Navigating the Affordable Care Act: What You Need to Know
The 2,900-page Patient Protection and Affordable Care Act (PPACA), aka Obamacare, contains regulations and timetables that business leaders must understand and be prepared to meet. However, delays and uncertainties seem to be as much a part of the story as new policies.
Until recently, Jan. 1, 2014, was the effective date for the employer mandate that requires businesses with 50 or more employees to offer health insurance. Citing the need for “time to adapt health coverage and reporting systems,” the U.S. Treasury Department in July postponed the employer mandate until Jan. 1, 2015. As of this writing, there is also debate on Capitol Hill about possibly delaying the individual mandate that requires employees to purchase health insurance.
“Midsize businesses are where all the action is regarding health care reform, and I think their world could change quite dramatically,” says Kevin Kuhlman, manager of legislative affairs at the National Federation of Independent Businesses (NFIB). “Even though the employer mandate is delayed, all insurance market reforms will kick in on Jan. 1, 2014.”
Employers with fewer than 50 full-time employees must comply with the Essential Health Benefits (EHB) package, a list of 10 benefit categories that all insurance plans must offer. EHB requires providers to offer not only traditional coverage, but also pediatric dental and vision and “habilitative” services, which Kuhlman says have yet to be defined. Deductibles will be limited to $2,000 for individuals and $4,000 for families. Beyond this, Kuhlman says it’s largely a “waiting game” as companies anticipate the employer mandate and face compliance requirements that show, for example, that their insurance plans don’t favor executives with more generous or free coverage.
As of Oct. 1, 2013, all employers were required to have distributed the U.S. Department of Labor’s Notice of Coverage Options to all full- and part-time employees, whether or not they are eligible for benefits. State and federal health care exchanges, where employees without coverage can shop for policies, opened Oct. 1 although online enrollment was difficult because of glitches with the Affordable Care Act website. The government’s Small Business Health Options Program (SHOP) exchange that provides insurance for companies with 50 or fewer full-time employees also began open enrollment Oct. 1. Coverage under SHOP begins Jan. 1, 2014, but in another recent change, the government announced that businesses can only offer a single plan under the program until Jan. 1, 2015.
Because requirements and penalties are based on the size and type of the workforce, Kuhlman says executives must take stock of their full- and part-time employee numbers. If a company, whatever its size, offers health insurance, it must determine whether that coverage is affordable. Affordable coverage means the employee contributes less than 9.5 percent of income toward premiums, and restricts employees’ access to the individual exchanges. However, if a company has at least 50 full-time employees — those working at least 30 hours per week, or 130 hours per month — or full-time equivalent employees and does not provide insurance, it must offer coverage beginning in January 2015 or pay fines beginning at $2,000 per full-time employee.
Employers are not required to offer coverage to part-timers who work less than 30 hours per week. The size of a workforce is determined by adding the number of full-time employees and part-time workers converted into full-time equivalent employees. (For example, if six employees each work five hours per week, that counts as if the firm had one additional full-timer.)
To stay under the 50-employee threshold, some companies may be tempted to redefine their workers as independent contractors, but Kuhlman cautions against this tactic.
“There are many legal and IRS requirements for using independent contractors,” Kuhlman says. “You give up a lot of control over an employee if they become an independent contractor. You can’t just switch all your W-2s to 1099s and then comply with the law.”
Kuhlman says business owners should be prepared for employees to come to them with questions.
“We encourage folks to get answers from their trade associations, attorneys, or the NFIB… you don’t have to be a member,” he says. “The further you get out in front of this thing, the more prepared you’ll be and the better both employers and employees will be able to understand and adapt.”
Key Person Insurance
Succession Planning: Key person insurance is important element
When a company’s survival relies heavily on one individual or group, it’s wise to prepare for a day when those “key people” might be taken from the picture by death or disability. To prepare for such unexpected circumstances, many executives include key person insurance as an important element of their company’s succession planning. These policies can provide much-needed cash to compensate for the loss of an owner, key salesperson, someone with specific technical or creative knowledge, or anyone who drives profits to the bottom line.
Key person insurance is not an insurance product, but a specific reason for buying life insurance, says Bob Guina, regional insurance consultant in Comerica Bank’s Insurance Group.
“It’s a life insurance policy, no more, no less. But instead of buying it for your family, it’s purchased and owned by a company and the company is the beneficiary,” he adds. A key person insurance policy can be purchased from an insurance company or an independent agent.
Expenses resulting from the loss of a vital employee can be covered with key person insurance. If a business must urgently replace a top-performing salesperson to prevent a key customer from being wooed away by the competition, the policy pays for costs related to the replacement, i.e., a headhunter’s commission or signing bonus. If the client walks, the insurance can provide cash flow to help recover the loss until a new client is found.
“Sometimes a lending institution will require a company to insure its key people to cover the loan, especially as they get older,” Guina says. “If you have a 70-plus-year-old business owner who’s still active and involved in the business and he wants to borrow several million dollars, the bank wants to feel confident that it’s going to get paid back.”
Eliminating debt is one of the most important and practical benefits of key person insurance.
“If you erase the debt, it makes it easier for the business to maintain profitability and survive,” Guina says. On the other hand, if the surviving spouse of a sole owner chooses to sell the business, a company with little or no debt could fetch a higher price.
Key person insurance does not cover all financial losses stemming from the exit of an essential employee – but only the fixed amount specified in the policy. Guina recommends that companies consider debt, a multiple of the individual’s salary (commonly three times the amount), and the anticipated costs of replacement when estimating how much coverage is needed.
Most life insurance products can be applied to key person insurance, including term life, universal life, and whole life policies. Term life policies are typically less expensive and provide coverage for periods as short as one year and up to 30 years. Universal life combines relatively low cost with flexible premiums and insured amounts that can adapt to changing business conditions. Whole life insurance is in effect for the life of the insured and charges higher premiums earlier on. Whole life products have cash values from which a company can borrow or use as collateral for a loan. Company executives should consult with a qualified insurance agent to determine the best policies for their particular situation.
Guina says CFO’s should consider the impact of key person insurance when formulating their company’s tax strategy.
“If structured properly, it should be a tax-free benefit to the company,” he says. “The value of a life insurance policy is often included in one’s estate for purposes of calculating federal estate tax, but the coverage can be structured to avoid that tax as well.” A joint estate can have a value of $10.5 million ($5.25 million each for husband and wife) before it’s subject to federal estate tax, “but it’s really easy to be a middle market business and go over that number,” Guina says.
“Having key person insurance can make the difference between a business thriving or just surviving,” he adds. “When trouble strikes, cash is king. As a business owner, if you lose one of your key people it creates a financial crunch on the business. Having cash on hand in the form of a life insurance death or disability benefit really solves a lot of problems.”
To learn more about key person insurance, contact Bob Guina at 313-584-4482 or firstname.lastname@example.org.
Energy Overhaul: Improving efficiency saves money
As middle market companies search for ways to cut costs and increase margins, they should consider the benefits of maximizing energy efficiency of their facilities. An energy overhaul of a commercial building can result in average utility cost savings of up to 30 percent, depending on the age of the building, equipment, occupancy, hours of operation, and total energy use.
“By using less energy, businesses can insulate themselves against future swings in utility costs,” says David Wible, Comerica Bank vice president of middle market banking. “When structured properly, energy efficiency pays for itself and positions the property to outperform its peers and generate higher returns.”
It’s not rocket science. Relatively mundane improvements like adding insulation, caulking, and weather-stripping; window and door upgrades; automating energy control and recovery systems; and modifying or replacing heating, ventilation, and air-conditioning systems can pay handsome dividends. When a Grand Rapids, Mich., engineering company replaced high-pressure sodium lighting with a fluorescent system, for example, it realized $240,000 in annual savings.
The first step toward achieving such results is to conduct an audit of your facility’s energy use. Potential vendors should have appropriate engineering backgrounds, be familiar with commercial and industrial buildings, and adhere to professional guidelines such as those set by the American Society of Heating, Refrigerating, and Air Conditioning Engineers. Auditors should not represent any company that stands to profit from their recommendations.
“A quick analysis of your utility bills will cost between $500 and $1,000, while a deep-dive systems analysis, including projected payback periods, will cost $5,000 to $10,000,” Wible says. “But if your company has energy bills of $500,000 or more, that’s really a drop in the bucket when you consider that a middle market company can save on average from $50,000 to $100,000 on these types of investments.
An energy auditor can also identify modifications that could potentially qualify for tax deductions and rebates from utility companies — and help file the necessary paperwork.
If you’re not yet ready to engage a paid auditor, you may want to look into two free programs available in Michigan. The University of Michigan’s Department of Mechanical Engineering offers free energy assessments for Michigan companies that have gross sales of less than $100 million, fewer than 500 employees at the plant, annual utility bills between $100,000 and $2 million, and no in-house professional staff who can perform the assessment. Michigan’s RETAP initiative (Retired Engineer Technical Assistance Program) also offers free energy-efficiency analyses for Michigan companies. Free audits are generally a starting point and tend to provide a more limited analysis than a paid audit.
Wible advises companies to coordinate the installation of energy-saving renovations with other facilities projects, if practicable, to minimize disruption to daily operations. It can also make sense to include the cost of an upgrade when refinancing a facility or consolidate it with an already-planned business loan. Obviously, the least-invasive option is to do the work before a new building is occupied or as you are planning an addition. “Having this work done before you move into a building eliminates interruptions to your business,” he says.
For companies leasing space, pursuing energy savings can be more complicated simply because it is somebody else’s property. In that case, Wible recommends pursuing a “split incentive” agreement under which the tenant agrees to pay additional rent every month out of the savings realized from the efficiency upgrades.
“If it’s a good relationship and they realize there’s a value to them for you to improve the building, maybe you can work something out together,” Wible suggests. “If you have a five-year lease, it makes sense to make improvements that have a one-year payback. It might not make sense to do something that has a seven-year payback.”
Minimizing a company’s energy use footprint can make particular financial sense when it comes time to sell.
“The growing trend of tenants seeking ‘green’ office space creates a market risk for owners of less efficient properties,” Wible says. “Portfolio managers and appraisers in some markets are already identifying wasteful buildings as high risk and are assigning lower values to them.” Conversely, sale prices for energy-efficient buildings are as much as 10 percent higher per square foot than conventional buildings.
“When you consider that company values are based on a multiple of its EBITDA, if energy savings add $50,000 to $100,000 annually to your bottom line and the company sells for a multiple of five times that, that’s another $500,000 in your pocket,” Wible says.
Comerica Bank can help middle market companies navigate the energy evaluation and savings process.
“This isn’t a political thing (like) whether you believe in climate change; this is about making more money with more stability using existing technology,” Wible says. “We’re not talking about starting with windmills and solar panels; we’re talking about caulk, insulation, new lighting — things you can easily do.”
To find out more how Comerica can help with energy efficiency and your business, contact David Wible at 313-222-6085 or email@example.com.