Since 2014 the Affordable Care Act, AKA Obamacare, has been giving employers fits with regulations and rules that they need to be in line with. It’s been fluid to say the least as far as determining what is in bounds, what is out of bounds, what was once ok, isn’t anymore. It’s a regulatory minefield, and the feds keep laying out more mines it seems.
The most recent change to the rules isn’t so much a change as it is a running clarification that has recently come to a head. Prior to 2014 it was a common practice for employees to go out and get individual (non-group) medical insurance and have an employer reimburse the premium cost. This would be used with a section 105 HRA in most cases. Technical guidance from the IRS prior to Obamacare’s January 1, 2014 kickoff dictated that these plans were considered to be group health plans and subject to market reforms.
Reimbursements for Individual Medical Plans
You better watch out doing this now. Reimbursements by companies for individual medical plans (HRA’s, Section 125’s or otherwise) has been deemed out-of-bounds by the ACA (Obamacare). There have been several technical releases by the IRS, Dept of Labor and HHS on the matter. At the end of the day, if a company is reimbursing employees for individual health insurance policies, or direct paying insurance companies for individual health insurance policies you are opening yourself up to a fine by the Feds.
This link The Affordable Care Act Implementation Part XXII goes to technical guidance released November of 2014 and goes into detail and clarifications from prior (Sept. 2013 and May 2014) releases from the IRS. The fines are as much as $100 per day per effected employee or up to $36,500/year.
More recent guidance from the IRS in February 2015 with Notice 2015-17 (Employer Health Care Arrangements) gave a moratorium of sorts to companies to get in line by June 30th 2015. While it may seem magnanimous on one hand to give companies a break, it would seem that the gloves will come off as of July 1.
The one way I’m aware of that you can do this and stay in bounds is to pay employees more salary. You can’t dictate to employees that it is used for coverage (per mandate as it would constitute a reimbursement) and there is the tax issue and expense because it can’t be treated as a pre-tax deduction.
My advice, don’t do it. Go with the group plan, PEO or otherwise. Stay out of the Feds crosshairs. If you need more help on the matter or to find a suitable plan, I’d be happy to help (shameless plug).
Do members of a board of directors need insurance? Why?
Members of a board of directors will be making a flurry of decisions that will have a profound impact on a company. Some of these decisions will be difficult and will have an impact on many interested parties. Put simply, not every decision a board makes is going to sit well with everyone.
If a board of directors makes a decision that could potentially harm another party, that party can turn around and sue not only the company but the directors and officers themselves. Because directors and officers can be sued personally, this can result in the personal assets of such directors and officers being at risk. This is where the D&O insurance comes into play. It insures directors and officers against such risks.
What if a company makes it a point to protect their Directors and Officers by indemnifying them in the event of such a lawsuit? D&O coverage also insures companies from going out of pocket to reimburse directors and officers by indemnifying the company in that case. Either way, the insurance sees to it that neither a director, officer or the company itself is left holding the bag.
D&O Claims Cost
D&O actions can stem from many different parties, company stakeholders, customers, competitors, even a company’s own employees. It can come from a lot of places. The stakes are high, according the Chubb 2013 Private Company Risk Survey, the average total cost of a D&O claim was $697,902 including judgments, settlements, fines and legal fees.
Needless to say, we’re talking about big money. Companies need to take steps given the rise in D&O claims and the exposure that they encompass.
Pre-requisite to Funding
Another potential key reason to this doesn’t directly speak to risks a board runs, but more to a requirement by a third party. Funding mechanisms such as venture capital and seed funding will typically require Directors and Officers insurance as a pre-requisite to closing out a funding deal. These outside parties want to see that their interests are protected and as such will make it a contractual obligation that a company get this in place before signing off.
How much do first year startups pay employees in benefits per month?
For starters, let’s assume that you want to limit this to the basics, medical and dental. Let’s also assume that you want to make a competitive contribution of 75% on a moderate to high level plan for both benefits.
On medical coverage, a good cost yardstick for a plan in CA, NY or MA (a few of the higher cost markets) would be $500/month for a single employee, $1,000/month for couple or single parents and $1,800/month for a full family. For dental coverage, yardstick numbers would be $50, $100, $150/month for single/couple or single parents/family plan price points.
If you are a funded startup looking to recruit and retain employees, that 75% employer contribution will make for a good yardstick as far as how much an employer will contribute. If a startup isn’t funded it will be less. If you are not a startup at all and in the tech space, it will likely be more. Industries where perhaps the fight for talent isn’t as bad (manufacturing, retail) this may a lesser percentage for startups.
Getting to the bottom line on a 75% contribution on medical and dental, the employer contribution costs break out a follows:
- single participant: medical is $500/mo, dental is $50, $550 total. 75% of this would be $550 x .75 or $412.50/mo ($4,950/annual)
- couples or single parents: medical is $1,000/mo, dental is $100, $1,100 total. 75% is $825/mo ($9,900/annual)
- family: $1,800/mo, $150 dental, total $1,950/mo. 75% is $1,462.50/mo. (17,550/annual)
Keep in mind, properly set up the 25% employee contribution will be pre-tax payment on the coverage. Both parties would gets the tax break on the contribution so it’s not straight after tax dollar expense. These employer contributions in the mock up example would constitute what a startup would pay in benefits per year in pre-tax dollars on medical and dental coverage. It’s not directly paid to employees as the question is written, but if you are doing a group medical plan for the company, direct payment isn’t how it works. If a company is paying or reimbursing employees directly for non-group medical policies that an employee directly owns, that’s a violation of the ACA/Obamacare laws which is a whole different can of worms you don’t want to open.
Consider Employee Demographics
I advise my clients to take these numbers into account as well as the demographics of their hiring. Use a figure the works as an average total annual outlay for benefits expenses per employee and figure that into a total compensation package when setting up and offer for a potential hire. Don’t just throw extra salary at a potential employee with a family while having a very low contribution level on benefits and expect things to go well. Benefits matter to those with spouses and children.
Can a startup company offer health insurance to salaried executives and not to hourly workers?
I’m going to break this question down into a few bite size chunks because there are a few different ways this can go. The current guidance to this question falls to IRS notice 2011-1 spelling out non-discrimination language in the Affordable Care Act. Here’s the rub. The provisions have been put on hold until the IRS comes out with new guidance regarding what is to be considered a highly compensated employee for the purposes of non-discrimination testing on a company health insurance plan. Even when the guidance comes from the IRS, any changes will not take place for at least 6 months after issuance of the guidance. This new guidance has not been released by the IRS up to this point.
Can a startup offer health insurance to salaried executives and not to hourly employees if those employees are considered full time?
No. This goes to vendor level specifications in their contract provisions and underwriting guidelines. There isn’t a health insurance vendor that I am aware of nationwide, and i’ve dealt with all the majors, who don’t spell out what is to be considered an eligible employee in their contract and in their employer level application. Usually the employer application will spell what is to be considered a full time eligible employee at 30 hours a week or allow for a company to dictate a guideline up to 40 hours. The point is that the vendor will require that all employees above a certain number of hours (considered full time) to be considered eligible employee and as such be offered coverage. Does that make it federal statute, not yet. At the same time, are you putting your signature to the health insurance application, yes.
The insurance companies know what is coming, that’s why they do it. If a company is doing something they shouldn’t when the enforcement begins, the vendors are going to cover themselves. Indirectly, they are covering their customers by forcing their hands too.
Can a startup offer more to executives in terms of benefit toward health insurance versus hourly (rank and file) employees?
As of the time of this writing, yes, but that will be changing and probably soon. Obamacare dictates that paying more in benefit to an executive class of employee violates the non-discrimination provision of the Affordable Care Act. This is laid out in full in IRS release 2011-1. But, and it’s a big But, these aspects regarding non-discrimination testing (not so dissimilar to what you would see on 401k plans) were put on hold, were held for comment on the laws by the IRS, and subject to further guidance before the components of the laws were to be enforced. Once again, as of this writing, the guidance hasn’t been handed down by the IRS, therefore a company can offer more in terms a contribution or benefit to an executive class of employee versus the rank and file.
Does this make it a good idea? Not my call, that’s yours. Understand that when the other shoe drops….and it will….violating the enforceable statute will be costly. A resource from the Society for Human Resource Management that goes into more detail concerning this are as follows:
For those that want the quick and dirty, penalties of $100 per day, per employee who gets less favorable treatment up to 500k is the penalty. Not someplace you want your company to be knowing that these rules are going to be enforced at some point down the road.
Needless to say this issue is fraught with potential landmines. My advice, just don’t do it. If you need to make things right with an executive, make it up someplace else besides on healthcare, the downside is just too big given the changing environment.
Here are a few trigger points where a company will want to get this directors and officers coverage in place.
A prerequisite to a funding round
You are trying to land a board member and they require it
CYA-Cover Your Ass
For more information you can check the following related posts:
How common is it for a startup to pay health insurance premiums for dependents?
Speaking from my experience with clients, it is very common, pretty much expected, that employer contributions for health insurance would extend to dependents. As a caveat to this post, understand that my clientele primarily are in the high-tech startup space and the competition for talent is very high. Maybe this pertains to your business maybe not.
If a company is not contributing to dependents health insurance, consider these rough numbers. Say you want to place a high level group medical program for your company and the monthly cost for an individual participant is $500. Rough numbers would dictate about a 2x multiple on cost for couples or single parents and approximately a 3.5x multiple for a family plan. Those those numbers would be $1k/month and $1,750/month. Now let’s say you wanted to contribute 100% of the cost for an employee, 0% dependent coverage. If you are a single employee with no kids, Huzzah, 100% employer paid health insurance, awesome benefit, can’t do better. But what if you are married? That employer contribution just went down to 50%. Have a family? That contribution is down to about 30%.
I went through something similar with a company that had three single employees (no kids) and a married employee and wanted to only contribute to the employee medical coverage, no dependent contribution. The first thing I asked was do you think you are doing right by everyone? If you are recruiting and you put this package in front of a potential hire that has a family, do you think you will land the hire? Good luck with that. Needless to say we discussed a more equitable strategy that not only did right by the entire employee base but also would not put the company at a disadvantage in recruitment.
There are different ways I’ve seen to mitigate the issue. I’ve seen companies set a contribution for an employee and set a smaller percentage for dependents (100% employee, 50% dependents). I’ve seen companies stagger different contribution amounts based on tiering (100/85/70 contributions on ind/couple/family). What I rarely see, and I mean just once, was $0 contribution to a dependents health insurance coverage.
As mentioned, my take is a little industry specific where that industry has a lot of competition for talent. I get the funding issue, if you are not funded, how do you pay for it? If you are funded though, take the issue of equitable treatment, recruitment and retention into account. If you grow, inevitably people get married and have kids.
What are some typical things that go into a buy-sell agreement?
There are several components that will go into a written buy-sell agreement. Part of what goes into the agreement will be dependent on the type of agreement it is. Items such as whether it will be a cross-purchase or an entity agreement, how the company is set up in terms of company structure and tax implications will have an impact as to how the plan is written. Below are some components that will be included in every agreement.
One of the things that go into every buy-sell arrangement is a means of valuation. The valuation method will be what determines the value on which all terms and conditions for a buyout will depend. The valuation model takes care of any disagreements or debate about what one stakeholder or heir of a stakeholder believes the value of one’s stake in a company may be. There will be no debate, the value will be predetermined so that the mechanisms and terms under which the actual buy sell operates will move forward smoothly. Some common valuation models one would find in a buy-sell include an ‘agreed value’ model where the company ownership in conjunction with corporate accountants will come to an agreed upon price. This pricing model would be revisited at times, typically annually, to reset the valuation. An ‘appraisal method’ is a valuation method where an independent valuation specialist would provide a valuation. The written agreement can dictate who would do the work, if there would be more than one person doing the evaluation and set in motion parameters if there were to be disagreements or large discrepancies. Say you had two evaluators pricing the company and each set of numbers were way off from one another. The agreement could stipulate a third valuation be done and an average of the three be the agreed value. A third common model is a ‘formula model’ where the valuation is based on an agreed upon valuation formula such as simple book value or adjusted book value.
Triggers for a buyout are also a standard component that goes into a buy-sell agreement, common triggers include death, disability and retirement. Some secondary triggers that can and should be considered would be an owner quitting the company or a shareholder actually being fired. The triggers set forth will do exactly what it is stated to do, trigger the terms of the buy-sell should any of the stated events in the agreement come to pass.
Obligations on the parties part will be a mandatory component of the agreement. The obligations lay out each parties responsibilities once a trigger is triggered. One such example would be in the case of the death of an owner. Obligations on the part of ownership will typically dictate that a deceased owners share will be purchased back into the company and distributed evenly amongst surviving ownership. Based on valuation models, the value of the deceased owners stake in a company would be paid for and the proceeds distributed to the estate, next of kin, what have you.
Circumstances such as disability or retirement would trigger other contractual functions to occur. Such functions would dictate buyout terms for the exiting owner as well as financing triggers such as disability buy-sell insurance policies. These obligations would be laid out in the written agreement and ultimately redistribute the shares to ongoing ownership. If a shareholder quit the company, or worse yet is fired, this is really where the language of the agreement becomes important. If certain parameters are not discussed or alluded to, it can become a messy divorce.
It’s one thing if someone is leaving the company to go do something else entirely from what the existing company does, but what if the quitting owner is leaving to start their own company as a competitor or leaving for an existing competitors firm? You’d have some serious conflicting issues there. If there is a need to outright fire someone who is a stakeholder? Those are some real fireworks. Too often this can lead to the downfall of a company if processes are not set in place in order to get ahead of such things. Obligations on the part of existing and outgoing owners in these scenarios need to be agreed to in writing beforehand. No crossing the bridge when you get there, no handshake agreement. Do it in writing, do it early.
Tax Implications and Financing
A couple of very important aspects that will be part of the agreement or be part and parcel to making the agreement work properly will be the tax implications and financing. The tax issues will revolve around the structure of the company be it sole prop, S or C-Corp, or LLC. Make sure any agreement and financing method is reviewed by qualified tax consultants to see that no landmines go off should an agreement be triggered. The most common method of funding is through insurance. In cases of death and disability, life and disability insurance policies will tend to be the financing method. Such events will trigger the insurance so as to provide funds to the appropriate entities and complete the buy/sell process. In instances such as retirement or buyout of a stakeholder leaving the company where insurance doesn’t apply, terms are financed through other types of financing mechanisms such as bank loans or installment purchase agreements.
So here comes the shameless plug. If your company is in need of such an arrangement feel free to reach out.
Business Insurance & Benefits Services of MA
When should a startup buy life insurance for its founders?
Life insurance for founders in a startup is going to become an important factor for a company at some point of the lifecycle. If such a company is still considered a bootstrapping startup, it may be a little premature. The question here is when should a startup purchase such things. From a bootstrapping startup perspective, my answer would be ‘when your hand is forced’.
The most common ‘when’ will be when securing a VC round. Quite often there will be a couple of prerequisites to finishing off a deal and getting the cash. Two of these prerequisites often include taking on some form of insurance. One is procuring Directors and Officers coverage, the second is getting key-man coverage on certain people in the company.
A VC or private equity entity will want to see that the company they are investing in will be protected if something were to happen to a key person or people. In many cases this will involve the founders. Founders will typically have particular experience or knowledge that makes then invaluable to the future of a company. VC’s will want to mitigate the risk against the death of such a key person with this type of coverage.
From the standpoint of a company that is not a bootstrapping startup, I would suggest the time frame is ‘when you can afford it’. If your hand isn’t being forced, it will still be important to secure your company against losing a key person as explained. You will also want to secure the company against ownership issues that arise from the death of an owner. This is where a funded buy/sell agreement comes into play. Life insurance is the primary funding mechanism toward this end.
Buy/Sell agreements are a key component to protecting the company and its ownership in the event of a death of a founder, allowing for the seamless transition of ownership should such an event occur. That said, if yours is a startup company with little or no dollar value attached, you don’t really doesn’t need to spend the too many resources here immediately. Once a company gets out of bootstrapping mode, gets some traction and revenue and has the resources to pay for the funding that goes along with a buy/sell, go ahead and do it. This also goes for key-man coverage. If you’re not having your hand forced, wait until you’re ready and then implement such coverage when the company has the resources.
Insurance brokers will almost always tell you that both is a must. Frankly the buy/sell is more of a must in my mind but that doesn’t mean the key-man isn’t important. Just be sure the timing is on your side if you can control such aspects.
Do your homework.
In Boston, there are so many networking events out there it can become a blur. If you wanted to you could literally go to a professional networking event, mixer, forum, fireside chat or any number of events every day of the week. You’ll never get to all of them, and you shouldn’t try. If networking is going to be a part of your marketing plan, then you need a roadmap. Are you looking to cast as large a net as possible or trying to focus in on a certain industry or segment? Does a large room full to the rafters make for a good environment for you or something a little more low key and intimate?
This speaks to two questions you need to answer, who are you trying to meet and what kind of environment is you best suited to?
For my purposes, I steer toward startup related tech events and I like a big room full of people. This speaks to the audience I want to meet and what makes me comfortable. I deal primarily with technology startups in my business. Over the course of time, I’ve been able to find the nicheier (I might have just made up a word there) events in town. It didn’t start that way. First it started with more generic chamber of commerce events, wide net stuff with a little bit of everything. Over time I was able to break down and target my audience and then find those events. If you can do the same thing quickly you can save yourself a lot of time.
The second question of environment plays a big role as well. I like a bigger room because it allows me to blend in a little more, especially if I don’t know anyone and I just hang back a bit. It’s easier to do that in a room with 150 people than in a room of 15, that’s just me. Some people may be intimidated by a big crowd full of strangers, especially a big crowd where a lot of folks already seem to know each other. In this case you may want to find smaller events with more structure than just an open networking session. The structure can keep the ‘it’s a zoo in here’ mentality at bay and simply be a less intimidating event environment.
Have a goal.
When you go into a networking event, don’t go in without having a goal in mind. If you go into an event with the goal of ‘I’m going to meet everyone there’, you can go that route. It better be a smaller event and it better be geared toward your favored audience.
A better way to go would be along the lines of ‘I want to meet 3 new people tonight’ or ‘I want to meet at least one person who would make a good strategic relationship’. The best events I see are those that have a registration list. This is a huge tool and a leg up if you take the time to use it. Such a list will allow you to narrow down your focus more. Instead of ‘I want to meet 3 new people’ you can put together a list of 3 specific individuals.
Point being, have a game plan going into an event, have an idea as to what you want to accomplish and go execute.
Introduce yourself, then make an introduction.
Some people I know that are fantastic networkers do this. If they meet someone at an event, especially if it is someone that they have never met before, they will have a conversation. During that conversation these really good networkers will pull someone else into their conversation and introduce that new person.
It does a few things. It establishes credibility that you are not just there for yourself but are there to help other people. This extends not only to a person you have just met but also to the 3rd person who just got introduced to someone new. I know this works because I’ve been the guy having a conversation with such a networker and that someone introduces me to a 3rd person brought into the conversation. I’ve also been the 3rd person. There have been multiple instances in both situations where I have been able to establish worthwhile business relationships.
Take it upon yourself to introduce yourself and introduce others.
What can you do for others?
A big mistake people make is to go into a networking event only looking for what they can get out of it for themselves. It’s the old ‘givers gain’ approach, and it works a whole lot better than most approaches. When you see posts similar to this giving advice on how to approach a networking event, one item that you will see again and again is don’t sell. Don’t go into an event looking to pitch everyone you see and try to sell them. If you are going to network, the likelihood is that most of the people you will meet will be people you have never met before. I don’t know anyone who likes to be sold, even less so by a stranger.
Networking is about establishing relationships, that means building some trust and that means not pitching every person you come across. The hopeless approach, and I’ve seen this, is to go in with your polished pitch, try to sell everyone in the joint, get nowhere, say it was a waste of time, stop networking entirely. Awful, just awful.
One of the better networkers I know says two things when he meets someone new at an event. After introducing himself he says ‘what can I do for you/how can I be of help to you’ and ‘who can I help you meet’? I run an event myself, and if you’ve been, you may know who I’m talking about (looking at you Stevie Z). It’s a great approach, it’s not salesy, it’s helpful. It’s an honest attempt at trying to help someone out that you haven’t met before. People remember that. It builds trust more quickly and effectively than another stale sales pitch.
I have been steered toward quite a few valuable resources by this gentleman because he doesn’t just do it once, he says the same thing to me every time I see him. And you know what? I leverage the heck out of him because his contacts are fantastic. Think I won’t try to help him out the next time I get an opportunity?
This last point is probably the best piece of advice I’d have for someone navigating networking events. See how you can help out others, and then go out of your way to do it. Your chance to pitch will come. You won’t even have to because others will be looking out for you so long as they know what you bring to the table. Let people know what you do and what your capabilities are, but leave the sales pitch at the door.
Avoid the horror show, get a buy-sell arrangement done (part two)
In part one of this two part post, I wrote about buy-sell arrangements and how that will protect business partners against the unexpected death of one of their own. Circumstances that come with the death of a partner can vary, but in the end, surviving owners need to be concerned with people and entities that will have competing interests if such folks wind up with the the decedents ownership stake in the company.
In this part of the blog we will tackle what happens if a partner in a company becomes disabled. In an instance such as this, the dynamics change. In the event of a partners passing, co-owners would need to deal with outside parties. In the event of a disability, you’re not dealing with outside parties, you’re dealing with your cofounder or partner. This is going to change the way things are treated.
A disability to a co-owner can create some uncomfortable problems if the event is severe enough. What if such an event is bad enough that a co-owner can no longer work at all? Maybe worse than that, what if you have to break the news that while a partner may feel he or she is good to go, they just can pull the weight anymore?
To start, we will discuss the worst case scenario, a permanent disability that simply will not allow one to work in the business anymore. Over the course of one’s working career, the chances of suffering a disability versus the chances of dying are about 3.5 to 1. In your younger days, that ratio is higher and as you age that ratio decreases. Given the chances of such an occurrence, the need for disability as part of a buy/sell arrangement becomes pretty clear.
So what happens? In the event of total disability, the disability buy/sell arrangement will dictate a process, a valuation model and if done properly, a funding method using disability insurance to fund the buyout. Within a complete corporate buy/sell arrangement, there will be a component in the event that a disability that will not allow for a partner to continue in such a capacity. Should this occur, it would trigger the terms of a buyout per the terms of the arrangement. For funding purposes, disability buy/sell insurance coverage should be put in place in order to finance the arrangement. Without the insurance proceeds, one partner would have to either have cash on hand, or raise the funds independently to finance the buyout.
Short of that, what you have is one partner running a business with a second partner simply along for the ride. Not the scenario the partner running the show at that point would feel to be fair to him or her.
What if there is no total disability? What if it isn’t permanent and all parties feel that the owner will fully recover and be able to return to work? This is where Disability Key-Man coverage comes into play. This becomes the middle ground that will cover a company for the expenses incurred while a key person is out on disability. It should be tailored to sufficiently stabilize the company while determinations can be made regarding an employee return or ultimately replacing said key person. This issue is more complex than the brief description given here and will be explored more completely in a different blog post.
The disability recovery scenario is why most buyout triggers of a buy/sell agreement dictate that a partner be deemed totally disabled and that a long probationary, typically 12 months, be subject to the triggering of a buyout. A business owner will not be too quick to hand over a stake in a business if he or she were to believe that they will be able to recover from an incident. Quite frankly, a business owner may plain and simple never give up the stake regardless…unless there is a preset arrangement with parameters in place.
As a disabled owner, without a formal agreement there is nothing forcing the issue to trigger a buyout. A disabled owner could set their own price that a co-owner doesn’t agree with or is simply an unfair valuation. A disabled owner could go out in the open market and find another buyer to take over their stake if he were to find someone other than a co-owner to meet his price. Where does that leave the healthy partner? Without the arrangement set in stone, one could be looking at running the company essentially by himself, a new business partner, and if things come to a head, the disillusion of the company entirely.
It doesn’t need to happen and both parties owe it to themselves to get ahead of such things. When an instance such as a disability occurs and the potential impact of business becomes an issue, egos and feelings get involved, that helps no one. Take it out of the equation now.
For more information on the topic or guidance, use the form below or reach out directly to Nathan Therrien at 978-400-7014 or at email@example.com
[contact-form-7 404 "Not Found"]