Finding a 401(k) that’s Right for Your Business

By and large, today’s employees expect employers to offer a tax-advantaged retirement plan. A 401(k) is an obvious choice to consider, but you may not be aware that there are a variety of types to choose from. Let’s check out some of the most popular options:

Traditional. Employees contribute on a pre-tax basis, with the employer matching all or a percentage of their contributions if it so chooses. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees and doesn’t favor highly compensated employees (HCEs).

In 2018, employees can defer a total amount of $18,500 through salary reductions. Those age 50 or older by year end can defer an additional $6,000.

Roth. Employees contribute after-tax dollars but take tax-free withdrawals (subject to certain limitations). Other rules apply, including that employer contributions can go into only traditional 401(k) accounts, not Roth 401(k)s. Usually a Roth 401(k) is offered as an option to employees in addition to a traditional 401(k), not instead of the traditional plan.

The Roth 401(k) contribution limits are the same as those for traditional 401(k)s. But this applies on a combined basis for total contributions to both types of plans.

Safe harbor. For businesses that may encounter difficulties meeting 401(k) testing requirements, this could be a solution. Employers must make certain contributions, which must vest immediately. But owners and HCEs can maximize contributions without worrying about part of their contributions being returned to them because rank-and-file employees haven’t been contributing enough.

To qualify for the safe harbor election, the employer needs to either contribute 3% of compensation for all eligible employees, even those who don’t make their own contributions, or match 100% of employee deferrals up to the first 3% of compensation and 50% of deferrals up to the next 2% of compensation. The contribution limits for these plans are the same as those for traditional 401(k)s.

Savings Incentive Match Plan for Employees (SIMPLE). If your business has 100 or fewer employees, consider one of these. As with a Safe Harbor 401(k), the employer must make certain, immediately vested contributions, and there’s no rigorous testing.

So, how is the SIMPLE 401(k) different from a safe harbor 401(k)? Both the required employer contributions and the limits on participant deferrals are lower: The employer generally needs to either contribute 2% of compensation for all eligible employees or match employee contributions up to 3% of compensation. The employee deferral limits are $12,500 in 2018, with a $3,000 catch-up contribution for those age 50 or older.

This has been but a brief look at these types of 401(k)s. Our firm can provide you with more information on each, as well as guidance on finding the right one for your business.

A Midyear Review Should Go Beyond Financials

Every year is a journey for a business. You begin with a set of objectives for the months ahead, probably encounter a few bumps along the way, and reach your destination with some success and a few lessons learned.

The middle of the year is the perfect time to stop for a breather. A midyear review can help you and your management team determine which objectives can still be met and which ones may need tweaking or perhaps even elimination.

Naturally, this will involve looking at your financials. Various metrics can tell you whether your cash flow is strong and debt load manageable, and if your profitability goals are within reach. But don’t stop there.

3 key areas

Here are three other key areas of your business to review at midyear:

  1. HR. Your people are your most valuable asset. So, how is your employee turnover rate trending compared with last year or previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.
  2. Sales and marketing. Are you meeting your monthly goals for new sales, in terms of both sales volume and number of new customers? Are you generating an adequate return on investment (ROI) for your marketing dollars? If you can’t answer this last question, enhance your tracking of existing marketing efforts so you can gauge marketing ROI going forward.
  3. Production. If you manufacture products, what’s your unit reject rate so far this year? Or if yours is a service business, how satisfied are your customers with the level of service being provided? Again, you may need to tighten up your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals.

Necessary adjustments

Don’t wait until the end of the year to assess the progress of your 2018 strategic plan. Conduct a midyear review and get the information you need to make any adjustments necessary to help ensure success. Let us know how we can help.

The Tax Impact of the TCJA on Estate Planning

The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.

Exemption increases

The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018.

This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond.

The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

The impact

Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025.

Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available.

Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater.

Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning.

For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax.

Review your estate plan

Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Contact us to discuss the potential tax impact of the TCJA on your estate plan.

Could a Long-Term Deal Ease Your Succession Planning Woes?

Some business owners — particularly those who founded their companies — may find it hard to give up control to successors. Maybe you just can’t identify the right person internally to fill your shoes. While retirement isn’t in your immediate future, you know you must eventually step down.

One potential solution is to find an outside buyer for your company and undertake a long-term deal to gradually cede control to them. Going this route can enable a transition to proceed at a more manageable pace.

Time and capital

For privately held businesses, long-term deals typically begin with the business owner selling a minority stake to a potential buyer. This initiates a tryout period to assess the two companies’ compatibility. The parties may sign an agreement in which the minority stakeholder has the option to offer a takeover bid after a specified period.

Beyond clearing a path for your succession plan, the deal also may provide needed capital. You can use the cash infusion from selling a minority stake to fund improvements such as:

  • Hiring additional staff,
  • Paying down debt,
  • Conducting research and development, or
  • Expanding your facilities.

Any or all of these things can help grow your company’s market share and improve profitability. In turn, you’ll feel more comfortable in retirement knowing your business is doing well and in good hands.

Benefits for the buyer

You may be wondering what’s in it for the buyer. A minority-stake purchase requires less cash than a full acquisition, helping buyers avoid finding outside deal financing. It’s also less risky than a full purchase. Buyers can, for example, push for the company to achieve certain performance objectives before committing to buying it.

Integration may also be easier because buyers have time to coordinate with sellers to implement changes — an advantage when their IT, accounting, or other major systems are dissimilar. In addition, in a typical M&A transaction, decisions must be made quickly. But under a long-term deal, the parties can debate and negotiate options, which may improve the arrangement for everyone.

What’s right for you

There are, of course, a wide variety of other strategies for creating and executing a succession plan. But if you’re leaning toward finding a buyer and are in no rush to complete a sale, a long-term deal might be for you. Our firm can provide further information.

Factor in State & Local Taxes when Deciding Where to Live in Retirement

Many Americans relocate to other states when they retire. If you’re thinking about such a move, state and local taxes should factor into your decision.

Income, property, and sales tax

Choosing a state that has no personal income tax may appear to be the best option. But that might not be the case once you consider property taxes and sales taxes.

For example, suppose you’ve narrowed your decision down to two states: State 1 has no individual income tax, and State 2 has a flat 5% individual income tax rate. At first glance, State 1 might appear to be much less expensive from a tax perspective. What happens when you factor in other state and local taxes?

Let’s say the property tax rate in your preferred locality in State 1 is 5%, while it’s only 1% in your preferred locality in State 2. That difference could potentially cancel out any savings in state income taxes in State 1, depending on your annual income and the assessed value of the home.

Also keep in mind that home values can vary dramatically from location to location. So if home values are higher in State 1, there’s an even greater chance that State 1’s overall tax cost could be higher than State 2’s, despite State 1’s lack of income tax.

The potential impact of sales tax can be harder to estimate, but it’s a good idea at minimum to look at the applicable rates in the various retirement locations you’re considering.

More to think about

If states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. Others offer tax breaks for retirement plan and Social Security income.

In the past, the federal income tax deduction for state and local property and income or sales tax could help make up some of the difference between higher- and lower-tax states. But with the Tax Cuts and Jobs Act (TCJA) limiting that deduction to $10,000 ($5,000 for married couples filing separately), this will be less help — at least through 2025, after which the limit is scheduled to expire.

There’s also estate tax to consider. Not all states have estate tax, but it can be expensive in states that do. While under the TJCA the federal estate tax exemption has more than doubled from the 2017 level to $11.18 million for 2018, states aren’t necessarily keeping pace with the federal exemption. So state estate tax could be levied after a much lower exemption.

Choose wisely

As you can see, it’s important to factor in state and local taxes as you decide where to live in retirement. You might ultimately decide on a state with higher taxes if other factors are more important to you. But at least you will have made an informed decision and avoid unpleasant tax surprises. Contact us to learn more.

How Competitive Is Your Business?

Every business owner launches his or her company wanting to be successful. But once you get out there, it usually becomes apparent that you’re not alone. To reach any level of success, you’ve got to be competitive with other similar businesses in your market.

When strategically planning, one important question to regularly ask is: Just how competitive are we anyway? Objectively making this determination entails scrutinizing key factors that affect profitability, including:

Industry environment. Determine whether there are any threats facing your industry that could affect your business’s ability to operate. This could be anything from extreme weather to a product or service that customers might use less should the economy sour or buying trends significantly change.

Tangible and intangible resources. Competitiveness can hinge on the resources to which a business has access and how it deploys them to earn a profit. What types of tangible — and intangible — resources does your business have at its disposal? Are you in danger of being cut off or limited from any of them?

For example, do you own state-of-the-art technology that allows you to produce superior products or offer premium services more quickly and cheaply than competitors? Assess how suddenly this technology could become outdated — or whether it already has.

Strength of leadership team. As the owner of the business, you may naturally and rightly assume that its management is in good shape. But be open to an objective examination of its strengths and weaknesses.

For instance, maybe you’ve had some contentious interactions with employees as of late. Ask your managers whether underlying tensions exist and, if so, how you might improve morale going forward. There’s probably no greater danger to competitiveness than a disgruntled workforce.

Relationships with suppliers, customers, and regulators. For most businesses to function competitively, they must rely on suppliers and nurture strong relationships with customers. In addition, if your company is subject to regulatory oversight, it has to cooperate with local, state and federal officials.

Discuss with your management team the steps the business is currently taking to measure and manage the state of its relationships with each of these groups. Have you been paying suppliers on time? Are you getting positive customer feedback (directly or online)? Are you in compliance with applicable laws and regulations — and are there any new ones to worry about?

Loss of competitiveness can often sneak up on companies. One minute you’re operating in the same stable market you’ve been in for years, and the next minute a disruptor comes along and upends everything. Contact us for more information and other profit-building ideas.

Get Started on 2018 Tax Planning Now!

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

Many variables

A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill.

For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

Certainty vs. uncertainty

Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. Additional major tax law changes aren’t expected in 2018, so holding off on tax planning isn’t necessary.

While there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks.

The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies.

Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

Now and throughout the year

To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.

Manage Costs of Health Benefits with a Multi-pronged Approach

Many companies offer health care benefits to help ensure employee wellness and compete for better job candidates. And the Affordable Care Act has been using both carrots and sticks (depending on employer size) to encourage businesses to offer health coverage.

If you sponsor a health care plan, you know this is no small investment. It may seem next to impossible to control rising plan costs, which are subject to a variety of factors beyond your control. But the truth is, all business owners can control at least a portion of their health care expenses. The trick is taking a multi-pronged approach.  Here are some ideas:

Interact with employees to find the best fit. The ideal size and shape of your plan depends on the needs of your workforce. Rather than relying exclusively on vendor-provided materials, actively manage communications with employees regarding health care costs and other topics. Determine which benefits are truly valued and which ones aren’t.

Use metrics. Business owners can apply analytics to just about everything these days, including health care coverage. Measure the financial impacts of gaps between benefits offered and those employees actually use. Then appropriately adjust plan design to close these costly gaps.

Engage an outside consultant. Secure independent (that is, non-vendor-generated) return-on-investment analyses of your existing benefits package, as well as prospective initiatives. This will entail some expense, but an expert external perspective could help you save money in the long run.

Audit medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By regularly re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing.

Renegotiate pharmacy benefits contracts. As the old saying goes, “Everything is negotiable.” The next time your pharmacy benefits contract comes up for renewal, see whether the vendor will do better. In addition, look around the marketplace for other providers and see if one of them can make a more economical offer.

No silver bullet exists for lowering the expense of health care benefits. To manage these costs, you must understand the specifics of your plan as well as the economic factors that drive expenses up and down. Please contact our firm for assistance and additional information.

Home vs. Away: The Company Retreat Conundrum

When a business decides to hold a retreat for its employees, the first question to be answered usually isn’t “What’s our agenda?” or “Whom should we invite as a guest speaker?” Rather, the first item on the table is “Where should we have it?”

Many employees and some business owners might assume that a company retreat, by definition, must take place off-site. But this isn’t necessarily so. Holding an on-site retreat is an option — and a markedly cost-effective one at that. Then again, it may also recall the old adage: You get what you pay for.

Staying put

Staying put can better keep out-of-pocket expenses in check in several ways. The most obvious is that you won’t need to rent one or more meeting rooms. Perhaps even more important is the fact that no one at your company will need to spend valuable time and energy calling around to various hotels, gathering information and negotiating costs.

You’ll also likely spend less on food and beverages. A local restaurant can probably cater in the food for a nominal sum, and you could buy beverages in bulk. Furthermore, you’ll have no concerns or expenses associated with transporting employees to the retreat location (as long as your employees all work on site).

The problem is that employees tend to view on-site retreats as just another day at the office, and that mentality makes turning on creative juices and accomplishing goals difficult. They’re constantly tempted to run back to their desks to check their e-mail and voice mail. Worse yet, they may consider their employer a little too cost-conscious, if you catch our drift.

Heading out

Generally, people are better able to focus on a retreat agenda at off-site locations. They’re in a new, “special” environment that has no visual cues triggering their workday routines. So, even though you’ll incur additional costs, you may get a better return on investment.

During the planning process, remember that everything is negotiable. Hotels and facilities that host company retreats need and want your business. Get several quotes and compare prices and services. You’ll have more leverage if you avoid scheduling your retreat during a time of year when local venues tend to be busy.

Because hotels earn bigger margins on food, beverages, and meeting set-up fees, many will provide complimentary or discounted rooms for guest speakers and out-of-town employees. Also, try to negotiate a set food and beverage price for the entire retreat rather than a per-person or per-event rate.

In addition, don’t be shy about asking for discounts. For example, if the facility requires an advance deposit and the balance at the end of the retreat rather than giving you 30 days to pay, request a discount for prompt payment.

Thinking it through

Not every company can afford to fly their staff to Aruba and hold beach-side brainstorming sessions replete with tropical beverages. But crowding everyone into the break room and expecting mind-blowing strategic ideas to flow forth probably isn’t realistic, either. Find a suitable and productive point somewhere in between. Let us know if we can help with further information or more ideas.