Can a startup company offer health insurance to salaried executives and not to hourly workers?

January 17, 2016

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:

Nondiscrimination Rules for Health Plans Loom Ahead

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.

 

When should a startup consider Directors and Officers liability coverage?

January 1, 2016

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

One point at which it makes sense to insure your directors is if getting a pile of money depends on it. In many cases, VC or private equity firms will make this a contingency to closing a round of funding for a company. The amount of coverage will be set by the entity but more often than not it is a stock 1mm coverage amount. EPLI may also be a component of this prerequisite and would be a seperate line item in a comprehensive management liability policy, just be aware.

You are trying to land a board member and they require it

I’ve had clients out in Silicon Valley try to bring experienced people in to become part of a board of directors. The people that were targets of these companies were experienced old hands in the tech and startup space, so one of the first requirements these folks had was making sure that D&O was in place. If you are trying to put a board in place made up of experienced industry veterans, be prepared to have Directors and Officers coverage become part of the conversation.
A third time frame is a little more of a judgment call on the timing, but if you yourself are an officer and are asking this question, you will want to consider it when you feel it is time to……

CYA-Cover Your Ass

As soon as there are directors and officers acting in a management capacity, there is a need for this type of coverage. Most bootstrapping startups will put it off until there is a trigger and that’s understandable but if the company has some traction and is moving along well enough where the resources are there, get this in place.
Claims made against the directors and officers of a company can put their personal assets at risk. In the event that a director or officer is named in a lawsuit on a claim that stems from the management of a company, there is a high probability that other insurances such as General or Professional Liability will not cover such claims. Directors and Officers coverage deals with precisely these types of issues. With the broad range of issues facing company management, the scope of potential litigants and the rise in claims made against directors and officers, if you aren’t looking into this type of coverage, you probably should be.

For more information you can check the following related posts:

Management Liability policies: Is it just Directors and Officers coverage?

How does Directors and Officers coverage work?

How common is it for a startup to pay health insurance premiums for dependents?

December 24, 2015

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?

December 3, 2015

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.

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.

Nathan Therrien
Founder
Business Insurance & Benefits Services of MA
978-400-7014
nathan@bibsma.com
http://www.bibsma.com

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