Category: Timely Updates

Posted on Mar 13, 2017

A U.S. Appeals Court recently ruled that the outsourced employees of a staffing company did count for purposes of determining whether the company met the small employer exception of the Consolidated Omnibus Budget Reconciliation Act (COBRA). Therefore, the court found the company was subject to the law, and imposed penalties due to the company’s failure to provide a COBRA notice to a terminated employee.

Facts of the Case

A sales manager was employed by a staffing company and was covered by its group health plan.

The employer terminated the sales manager’s employment on January 6, 2012, and cancelled his medical coverage retroactively for the month of January even though his final paycheck had a deduction of $467 for “health.”

The company didn’t provide the employee with a COBRA notice about his right to continuation of coverage. It relied on the small employer exception, which exempts employers with fewer than 20 employees from COBRA requirements.

In response, the employee filed a lawsuit, alleging that the small employer exception didn’t apply to the company, and it had violated the law by failing to provide him a COBRA notice.

The company argued that it employed fewer than 20 employees, and the 396 employees they outsourced to clients didn’t count. It claimed that there was no evidence that Congress intended COBRA to apply to staffing companies that have only a few full-time employees in the company office (such as the sales manager), but also have other outsourced workers with no insurance benefits whose work is directed by the company’s client employers.

The problem: The outsourced employees in this case remained on the staffing company’s payroll and were recruited, screened, hired, trained and supervised by the company even though they performed services for its clients.

The U.S. District Court held that the company’s outsourced employees were its common-law employees, and as a consequence, COBRA’s small employer exception didn’t apply to the company. Thus, the court imposed COBRA penalties of $110 a day on the company and its owner due to its failure to provide a COBRA notice to the terminated employee.

Outsourced Employees

On appeal, the Eleventh Circuit agreed with the district court decision and held that COBRA’s small employer exception didn’t apply to the staffing company. The appellate court reasoned that if the outsourced workers were counted along with the company’s full-time employees, they indisputably employed significantly more than the requisite 20 employees to be subject to COBRA.

The court also noted the company “held itself out as the employer of the staffing workers by claiming federal tax credits for them.”

Although the outsourced workers were at other job sites, the evidence indicated that they remained the staffing company’s employees for purposes of COBRA. Thus, the court affirmed the district court’s imposition of penalties for failing to provide the employee a COBRA notice.

Was it a Qualifying Event?

For COBRA purposes, a “qualifying event” includes termination of an employee “other than by reason of such employee’s gross misconduct.” In this case, the employer argued that the sales manager’s termination wasn’t a qualifying event under COBRA because he was terminated for “gross misconduct.”However, the court also rejected this argument. It stated that the evidence suggested the sales manager was fired because he missed his sales quota (in other words, he was fired for unsatisfactory job performance rather than misconduct). (Virciglio v. Work Train Staffing LLC, 2016, WL 7487725)

Basics about COBRA

COBRA requires group health plans to offer continuation coverage to covered employees, former employees, spouses, former spouses and dependent children when group health coverage is lost due to certain specific events.

Those qualifying events include:

Death of a covered employee,
Termination or reduction in the hours of a covered employee’s employment for reasons other than gross misconduct,
A covered employee becoming entitled to Medicare, divorce or legal separation of a covered employee and spouse, and
A child’s loss of dependent status (and coverage) under the plan.
COBRA sets rules for how and when continuation coverage must be offered and provided, how employees and their families may elect continuation coverage, and what circumstances justify terminating continuation coverage.

Employers can require individuals to pay for COBRA continuation coverage. The premium the employer charges can’t exceed the full cost of the coverage, plus a 2% administration charge.

COBRA generally applies to private-sector group health plans maintained by employers with at least 20 employees on more than 50% of its business days in the previous calendar year. Both full and part-time employees are counted. Each part-timer counts as a fraction of a full-timer, with the fraction equal to the number of hours that the part-timer worked divided by the hours an employee must work to be considered full time.

Notice Responsibilities

Group health plan administrators must give each employee and each spouse of an employee who becomes covered under the plan a general notice describing COBRA rights. The general notice must be provided within the first 90 days of coverage.

After receiving a notice of a qualifying event, the plan must provide the qualified beneficiaries with an election notice, which describes their rights to continuation coverage and how to make an election. The election notice must be provided to the qualified beneficiaries within 14 days after the plan administrator receives the notice of a qualifying event.

— Source: U.S. Dept. of Labor,
“Employer’s Guide to Group Health Continuation Coverage under COBRA”

Issues to Keep in Mind

COBRA’s small employer exception focuses on the total number of employees — not just on the number covered by the health plan. This court case illustrates that employee status isn’t determined on the basis of a worker’s title or job location, but on factors enumerated by IRS and the courts.

Although the court didn’t address the issue, it would appear that the outsourced employees wouldn’t only be counted for purposes of the small employer exception, but they also would be entitled to COBRA rights to the extent they participated in the company’s group health plan and experienced a qualifying event under COBRA.

If you have questions about your company’s responsibilities under COBRA, consult with your HR or employee benefits advisor or your employment attorney.

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Posted on Mar 8, 2017

Many people are talking about a border tax these days, but how many know what proposals from the White House and Congress really mean?The highly debated proposal from President Donald Trump would impose a tariff, or border tax, on manufactured goods imports from certain countries, most notably China and Mexico. Republicans in Congress agree that action is needed, but have proposed an alternative border adjustment tax. With the news coming out of Washington D.C. confusing at times, there are several critical questions relating to both plans. This Q&A attempts to clear up some of the issues.

Q. How would the proposed Trump plan work?

A. The aim of the tariff, or border tax, is to discourage U.S. companies from importing goods from certain firms outside the United States, particularly some that have set up shop in Mexico and elsewhere to produce goods for the U.S. market. Although details have remained vague, Trump has said that the tariff would be “very major” and could be as high as 35%, a figure he once proposed should apply to automobiles made by U.S. companies in Mexico. The tariff would be accompanied by Trump’s proposed across-the-board reduction in corporate tax rates to 15%.

This plan, however, would likely violate the North American Free Trade Agreement (NAFTA). But Trump has long advocated changing that pact and other trade agreements and has threatened to pull out of NAFTA.

Q. What about the Republican plan?

A. Leading Republicans in the House of Representatives — notably Speaker Paul Ryan (Rep.-WI) — would include a border adjustment tax as part an overhaul of the corporate tax system. Along with reducing corporate income taxes to 20%, that plan would shift taxation to a territorial-based system in which companies are taxed where income is earned. The cost of imported parts or goods for use or sale in the United States would no longer be tax-deductible, while income from exports would be excluded from tax. This approach is designed to bring manufacturing and other firms back into the country.

Initially, Trump characterized this tax plan as being “too complicated,” but later signaled a willingness to work with the House leadership. If this approach is implemented, companies would have to factor in the higher cost of imports, minus any deduction.

However, the plan may violate World Trade Organization (WTO) rules. The WTO permits border adjustments for indirect levies (such as value added taxes), but a direct tax on income may be banned.

Q. What is the history of imposing tariffs?

A. Prior to the introduction of the federal income tax in 1913, tariffs were the main source of revenue for the U.S. government. They reached a high in 1930 when tariff legislation was passed to protect workers during the Great Depression. After other countries responded with their own high tariffs, the United States gradually cut back. These reductions were subsequently enhanced by WTO efforts to lower tariffs.

Currently, U.S. tariffs are assessed on a wide number of goods, ranging from automobiles to running shoes. Non-agricultural products, which account for the vast majority of goods imported into the United States, have an average import tariff of 2%. About half of all industrial goods entering the country are exempt from tariffs. Since 1994, NAFTA has gradually eliminated U.S. tariffs applying to Canada and Mexico.

Q. What is expected to happen if the Trump tariff is imposed?

A. For starters, by raising costs for U.S. importers, the proposed Trump tariff would encourage companies to increase domestic production, while eliminating some of the benefits of manufacturing in countries with lower wages. The Trump administration expects that the tariff would help restore manufacturing jobs as domestic production climbs.

But critics assert that the border tax would also likely result in higher prices for U.S. consumers, especially if other countries react negatively, as many expect them to do (see Is This a Declaration of War? below). Ultimately, a trade war could produce shock waves around the world and could even conceivably lead to a recession or, worse, a depression.

Q. Does President Trump have the authority to impose his tariff plan?

A. Some of Trump’s actions since he took office have raised constitutional issues that haven’t yet been resolved. But it appears that he would be standing on relatively firm ground with tariff-related actions. Congress has the constitutional power to regulate commerce with foreign countries, but that power has often been delegated to the president.

For example, under the Trade Act of 1974, Trump may be able to impose tariffs on countries that violate trade agreements or engage in unfair trade practices. That law effectively allows the president to levy temporary surcharges of up to 15% for as long as 150 days. (Back in 2009, former President Obama relied on this provision to apply a tariff on tire imports from China.) Alternatively, Trump might rely on emergency powers that would allow him to restrict imports in the name of national security.

Q. Could Congress override Trump’s tariff plan?

A. Yes, but it takes a two-thirds majority in both houses of Congress to override a presidential veto. Based on the current makeup of both chambers and the general support that Republicans have shown the new president thus far, this scenario would appear to be unlikely.

Furthermore, if any actions are found to violate NAFTA or the WTO, President Trump has the potential option of simply bowing out of those agreements. In other words, if a tariff plan is implemented, it is likely to stand up to scrutiny.

Is the United States Declaring War?

Don’t expect other countries to take a new U.S. tariff plan lying down.

Foreign nations could initiate legal actions in U.S. courts or through the WTO. What’s more, countries like China or Mexico could respond with their own tariffs on specific companies and goods. Of course, some nations already have tariffs in place, such as the Chinese levy on imported automobiles.

There’s no way of knowing what the full impact of a global trade war would be. But most economists believe there would be more losers than winners once the dust settles.

 

 

 

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Posted on Mar 5, 2017

Simplified Employee Pensions (SEPs) are stripped-down retirement plans intended for self-employed individuals and small businesses. If you don’t already have a tax-favored retirement plan set up for your business, consider establishing a SEP — plus, if you act quickly enough, you can claim a deduction for your initial SEP contribution on your 2016 tax return.

Putting SEPs to Work for You

Because SEPs are relatively easy to set up and can allow large annual deductible contributions, they’re often the preferred retirement plan option for self-employed individuals and small business owners — unless they have employees. (See “Beware of Requirements to Cover Employees” at right.)

The term “self-employed” generally refers to:

  • A sole proprietor,
  • A member (owner) of a single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes,
  • A member of a multimember LLC that’s treated as a partnership for tax purposes, or
  • A partner.

If you’re in one of these categories, your annual deductible SEP contributions can be up to 20% of your self-employment income. For a sole proprietor or single-member LLC owner, self-employment income for purposes of calculating annual deductible SEP contributions equals the net profit shown on their Schedule C, less the deduction for 50% of self-employment tax. For a member of a multimember LLC or a partner, self-employment income equals the amount reported on their Schedule K-1, less the deduction for 50% of self-employment tax claimed on their personal income tax return.

If you’re an employee of your own corporation, it can establish a SEP and make an annual deductible contribution of up to 25% of your salary. The contribution is a tax-free fringe benefit and is, therefore, excluded from your taxable income.

For 2016, the maximum contribution to a SEP account is $53,000. For 2017, the maximum contribution is $54,000. However, there’s no requirement to contribute anything for a particular year. So when cash is tight, a small amount can be contributed or nothing at all.

As with most other tax-advantaged retirement plans, assets in a SEP can grow tax-deferred, with no tax liability until withdrawals are made. Early withdrawals (before age 59½) are generally subject to a 10% penalty, in addition to income tax. Certain minimum distributions are generally required beginning after age 70½.

Beware of Requirements to Cover Employees

Establishing a SEP is more complicated if your business has employees. Specifically, contributions may be required for any employee who:

1. Is age 21 or older,

2. Has worked for your business during at least three of the past five years, and

3. Receives at least $600 of compensation.

Your business can deduct any contributions made for employees. Because SEP contributions made for employees vest immediately, a covered employee can leave your company at any time without losing any of his or her SEP money. For this reason, SEPs generally aren’t preferred by businesses with more than a few trusted employees.

Setting Up Your Plan

A SEP is fairly simple to set up, especially for a one-person business. Your financial advisors can help you complete the required paperwork in just a few minutes. A key benefit of SEPs is that you can establish your plan as late as the extended due date of the return for the year in which you claim a deduction for your initial SEP contribution.

For example, say your business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes. If you establish a SEP and make your initial SEP contribution by April 18, 2017 — the deadline for filing your 2016 federal income tax return — you can deduct the contribution on your 2016 tax return.

Important note: If you extend your 2016 return, you have until October 16, 2017, to set up the plan and make a deductible 2016 contribution.

Need Help?

SEPs can be a smart way for many small businesses to save tax. You still have time to retroactively set up a SEP for the 2016 tax year and make a contribution that can be deducted on your 2016 return. If you have questions or want more information about SEPs and other small-business retirement plan options, contact your tax or financial advisor.

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Posted on Mar 4, 2017

Bonuses: They’re not just for senior executives anymore. Many companies now offer performance-based incentives to rank-and-file personnel, too. But serious problems can occur when these incentives are too strong, poorly designed or insufficiently monitored.

For example, in a widely reported recent case, a large national bank set aggressive sales goals that came with financial rewards. To meet their goals, bank employees opened new credit card accounts in customers’ names without their knowledge or consent. The resulting fallout was a major embarrassment for the employer.

For some perspective, the accompanying table highlights results of the most recent WorldatWork member survey for 2017 variable pay budgets:

2017 Variable Pay: Budgets as a Percent of Total Compensation

Nonexempt hourly nonunion Nonexempt salaried Exempt salaried Officer/
executive
Mean 5.5% 6.3% 12.6% 36.6%
Median 5.0% 5.0% 12.0% 35.0%
Source: WorldatWork 2016-2017 salary survey

Desired Behavior

Before thinking about the potential size of a bonus award, it’s important to consider what kind of behavior your company is hoping to motivate. According to the same WorldatWork survey, most employers tie bonuses and incentive compensation to multiple objectives.

Specifically, 70% based bonuses on a combination of organizational, divisional and individual performance. About one-third use more limited criteria. The determination of whether a single criterion or multiple criteria should be used in the bonus formula, and which one or ones, typically varies according to two factors:

  1. Company philosophy. You may want to instill in your workforce a spirit of cooperation by showing employees that, at least in part, their financial destinies are linked to coworker performance. If that’s the case, your bonus formula might include organizational performance metrics, such as overall customer relationships or how well the company communicates internally and externally.
  2. Individualized assessment of employee motivation. If you focus on differences in how particular employees are motivated, you might conclude that individual performance is the appropriate criterion for some and organizational performance for others. Then your approach might be to custom-fit your bonus formula to the individual or department. For instance, you could base bonuses on production or on contributing new ideas.

Harmonized Pay Plan

When establishing (or overhauling) a bonus plan, it’s important to harmonize incentives with your strategy on base pay. Let’s say you try to give at least modest annual raises to employees whose performance is merely acceptable, and perhaps larger raises to top achievers. In that case, you might be less ambitious with your bonus program.

Obviously there are only so many dollars available in the compensation budget. Also, think about the message you want to communicate through your pay plan. If you give automatic raises, even small ones, you’re saying that, performance aside, all a person has to do to get a raise is stick around for another year. If what you’re really hoping to say is that improved performance will pay off, a small standard raise, even if paired with a small bonus, is unlikely to be motivational.

If you’ve moved away from the practice of cost-of-living style raises, you may be able to award larger bonuses that do have the power to motivate. Also, that doesn’t lock you into an ever-growing base pay commitment.

Keep in mind, a generous bonus could be a waste of money if its structure isn’t carefully considered and communicated effectively to employees. In designing the bonus, you need to determine the specific behavior you wish to reward, and how it will be measured. Then communicate your expectations clearly to your employees.

Avoiding Pitfalls

Be aware of the possibility that some employees will be motivated to produce results that look good in the short run, but could have harmful effects long term. This is of particular concern when financial criteria such as revenue generation or operating profits are involved.

For example, if sales goals are highly aggressive and the bonus will represent a substantial proportion of the employee’s income, the risk of ethical lapses can be high. That means careful supervision will be important — particularly with newer employees.

When bonuses are based on the bottom line, guard against a manager’s aggressive cost-cutting that can produce deceptive short-term results but negatively affect growth in later years.

It’s also critical that employees actually have the ability, within the confines of their job responsibilities, to influence the desired outcomes that you’ve communicated. For instance, if greater accuracy is a stated objective, is it reasonable to expect an employee to find a way to reduce errors?

Naturally, not all bonus criteria are measurable. Some goals, such as “improve the level of cooperation among employees in your department,” will require a subjective assessment. But you can still give midyear feedback and possibly coaching as well.

Finally, before an incentive compensation plan is cast in stone, you may find it useful to discuss it with the employee. People are motivated differently, so connecting on an individual basis where possible may be helpful. That gives you the opportunity to modify the plan if he or she raises important and valid concerns that hadn’t occurred to you.

Still Have Questions?

Designing an effective compensation program isn’t necessarily an intuitive process, but it also isn’t rocket science. Detailed written resources exist to help you establish general policies. Two places to find reliable help are the Small Business Administration website, at sba.gov, and SCORE.org, a nonprofit association dedicated to helping small businesses meet common challenges

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Posted on Feb 27, 2017

Businesses currently face numerous uncertainties in the marketplace. As President Trump and Republican congressional leaders work toward fulfilling their campaign promises, tax laws could substantially change, the estate tax could be repealed, and various laws and regulations (including the Dodd-Frank and Affordable Care Acts) could be repealed or revised. Interest rates and inflation could both rise. Economic relationships with other countries could also change. Some of these changes could be good for your business, while others could have negative effects on the value of your business.

History Lesson

Business valuation professionals are no strangers to dealing with market uncertainties — and neither are business owners and investors. The approach to valuing a business interest doesn’t change because of the uncertainties surrounding the current political environment.

Under the market and income approaches, the value of a business continues to be a function of expected economic returns and market, industry and specific company risk. These fundamentals didn’t change during other events that caused uncertainty earlier in the 21st century, such as the terrorist attacks on September 11, 2001, or the Great Recession that lasted from December 2007 to June 2009.

Key Considerations

Here are some considerations when valuing a business in today’s volatile political climate.

Public market returns. The inputs that valuators use to determine discount rates and pricing multiples are typically based, in part, on data from the public stock and bond markets. So far, public markets have reacted to the election results in a positive manner. In general, the proposed changes to taxes and business regulations are likely to lower expenses and increase cash flow for many businesses.

Company-specific risks. A factor that has changed substantially is the risk associated with specific companies and industries — and valuators face challenges as they attempt to measure these risks. For example, proposed regulatory changes might increase the value of companies that operate in the energy sector or the manufacturing sector. On the flipside, they might adversely affect the value of companies that operate in the government contracting or health care sectors.

Known (or knowable) information. Many private business valuations are prepared with a year-end effective date, because it corresponds to the cut-off date for their annual financial statements. Valuation experts can only use information known or knowable at the date of the valuation. But what did we know as of December 31, 2016?

Valuation experts constantly monitor market conditions. Realistically, at the end of 2016 and even today, there are many unknowns. The specific details of tax reforms and other regulatory proposals haven’t been fully put into effect or made into law. Since we can only speculate on what will happen in the future, business valuators must focus on the likelihood that the subject company will achieve its expected future income. The risk that a company won’t meet its financial forecasts is factored into its discount rate.

Contact a Valuation Pro

Experienced appraisers understand the importance of reacting to events that cause added uncertainty with an objective, measured response, rather than a knee-jerk response. In today’s marketplace, they understand that politicians have many divergent plans that may (or may not) be approved or take effect.

In the meantime, business owners and investors should stay calm and carry on. A valuation professional can help you stay atop the latest tax and regulatory changes and understand how they could impact your company’s expected return and risk profile in the future.

Public Markets Respond to the Election Results

Following the election and through the end of 2016 — the effective date for many private business valuations — the Standard & Poor’s 500 Composite Stock Price Index, a leading indicator of large stocks, has responded positively.

Specifically, the S&P 500 index increased from $2,139.56 on November 8, 2016, to $2,163.26 on November 9, 2016, an increase of 1.1% from the closing price on Election Day. As of December 31, 2016, the S&P 500 index had risen to $2,238.83, an increase of 4.6% compared to the closing price on Election Day.

It’s important to note that changes in the S&P 500 index aren’t exclusively tied to the election results — and sometimes the market misjudges the impact of major events. However, the performance of the S&P 500 does provide a general indication of investors’ expectations about expected economic returns and systematic risk that can assist in valuing businesses in today’s uncertain marketplace. When valuing small private firms, however, current events in the public markets can be less of a factor than estimating long-term economic income probabilities.

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Posted on Feb 26, 2017

As everyone in America knows by now, President Trump and Republicans in Congress have vowed to repeal and replace the Affordable Care Act (ACA). In its place, they plan to introduce a more market-based system of health coverage.

One question many people have: How will the replacement plan help individuals without employer-provided insurance buy health coverage on the open market? A “Policy Brief” released on February 16 by U.S. House Speaker Paul Ryan (R-WI) provides some details on how Republicans hope to get this done. The main features are:

  • An advanceable and refundable tax credit, and
  • Expanded health savings accounts (HSAs).

This article explains some of the details in the document Ryan released titled, “Obamacare Repeal and Replace: Policy Brief and Resources.”

Current Premium Tax Credit

Under current law, lower-income individuals who aren’t eligible for other qualifying health coverage or “affordable” employer-sponsored insurance plans, which provide “minimum value,” are allowed to claim a refundable premium tax credit to subsidize the purchase of certain health insurance plans through a state-established American Health Benefit Exchange or through federally-facilitated Exchanges. This credit is also known as a health care affordability tax credit or premium assistance credit.

The credit generally is payable in advance directly to the insurer on the individual’s behalf, with the taxpayer reconciling the actual credit that he or she is due on a timely filed return. Alternatively, individuals can elect to purchase health insurance out-of-pocket and apply to the IRS for the credit at the end of the tax year. There are a number of complex steps involved in computing the credit.

What Are Refundable and Advanceable Tax Credits?

A refundable tax credit involves a taxpayer receiving a payment from the federal government even if the credit amount exceeds the amount the individual owes in taxes.

An advanceable tax credit provides financial help in advance of filing a tax return. The Republicans’ Policy Brief states that “advanceability is a key feature” of its tax credit proposal “because many Americans need help paying their monthly premiums. They cannot afford to wait until they file their taxes the following year to get assistance.

Proposed Universal Health Care Tax Credit

According to the Policy Brief, the Republican plan would create a new, advanceable, refundable tax credit, under a new tax code section to assist with the purchase of health insurance on the individual insurance market.

The credit would be available to all qualified individuals regardless of income, with older people receiving a higher credit amount than younger individuals, to reflect the higher cost of insurance as people age. A qualified individual would be a citizen or qualified alien who isn’t eligible for coverage through other sources, specifically through an employer or government program.

Taxpayers also would be able to receive credits for their dependents — including children up to the age of 26. (Incarcerated individuals wouldn’t be eligible for the credit.)

The credit could be used to purchase an eligible plan approved by a state and sold in the individual insurance market, including catastrophic coverage. However, the credit wouldn’t be available for plans that cover abortion.

In addition, if an employer doesn’t subsidize health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), an individual could use the credit to help pay unsubsidized COBRA premiums while he or she is between jobs.

If the individual doesn’t use the full value of the credit, he or she could deposit the excess amount into an HSA (see information below for more about HSAs).

ACA Penalties Would Be Repealed

The ACA penalty taxes for the individual mandate and the employer mandate would be repealed immediately. To provide relief during a transition period, Americans who are eligible for the ACA subsidy would be able to use their credit for expanded options, including currently prohibited catastrophic plans. Additionally, the ACA subsidies would be adjusted slightly to provide additional assistance for younger eligible individuals and reduce the over-subsidization that older people are receiving. Restrictions on federal funding for abortions would be included for the transition period.

HSA Rules Today

In general, eligible individuals may, subject to statutory limits, make “above-the-line” deductible contributions to an HSA. Other people (for example, family members) may also contribute on behalf of eligible individuals, and employers can, too. Eligible individuals are those who are covered under a high deductible health plan (HDHP) and aren’t covered under any other health plan that isn’t a HDHP, unless the other coverage is certain permitted insurance (for example, worker’s compensation).

For 2016 and 2017, an HDHP is a health plan with an annual deductible that isn’t less than:

  • $1,300 for individual coverage and
  • $2,600 for family coverage.

Maximum out-of-pocket expenses under the plan for 2016 and 2017 can’t exceed:

  • $6,550 for individual coverage and
  • $13,100 for family coverage.

The maximum annual HSA deductible contribution is:

  • $3,350 for 2016 (for family coverage, $6,750) and
  • $3,400 for 2017 (for family coverage, it remains $6,750).

The maximum HSA contribution is increased by an additional catch-up contribution amount (computed on a monthly basis) for individuals age 55 or older as of the last day of the calendar year who aren’t enrolled in Medicare. The catch-up contribution amount is $1,000.

Distributions from an HSA that are used exclusively to pay the qualified medical expenses of an eligible individual (account holder) or his or her spouse or dependents are excludable from gross income.

What Are “Qualified Medical Expenses?”

Qualified medical expenses are unreimbursed expenses for medical care as defined under the medical expense deduction rules. Medicine or drugs are qualified expenses only if they’re prescribed (whether or not over-the-counter) or if they are insulin. Qualified medical expenses, which must be incurred after the HSA is established, don’t include insurance premiums other than premiums for qualified long-term care insurance, COBRA and coverage while the eligible individual is receiving unemployment compensation.

Distributions not used for qualified medical expenses are subject to tax, and also are subject to an additional 20% for distributions reported on Form IRS 8853 unless they’re made after the individual attains age 65, dies or becomes disabled.

Proposed HSA Changes

The Policy Brief says Republicans want more people to be able to utilize HSAs, and expand how they and their families can use them. Specific proposals would:

  • Allow HSA distributions to be used for “over-the-counter” health care items.
  • Increase the maximum HSA contribution limit to equal the maximum out of pocket amounts allowed by law.
  • Allow both spouses to make catch-up contributions to the same HSA. Specifically, if both spouses are eligible for catch-up contributions and either has family coverage, the annual contribution limit that could be divided between them would include both catch-up contribution amounts. For example, they could agree that their combined catch-up amount would be allocated to one spouse to be contributed to that spouse’s HSA. In other cases, as under present law, a spouse’s catch-up contribution amount wouldn’t be eligible for division between the spouses. It would have to be made to the HSA of that spouse.
  • Provide that, if an HSA is established during the 60-day period beginning on the date that an individual’s coverage under a high deductible health plan begins, then the HSA would be treated as having been established on the date that such coverage begins for purposes of determining if an expense incurred is a qualified medical expense. Thus, if a taxpayer establishes an HSA within 60 days of the date that his or her coverage under a high deductible health plan begins, any distribution from an HSA used as a payment for a medical expense incurred during that 60-day period after the high deductible health plan coverage began would be excludible from gross income as a payment used for a qualified medical expense — even though the expense was incurred before the date the HSA was established.

The Republicans’ repeal-and-replace plans for the ACA still appear to be a work in progress. For example, under the Patient Freedom Act of 2017, a bill introduced by Senator Bill Cassidy (R-LA) and Senator Susan Collins (R-Maine) in January, contributions to expanded HSAs would be nondeductible. They would be set up as Roth HSAs.

However, the Policy Brief provides some clues as to what the future may hold. Stay tuned.

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Posted on Feb 8, 2017

The perk of a company car isn’t entirely “free” for employees.

Generally, employees are taxed on the personal value of this fringe benefit, subject to certain special rules and annual limits. Significantly, the IRS recently announced the 2017 thresholds applicable for valuations of vehicles.

Background Information

An employer that provides taxable fringe benefits to employees is responsible for withholding taxes from employees based on the fair market value (FMV) of the benefits. The FMV may be reduced by amounts excluded from taxable compensation by statute and payments by employees for the fringe benefit.

Because personal use of an employer-provided vehicle is a non-cash fringe benefit, the FMV must be determined at least once a year for withholding purposes. However, an employer may choose to determine FMV on a monthly or quarterly basis.

To simplify tax reporting involving monthly valuations, the employer may use a special accounting rule that includes the value of a fringe benefit for the last two months of the calendar year with the value for the first ten months of the following year.

If an employer uses this safe-harbor rule for one type of fringe benefit for one employee, it must use it for all employees. Furthermore, employees must be notified of the use of the special rule. Typically, the monthly valuation of personal use of a vehicle will depend on employee travel logs.

Sometimes, an employer may provide company-owned vehicles to employees without requiring documentation of personal use. As a result, the entire FMV of the vehicle is included in the employee’s taxable income. In this case, the employee has the option of deducting costs attributable to business use of the vehicle on his or her Form 1040, subject to other limitations.

Three Valuation Methods

The IRS has established three primary methods determining the FMV of the vehicle:

Commuting rule. If the sole personal use of an employer-provided vehicle is commuting back and forth from work, the value of each one-way commute is $1.50. This amount, which hasn’t changed in years, is either included in the employee’s taxable compensation or the employer can be reimbursed for it by the employee.

The commuting rule method is the easiest one to administer because it doesn’t require employees to keep mileage logs of vehicle use, but it’s not always available (see “Easy Does It, if You Can Use this Method” below).

Cents-per-mile rule. This method is based on the annual IRS standard mileage rate. For 2017, the rate is 53.5 cents per business mile (down from 54 cents per mile in 2016). Employees must either reimburse the employer at this rate for all personal miles driven in an employer-provided vehicle or add the value to the employee’s taxable income. If the employer doesn’t provide gasoline for the car, the rate may be reduced by 5.5 cents per mile.This rule has certain restrictions:

The value of the vehicle at the time it is made available to employees cannot exceed the maximum value established by the IRS each year.

The vehicle must be used for business reasons for at least 50% of the annual mileage.

The vehicle must actually be driven at least 10,000 miles during the year (or proportionately fewer miles if the vehicle is used less than a full year).

The vehicle must be used primarily by employees.

The method generally must be used in subsequent years (absent any special circumstances).
Note: The cents-per-mile rate includes the value of maintenance and insurance. If the employee pays for these expenses, the value of the personal use is reduced based on receipts provided by the employee.

Annual lease value rule. This rule requires the employer to determine how much of the vehicle’s FMV can be excluded from the employee’s income as a working condition fringe benefit. In other words, the employer must calculate the FMV of the vehicle and the lease value of the business use of the vehicle to establish the difference as the amount of the taxable fringe benefit.

The FMV is based on IRS tables and must be determined on the first date a vehicle is available for use by an employee. Once the annual lease value is set, the employer must determine the percentage of the vehicle’s use that is personal, based on mileage logs.

Note: The annual lease value doesn’t include the cost of gasoline. An employer can either determine the value of personal use based on the fair market value of gasoline (if it provides it at a rate of 5.5 cents per mile). If an employee doesn’t keep mileage records, the entire lease value, plus gasoline costs, is taxable to the employee.

New Valuation Thresholds

The IRS recently announced the maximum FMVs for employer-provided cars, trucks and vans using the mileage allowance of 53.5 cents per mile and the maximum fleet-average vehicle FMVs for autos, trucks and vans for purposes of the annual lease value method.

Cents-per-mile method. This method may be used only if the auto’s FMV doesn’t exceed $12,800, adjusted for inflation. The thresholds for vehicles first made available to employees for personal use in 2017 are $15,900 for automobiles (unchanged from 2016) and $17,800 for trucks and vans (up from $17,700 for 2016).

Fleet average method. This rule can’t be used to determine the average lease value of any vehicle if its FMV on the date it is first made available in 2017 for employee personal use exceeds $21,100 for a passenger auto (down from $21,200 for 2016) or $23,300 for a truck or van (up from $23,100 for 2016).
If all other requirements are met, an employer with a fleet of 20 or more vehicles consisting of passenger autos, trucks and vans may use the fleet-average valuation rule as long as the respective maximum allowable values aren’t exceeded.

Useful Lure

A company car is still used as a fringe benefit for attracting and retaining key employees. But it’s important to address all the payroll tax complexities relating to the personal use of a vehicle. Consult with your tax advisor to help ensure you meet the requirements.

Easy Does It, If You Can Use this Method

To use the simplified commuting method, the easiest of all, the following requirements must be met:

  • The employer provides the vehicle to the employee for use in the employer’s trade or business.
  • The employer has a written policy that doesn’t allow the employee to use the vehicle for personal purposes, other than for commuting or “de minimis” personal use, such as a trip to the dry cleaner between a business stop and home.
  • The employee in actuality doesn’t use the vehicle for personal purposes.
  • The employee isn’t a “control employee.”

For 2017, the definition of a “control employee” generally includes:

  • A board or shareholder-appointed, confirmed or elected officer whose pay is $105,000 or more,
  • A director,
  • An employee whose pay is $215,000 or more, and
  • An employee who owns a 1% or more in the business. (The dollar figures are unchanged from 2016.)

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Posted on Jan 30, 2017

In an era of hyper-connectedness and a burgeoning global cybercrime industry, you can’t afford to hope you’ll just be lucky and avoid a successful attack. It’s essential to establish policies and procedures to minimize risk and train employees on how to protect your company.

The basic kinds of criminal acts you need to guard against are:

  • Theft of proprietary or sensitive business data that could be sold to competitors or other hackers,
  • Installation of “ransomware” that locks you out of your own data until you pay the cybercriminals’ demands,
  • Malicious damage to your system, such as crashing your website to prevent customers from accessing it (often referred to as a “denial-of-service attack,” under which hackers overwhelm your site with data requests), and
  • Theft of employees’ personal information to eventually steal from them.

Internal Threats

Building a defensive strategy starts with recognizing that, even with the best technical external barriers in place, you could fall victim to an employee who goes rogue, or even joins your organization specifically with cybercrime as a goal.

While unlikely, it’s essential for your hiring managers to be mindful of these risks when reviewing employment applications — particularly those for positions that involve open access to sensitive company data. It’s just another checklist item when reviewing applicants with unusual employment histories. Checking references and conducting background checks is also a good idea.

In the same way, it’s generally advisable to include a statement in your employee handbook informing employees that their communications are stored in a backup system, and that you reserve the right to monitor and examine their company computers and emails (sent and received) on your system.

When such monitoring systems are in place, prudence or suspicious activity will dictate when they should be ramped up.

DHS Tips for Employees and IT Staff

It can also be useful to establish a policy encouraging employees to report any suspicious computer-based activities they observe around them. Of course, you don’t want to foster employee paranoia or promote the spread of baseless accusations. But deploying more eyes and ears can serve both to forestall cyber bad behavior and detect it, if it occurs.

The largest threat isn’t that employees may intentionally commit cybercrime, but that they might inadvertently open the door to external cybercriminals. That’s why the Department of Homeland Security (DHS) considers cybercrime serious enough to offer eight tips for employers to pass along to their employees:

1. Read and abide by the company’s Internet use policy.

2. Make passwords complex — use a combination of numbers, symbols, and letters (uppercase and lowercase).

3. Change passwords regularly (every 45 to 90 days).

4. Guard user names, passwords, or other computer or website access codes, even among coworkers.

5. Exercise caution when opening emails from unknown senders, and don’t open attachments or links from unverifiable sources.

6. Don’t install or connect any personal software or hardware to the organization’s network or hardware without permission from the IT department.

7. Make electronic and physical backups or copies of critical work.

8. Report all suspicious or unusual computer problems to the IT department.

Employees that follow these steps faithfully can serve as an additional layer of protection against cyberattacks.

For those people who are charged with the responsibility to maintain a secure system, the DHS offers the following advice:

  • Implement a layered defense strategy that includes technical, organizational and operational controls,
  • Establish clear policies and procedures for employee use of the organization’s information technologies,
  • Coordinate cyberincident response planning with existing disaster recovery and business continuity plans across the organization,
  • Implement technical defenses, such as firewalls, intrusion detection systems and Internet content filtering,
  • Update the existing anti-virus software often,
  • Follow organizational guidelines and security regulations,
  • Regularly download vendor security patches for all software,
  • Change the manufacturer’s default passwords on all software,
  • Encrypt data and use two-factor authentication where possible,
  • If a wireless network is used, make sure that it’s secure, and
  • Monitor, log and analyze successful and attempted intrusions to the company’s systems and networks.

Cybercrime Insurance

What else can be done? It’s often a good idea for businesses to protect their computer systems further by buying cybercrime insurance. Alone, this won’t prevent victimization, but it can offset some of the financial damage in case of a successful attack.

In addition, most insurers perform a rigorous risk assessment before issuing a policy and setting premiums. The results of such an assessment can be quite eye-opening for business owners.

If you decide against buying insurance, it might be useful to have a consultant conduct a cybercrime exposure risk assessment anyway. The growth, ubiquity and high cost of cybercrime has spawned a large industry of cybersecurity consulting firms. And, unless your company already has a robust IT staff with expertise in cyber-risk mitigation, you’ll likely save time and money engaging a third-party vendor.

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Posted on Jan 3, 2017

Can President-elect Donald Trump’s administration, paired with a Republican-led Congress, really bring jobs back home and restore America’s reputation as the preeminent manufacturing country in the world?

Opinion is sharply divided. Trump’s supporters believe he can deliver the goods, their optimism buoyed by his deal with air conditioning firm Carrier that will keep several hundred in Indiana, the home state of Vice President-elect Mike Pence. But naysayers disagree and point to other indicators, noting that Carrier was persuaded by generous tax breaks and that the deal is relatively small (see box below).

Let’s take a closer look at what could be in store for manufacturers in 2017.

Complexities in Current Affairs

It’s a bit of an oversimplification to say that U.S. manufacturing is in decline. Data for October — the month before election — showed the industry edging past the production numbers posted before the recession of 2008-09, with fewer workers.

Another oversimplification is the idea that America is “losing” jobs overseas.

This is true to some extent — the use of cheaper foreign labor is well-documented — but the main culprit here is, ultimately, technology. Robotics and other innovations are having a profound effect on the manufacturing sector.

The numbers don’t lie. Manufacturers shed more than seven million jobs during the past three-and-a-half decades while reaching a high point in productivity, according to the Economic Policy Institute (EPI). The institute goes on to say that U.S. manufacturing had a gross output of $5.9 trillion in 2013, more than one-third of the gross domestic product (GDP) for that year.

This solidifies the position of manufacturing as the key U.S. business sector. It supported approximately 17.1 million indirect jobs in the U.S. plus 12 million directly employed individuals for a total of 29.1 million jobs in 2013. That was more than one-fifth (21%) of total U.S. employment, according to the EPI.

Trump has said he’ll renegotiate trade agreements — including the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) — and impose tariffs in his efforts to restore jobs. This could result in higher tariffs on 11 countries, such as Mexico and China, according to the Wall Street Journal. But would this just be a Band-Aid on an even bigger problem (see box below)?

The Issue of Tax Inversions

Money talks, so it’s no surprise that multinational companies have been moving their operations overseas. Part of the appeal is lower labor costs. Another draw is the ability to reduce tax liability. By moving headquarters to such tax havens as the Cayman Islands, corporations can save millions in taxes.

Trump has vowed to halt these tax inversions as part of his economic and tax reform policies. To this end, he has proposed a one-time, 10% repatriation tax and lower corporate tax rates. Congress is expected to go along.

But consider another repercussion of bringing manufacturing jobs back home. When items are produced overseas, manufacturers and sellers can keep prices lower than if the goods were produced domestically. So it’s only logical to assume that increasing the manufacturing output in the U.S. generally would result in somewhat higher prices.

A Question of Price

Would American consumers be willing to pay more for domestically produced products? Surveys suggest they would, particularly if a patriotic appeal is made. But how much more? Almost everyone has a price point where they just say no (see box below).

As mentioned above, the main factor in the loss of manufacturing jobs is technology, and that isn’t likely to change. So imposing higher tariffs on foreign countries might simply encourage even greater automation, especially as new technological advances are made.

Another potential problem: U.S. exports are inextricably linked to a global supply chain that relies on cheap components. If product components are produced in countries with tariffs, it could increase costs throughout the global supply chain.

Other countries could then turn around and hit the U.S. with higher tariffs and then everyone pays more. This would have a decidedly negative impact on the U.S. economy.

It’s also important to remember that trade agreements have boosted jobs. After NAFTA was inked, for instance, some of the large automakers — including Toyota, Nissan, Mercedes and BMW — established plants and hired workers in the U.S.

What the Future Holds

Whatever steps the Trump administration takes, the outcome should make sense for the U.S. Ultimately, the manufacturing sector must seek to find its competitive advantage in the current global economic environment in order to thrive in the years to come.

Made in America? Cost Matters

When it comes to a choice between buying domestically produced products or paying less, price wins out, according to a 2016 survey by the Associated Press-Gfk.

Almost three out of four survey participants said they’d like to buy goods manufactured inside the U.S., but those items are often too costly or difficult to find. Only 9% said they buy strictly American.

When Carrier, a division of United Technologies, announced that it was going to move an estimated 2,100 factory jobs from Indiana to Mexico, President-elect Donald Trump went on a mission to keep the jobs at home.

Trump quickly secured, with the help of Vice President-elect Mike Pence, a deal with the air conditioning firm.

But the victory came at a price. The trade-off was $7 million in tax breaks to be paid by Indiana over 10 years. Also, only about half of the estimated job losses were prevented. It remains to be seen if this deal can be termed a success and a harbinger of things to come.

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Posted on Nov 7, 2016

reen building” is no longer a fringe movement among environmentally conscious contractors. Nor can it be dismissed as a pie-in-the-sky aspiration.

It appears that green building is here, at long last, and likely to stay in vogue for the foreseeable future. There
was ample evidence of this at the recent 2016 Greenbuild International Conference & Expo in Los Angeles. The same was expected at the gathering in Boston on November 8-10.

Background Information

Green building — also known as green construction or sustainable building — refers to practices and procedures that are environmentally sensitive and make efficient use of resources. It encompasses the entire life cycle of a building, from design and construction through operation and maintenance to renovation and, if necessary, demolition.

This type of construction requires firms to find the proper balance between traditional considerations such as quality, functionality and affordability with sustainability. And green building isn’t limited to just new construction, it can be applied to all buildings.

Among the technologies and materials you might use if you are constructing a green building are:

1. Natural paints, which are void of the volatile organic compounds typically found in their traditional counterparts, eliminate indoor pollution and decompose naturally without contaminating the earth.

2. Zero-energy designs that use solar cells and panels, wind turbines, and biofuels, among others, to provide electricity and HVAC needs.

3. Water recycling, which reuses treated wastewater for agricultural and landscape irrigation, industrial processes, toilet flushing, and replenishing a groundwater basin.

4. Low-emittance windows coated with metallic oxide to block the sun’s harsh rays during summer and keep the heat inside in the winter. They significantly bring down HVAC costs.

Although the ground rules and technology continue to evolve, the main shared objective of green building remains protecting the environment. This may be accomplished through such elements as:

  • More efficient use of energy, water and other resources,
  • Improved productivity,
  • Reduced waste, pollution and general deterioration of the environment, and
  • Sustainability.

Data Collection and Analysis Trends

Previously, green building relied primarily on anecdotal evidence or limited instances documented on a case-by-case basis. Now, with support from certification organizations (see box below), improvements in data collection and analysis are furthering green building initiatives.

Data collection is only now moving to the forefront of the construction process. This may transform how buildings are designed, constructed and operated.

Specifically, it’s now possible to track data sets during the operations and maintenance stages, including:

  • Air quality,
  • Lighting,
  • Utility and leading data,
  • Thermal comfort, HVAC and weather,
  • Waste recycling,
  • Security, and
  • Occupancy.

Gathering this information and then acting on it can have a profound impact, especially when technology is used, and it may result in greater energy efficiency and cost reduction.

A potential stumbling block is the complexity of varying software tracking methods. This is being overcome by advances in technology that make it easier to quantify and apply the data. With programs like GRESB, companies can track the continuing performance of their buildings and make improvements when necessary.

Furthermore, innovators using this approach are being recognized as leaders in their industries, generating greater interest from investors, while attracting and retaining top-notch talent. This happy confluence of events creates even more momentum for the green building movement.

Investors and other interested parties have also sparked green building activity by trumpeting the need for reducing the world’s carbon imprint. Naturally, the investors are interested in protecting their assets, but they are also addressing environmental concerns and promoting the type of sustainability that will benefit them in the long run. Finally, environmentalists in certain other fields (notably, the manufacturing sector) have rushed to join the cause.

Outlook for More Greening

Now that the steps of data collection and analysis are being implemented, proponents of green building hope to move forward through innovation and sensitivity to environmental issues. But certifications and adopting different approaches for utilizing data to improve building performance shouldn’t be the final goal. It’s important for green building to become integral to the construction process.

Expect technology to facilitate the next phase. Stakeholders in the industry, including construction firms of all shapes and sizes, should learn from others and then “pay it forward” by sharing information and new developments with peers.

Those who don’t jump on the bandwagon now run the risk of being left in the dust.

Seven Top Shelf Products

At the 2016 Expo, BuildingGreen Inc., a green resource center based in Vermont, presented its annual selection of green products that have the potential to change construction processes and procedures.

They ranged from products that conserve electricity to those that reduce construction waste to replacements of traditional materials with healthier alternatives. Here are seven of them:

1. Accoya Acetylated Wood, which is stable, insect repellent and moisture resistant.

2. Securock ExoAir 430, a weather barrier that allows for faster installation and reduces jobsite waste.

3. Aquion Low Toxicity Battery, which uses non-hazardous sodium sulfate electrolyte instead of the common lithium ion or lead acid found in typical batteries.

4. Nextek Power Hub Driver, an all-in-one AC to DC power converter that uses solar energy, batteries, and other renewable energy sources to convert power currents.

5. HyperPure Water Piping, a flexible potable water pipe made from bi-modal polyethylene.

6. Designtex Textiles, a database that allows search through more than 8,000 certified sustainable textile materials based on criteria ranging from specific certifications, to chemicals, logistics and optimized chemistry.

7. The d-Rain Joint Rainwater Filter Drain that is a low-cost system to manage water runoff.

Being Certified

Supporting the green construction movement are standards, certifications and rating systems aimed at mitigating the impact of buildings on the natural environment through sustainable design.

The Building Research Establishment’s Environmental Assessment Method (BREEAM) is the first green building rating system in the U.K. It is the oldest rating system, created in 1990.

In 2000, the U.S. Green Building Council (USGBC) followed suit and developed and released criteria also aimed at improving the environmental performance of buildings through its Leadership in Energy and Environmental Design (LEED) rating system for new construction. The U.S. Green Building Council developed it.

Various other efforts stimulating green building have been championed by the World Green Building Council and World Bank. Netherlands-based Global Real Estate Sustainability Benchmark (GRESB), a for-profit organization specializing in assessing real estate properties, has also been a valuable contributor.

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