively treat the infection because the treatment will provide comfort to the patient and we can do that more effectively using an in-patient setting.
What are the care advantages of in-patient hospice treatment?
Hospital-based in-patient hospice units can be part of the comprehensive care of cancer and other end-stage diseases. The unit provides continuity of care within the same care setting. Environmental and psychological adjustments will be minimized for patients and their families, and the transition of care is smoother from the perspective of health care workers. Not only is the communication and transfer of medical information easier when the patient stays in the same facility, but the same physician can follow the case, assisted by a hospice-trained nursing staff that is on duty 24 hours a day. Additionally, the medical director for the hospice can also assume management of the case.
Patients receive fluids and antibiotics intravenously if necessary, as well as tube feedings, pain medications and mild rehabilitation to keep them comfortable. The family will immediately receive palliative care, including all of the counseling benefits that are part of the hospice program and should their loved one pass away they can continue to receive counseling for a period of 13 months following death.
Are in-patient hospice programs readily available?
Not all acute care facilities offer in-patient hospice treatment, but if the situation arises where this is the best solution for a member of your family, you can request transfer to a facility that offers the service. You may also request a consultation with a hospice professional to determine where you can find the most convenient acute care facility that offers an in-patient program.
The community benefits having in-patient hospice care as an option because the patient can be more at ease, and the family is reassured that the end of life will occur in a comfortable setting.
DR. RAJ MENON is medical director with Hospice Care of the West and staff physician with Coastal Communities Hospital. Reach him at (714) 556-6666.
This news is even more disappointing when factoring in that the number of employers offering consumer-directed health care plans (CDHP) continues to grow. In the same survey, the number of companies offering high-deductible health plans increased from 33 percent in 2006 to 38 percent in 2007.
A bright spot in the survey was the revelation that some firms are beating the odds and reducing the rate of increase from an average of 8 percent to 2.5 percent. Watson Wyatt Worldwide explored how these firms had gone about achieving that result.
“The best performing companies in the survey were more likely to implement programs that go beyond employee cost sharing,” says Dean Hatfield, senior benefit consultant for the Group Healthcare Practice at Watson Wyatt Worldwide. “They have involved the use of financial incentives, effective information delivery, efficient quality of care, maximum health and productivity, and decisions based upon data and metrics.”
Smart Business spoke with Hatfield about how the best performing companies are achieving better cost management results through comprehensive solutions.
What are the best companies doing to curb the rate of health care cost increases?
One of the most efficient ways for companies to curb their health care trend is by improving quality. When employers looked at the outcomes from medical facilities such as hospitals, they began steering employees toward hospitals and physicians that specialized in the employees’ needs for procedural or condition-related treatments. Consequently, the patients had fewer complications and lower mortality rates.
Rather than shopping for the lowest rate, employers looked at the available data and made decisions based upon medical outcomes. Not only were results better, but costs were lowered.
What other types of data should CEOs look at to help reduce health care costs?
The best companies looked at the data surrounding their employees’ health issues, such as employee absenteeism and the effect of employee wellness on productivity, to help structure their health programs and didn’t just focus on the aggregate cost of their health program.
For example, firms have found that obesity is the cause behind many illnesses and subsequent rising costs, including lost time. So now they are doing a better job of instituting programs that promote behavior changes. They are creating customized communication pieces tailored to defined employee segments with relevant and meaningful messages that teach employees the health conditions that can be improved or even avoided.
How important is employee education for achieving cost reduction?
It’s absolutely vital. The survey results show that most employees don’t understand key terms in their health plans like ‘co-insurance’ or ‘formularies.’ Because they don’t understand how their health coverage works or how they might benefit from selecting cost-effective health care services, employees are not effective cost management partners.
Merely cost-shifting to employees is clearly not enough. You have to educate them so they can become better managers of their own resources and their own health. The data also show that only about 50 percent of the employees read all of the materials provided them about their medical coverage and the other 50 percent only read the enrollment insert or plan changes.
What is the best way to provide information to employees?
The survey says that the most effective way to communicate with employees is by sending information in printed format to their homes (69 percent). Other effective means include providing information in printed format at work (67 percent), via the Internet (62 percent) and in face-to-face meetings (44 percent).
Research is key to making communication messages relevant and meaningful. Face-to-face education sessions are the most effective communication method, and different marketing techniques can maximize the attention spent on health care.
Teaching employees about not just the cost of care, but the value of changing their health behavior, is more effective if the education sessions are live and interactive.
Most employers are focusing on plan design and cost-sharing. It is effective in the short run but not in the long run. The best savings in the long run are being achieved by providing personalized, tailored programs and resources that inspire employees to take action; keeping health improvement behaviors on track; and boosting individual accountability through employee education and promotion of best practices.
DEAN HATFIELD, CEBS, is a senior benefit consultant for the Group Healthcare Practice at Watson Wyatt Worldwide. Reach him at (415) 733-4100 or email@example.com. For more information, visit www.watsonwyatt.com.