Look to a SWOT analysis to make better HR decisions

Many business owners spend most of their time developing strategic plans, overseeing day-to-day operations and, of course, putting out fires. Yet an underlying source of both opportunity and trouble can be human resources (HR).

Think about it: The performance of your HR department determines who works for you, how well employees are supported, and to what extent the business complies with laws and regulations pertaining to employment and benefits.

One way to ensure that your strategic HR decisions are likely to yield positive, cost-effective results is to apply a strengths, weaknesses, opportunities and threats (SWOT) analysis.

Strengths and weaknesses

When used for general strategic planning, a SWOT analysis typically begins by identifying strengths — usually competitive advantages or core competencies that generate value, such as a strong sales force or exceptional quality of products or services.

Next, you pinpoint weaknesses. These are factors that limit business performance, which are often revealed in comparison with competitors. General examples include a negative brand image because of a recent controversy or an inferior reputation for customer service.

When applying a SWOT analysis to HR, think about that department’s core competencies. These include filling open positions, administering benefits, and supporting employees who need help or are in crisis. What are its strengths? What are its weaknesses?

You can use various HR metrics to put a finer point on these relatively broad questions. For example, calculate “time to hire” to determine how long it’s taking to fill open positions and “early turnover” to see how many new hires you’re losing in the first year of employment.

External conditions

The next step in a typical SWOT analysis is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit performance or undermine strategic objectives.

When differentiating strengths from opportunities, or weaknesses from threats, ask yourself whether an issue would exist if your company didn’t. If the answer is yes, the issue is external and, therefore, an opportunity or threat. Examples include changes in hiring demographics or government regulations regarding benefits.

How to apply it

Let’s say you determine, by benchmarking yourself against similar businesses, that “time to hire” is a strength. This means that your HR staff is skilled at placing targeted, effectively worded ads; working well with recruiters; and interacting in a timely, efficient and positive manner with applicants.

In today’s environment, a strong hiring mechanism is undoubtedly a competitive advantage. If hiring and retention are weaknesses, however, you could be headed toward a crisis if you lose too many employees — particularly in today’s tight job market.

Opportunities and threats are important as well. For example, if your company seeks to strengthen employee retention through expanded benefits, you’ll need to anticipate the opportunities and challenges for your HR staff. You may need to invest in training and upskilling to make sure that they can effectively communicate with employees about the broader package and administer the specific benefits therein.

And there are likely external threats to consider. For example, an aggressive competitor may begin poaching your employees. Evolving tax regulations and compliance requirements for health and retirement benefits could catch your HR staff off-guard if they’re unaware of the changes.

Advisable and feasible

Sometimes business owners assume that HR will run itself while they dedicate themselves to growing the company. But the truth is that HR departments need to set strategic goals, just like the business does. A SWOT analysis can help ensure that these goals are advisable and feasible.

© 2023

Sailing a steady ship in today’s interesting economy

Business owners: If you’re having trouble reading the U.S. economy, you’re not alone. On the one hand, the January 2023 jobs report revealed that the unemployment rate had fallen to 3.4%, its lowest level in 54 years. And inflation, while still a concern, has moderated in most sectors — staving off fears of a recession in the immediate future.

And yet concern remains about whether the economy will grow or suddenly stall. And the Fed is expected to continue raising interest rates, meaning the battle against inflation is far from won. What can you do, strategically, to neither under- nor overreact to this “interesting” situation? Sail a steady ship.

Save a little, spend a little 

In a faltering economy, business owners tend to want to curb spending. Conversely, during boom times, companies are more apt to spend money to seize opportunities. Right now, the best approach may be a little of both.

Enlist employees to help cut expenses that don’t foster your business’s long-term success. Communicate regularly with staff about the need to curb spending and celebrate those who come up with effective cost-control measures.

That said, now isn’t the time to stop investing in new assets, people or technologies if they’re essential to your operations or could sharpen your company’s competitive edge.

Prioritize expenditures

A good exercise to undertake at least annually, if not quarterly, is to make a list of all expenses over the course of a year and separate them into three categories: “must have,” “nice to have” and “don’t need.” Ask your leadership team for input on which expenses should fall under each category.

Another idea for small to midsize businesses: Have a “check-signing social” in which you gather department managers to discuss major cash outlays while you sign checks or otherwise remit payments. An event like this lets managers know that you’re aware of their spending while giving them a chance to explain their rationale for the spending.

Know your suppliers 

In tough economic times, businesses must keep a close eye on the stability of suppliers. If a major vendor goes under, you could be left in the lurch.

You might not have to worry quite as much about insolvencies in today’s environment, but don’t let your guard down. Nurturing good relationships with suppliers is particularly vital with supply chain issues continuing to trouble many industries. Maintain strong communication. Every so often, you may want to conduct a supplier audit to collect key data points regarding each one’s performance.

Watch out for fraud

No matter what the state of the economy, dishonest employees and outside criminals may seize the opportunity to commit fraud. Cash and asset misappropriation, as well as outright theft, are among the most prevalent types of “traditional” fraud. Cybercrimes are also increasingly common today. Hackers can steal from you or shut down your operations from hundreds or thousands of miles away.

Reduce typical fraud risks by implementing a solid system of internal accounting controls, such as segregating duties and requiring a second signature on checks over a certain amount. Also, if you’re hiring, conduct thorough background checks within legal parameters. Finally, invest time and money in cybersecurity measures to protect your systems and data.

Good news, bad news

The good news is the U.S. economy has generally rebounded well from the many changes and challenges of the pandemic. The bad news is, no one is completely sure where we’re headed. Our firm can help you gather and analyze the right financial data to make strong strategic decisions.

© 2023

3 ways your business can uncover cost cuts

Every business wants to find them, but they sure don’t make it easy. We’re talking about cost cuts: clear and substantial ways to lower expenses, thereby strengthening cash flow and giving you a better shot at strong profitability.

Obvious places to slash costs — such as wages, benefits, and overhead — often aren’t a viable option because the very stability of your operation may depend on them. But there might be other ways to lower expenses if you dig deeply enough. Here are three ways to perhaps uncover some cost-cutting opportunities.

1. Study your suppliers

Many companies find that just a few of their suppliers account for most of their spending. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.

On a related note, how well do you know your suppliers? One way to ensure you’re working off an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data points regarding a supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Go green

Given the already noticeable effects of climate change, operating an environmentally friendly company has become imperative. But going green can, under the right circumstances, save you money as well.

Refurbished computers or office furniture often can be found at substantial savings compared with their brand-new counterparts. If you no longer need equipment, computing devices, or office furniture, you may be able to sell them to a liquidator or dealer. You’ll not only bring in some money on the sales but also free yourself of the need to store and maintain the items.

In addition, look at your facilities. If you own the property on which you operate, research energy-efficient upgrades to the HVAC and lighting systems. Naturally, making such upgrades will cost you money initially, but you may be able to lower energy costs over the long term. What’s more, you might qualify for tax credits for installing certain items.

3. Explore outsourcing, tech upgrades

Many business owners try to cut costs by doing everything in-house — from accounting to payroll to HR. But if the staffing and expertise just aren’t there, these companies often suffer losses because of mistakes and mismanagement. Although you’ll obviously incur costs when outsourcing, the time and labor it saves you could end up being a net gain.

Carefully chosen and implemented technology upgrades can serve a similar purpose. Many products on the market today are so robust and fully featured, upgrading to them is almost comparable to outsourcing.

Again, you’ll need to spend money in the near term but, eventually, you could lower the cost of doing business. For example, the right customer relationship management system can help you generate sales leads and focus on your most profitable existing customers.

Snip, snip, snip

Lowering expenses is often difficult, but looking for ways to do it is an important activity to undertake regularly. This is particularly true now that inflation is a major factor in the economic landscape. Please contact us for help identifying and lowering your company’s most “cuttable” costs.

© 2023

Is now the time for your small business to launch a retirement plan?

Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not downright mandatory.

Is now the time for your small business to do so? More specifically, as you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly, and the good news is the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.

Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:

1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously only 50% of costs were allowed — this limit still applies to employers with 51 to 100 employees.

2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than three years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.

3. Enhancement of employer contributions. Perhaps the biggest change wrought by SECURE 2.0 is that certain employer contributions for a plan’s first five years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:

• 100% in the plan’s first and second tax years,

• 75% in the third year,

• 50% in the fourth year, and

• 25% in the fifth year.

For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.

In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.

To be clear, though the name of the tax break is the small employer pension plan start-up cost credit, it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine whether now is indeed the right time for your small business to launch a retirement plan and, if so, which one.

© 2023

Look forward to next year by revisiting your business plan

Businesses of all stripes are about to embark upon a new calendar year. Whether you’ve done a lot of strategic planning or just a little, a good way to double-check your objectives and expectations is to revisit your business plan.

Remember your business plan? If you created one recently, or keep yours updated, it might be fresh in your mind. But many business owners file theirs away and bust them out only when asked to by lenders or other interested parties.

Reviewing and revising your business plan can enable you and your leadership team to ensure everyone is on the same page strategically as you move forward into the new year.

6 traditional sections 

Comprehensive business plans traditionally comprise six sections:

1. Executive summary,

2. Business description,

3. Industry and marketing analysis,

4. Management team description,

5. Implementation plan, and

6. Financials.

Business plans are a must for start-ups. And, as mentioned, they’re sometimes part of the commercial lending process. Yet business plans are often overlooked when leadership teams engage in strategic planning.

The best ones can be quite simple. In fact, long-winded business plans can wind up confusing everyone involved or simply go ignored. For a small business, the executive summary shouldn’t exceed one page, and the maximum number of pages of the entire plan should generally be fewer than 40.

Spotlight on financials

The executive summary is usually the first thing anyone looks at when reading a business plan, but it’s the last section you should write. Start with your company’s historic financial results, assuming it’s not a start-up. Then, identify key benchmarks that you want to achieve in the coming year — as well perhaps longer periods, such as three, five or even 10 years out.

Next, generate financial projections that support your strategic goals. For example, suppose your company has $10 million in sales in 2022 and expects to double that figure over a three-year period. How will you get from Point A ($10 million in 2023) to Point B ($20 million in 2025)?

Let’s say you and your leadership team decide to double sales by hiring four new salespeople and acquiring the assets of a bankrupt competitor. These strategic objectives will drive the projected income statement, balance sheet and cash flow statement included in your business plan.

Be particularly sure you’ve discussed how you’ll fund any cash shortfalls that take place as the company grows. Cash flow projections are critical for fruitful strategic planning, as well as for applying for a loan.

Blueprint for the future

One could say that integrating your strategic planning objectives into your business plan is a way to make your strategic plan “official.” By putting it in writing, and including the necessary financial documentation, you’ll have a blueprint of how to build the future of the business. Contact us for help.

© 2022

Inbound vs. outbound: Balancing your company’s sales strategies

It might sound like the lingo of air traffic controllers — inbound vs. outbound. But businesses of all types must grapple with these concepts and their associated challenges when developing sales strategies.

Inbound sales originate when someone contacts your company to inquire about buying a product or service, whereas outbound sales arise from members of your sales team reaching out to customers and prospects.

Like many businesses, yours may not have the luxury of choosing one approach over the other. You probably have to find the right balance.

Inbound sales: Marketing your brand

Inbound sales are all about marketing your brand. Customers and prospects need to know who you are and what you offer, otherwise they won’t be in touch.

Thus, you’ll need to invest in a strong brand-based, content-driven marketing strategy that establishes and maintains your reputation as a “destination business” in your industry. Interested parties who encounter your marketing materials should wind up thinking, “I want to go there.”

If you can accomplish that, you’ll need a well-trained, patient inside sales team who are experts on your products or services. The word “patient” is key. One of the downsides to inbound sales is that they can take longer to close than outbound sales. They’re also less targeted. You have to deal with whoever contacts you. Some prospects might show up with unrealistic expectations or turn out to be difficult customers.

On the plus side, inbound sales are typically less labor-intensive and expensive because the buyer is coming to you and your customer base is generally more concentrated. What’s more, inside sales teams may incur less turnover because of lower rejection rates and a greater emphasis on technical know-how over a traditional “make your numbers or else” mindset.

Outbound sales: Lots of work, big potential

Outbound sales are largely based on intensive market research. You need to know the demographics and other key data points of those most likely to buy from you — and then you’ve got to go out and get ’em.

The downside to outbound sales is they tend to entail much more work (cold calls, follow-up, virtual and/or in-person meetings) and typically incur a higher rejection rate. In addition, this approach is often more expensive. You’ll need to cast a much wider net in terms of marketing and advertising. Outside salespeople tend to work longer hours, and they may incur substantial travel expenses and have a higher turnover rate. You might need more of them to cover your sales territories, too.

All that said, under the right circumstances and when properly executed, outbound sales can generate more revenue than inbound sales. You can target a large number of precisely the types of customers who will most likely buy from you, and sales are often quicker and easier to close.

Assess your position

Has your company been running on autopilot when it comes to balancing inbound vs. outbound sales? Now’s a good time to address the issue as we head into the new year.

If, for example, you’re waiting around for inbound sales that aren’t showing up, maybe it’s time to pivot to an outbound sales strategy. On the other hand, if you’ve emerged as a major player in your market, perhaps you can cut back on the outreach, beef up your brand and rely more on inbound sales. Contact us for help evaluating your sales numbers, as well as identifying the costs and forecasting the potential revenue of both approaches.

© 2022

Timing is everything when it comes to accounting software upgrades

“Well, it still works, and everyone knows how to use it, but….”

Do these words sound familiar? Many businesses stick with their accounting software far too long for these very reasons. What’s important to find out and consider is everything that comes after the word “but.”

Managers and employees often struggle with systems that don’t provide all the functionality they need, such as being able to generate certain types of reports that could help the company better analyze its financials. Older software might constantly freeze up or crash. In some cases, the product may even be so old that support is no longer provided.

When it comes to accounting software upgrades, timing is everything. You don’t want to spend money unnecessarily if your system is fully functional and secure. But you also don’t want to wait too long and risk losing a competitive edge, suffering data loss or corruption, or incurring a security breach.

Building a knowledge base

The first question to ask yourself is: When was the last time we meaningfully upgraded our accounting software?

Many more products may have hit the market since you bought yours — including some that were developed specifically for your industry. Although most accounting software has the same essential features, it’s these specialized functions that hold the most potential value for certain types of companies.

To make an educated choice, business owners and their leadership teams need to gain a detailed understanding of their specific needs and the technological savvy of their employees. You can go about this knowledge-building effort in various ways, including conducting a user survey and putting together a comprehensive, detailed comparison of three or four accounting software products that appear best suited to your business.

If it appears highly likely that a new accounting system would markedly improve your financial tracking and reporting, you’ll be able to make a confident and well-advised purchasing decision.

Preparing for the transition

Bear in mind that buying the software will be the easy part. Transitioning to the new system will probably be much more challenging. When changing or significantly upgrading their accounting software, companies have to walk a fine line between:

• Rushing the timeline, potentially mishandling setup issues and not providing sufficient training, and

• Dragging their feet, potentially falling behind on financial reporting.

You might need to engage an IT consultant to help oversee the data transfer from the old system to the new, catch and clean up errors, and ensure strong cybersecurity measures are in place.

It’s a big decision

Moving onward and upward from a long-used accounting system is a big decision. Let us help you determine what software features would be most beneficial to your business, identify which current products would best fulfill your needs, and develop a sensible budget for the purchase.

© 2022

Take a look at stock options as a recruitment tool

According to the U.S. Bureau of Labor Statistics, the U.S. unemployment rate rose slightly to 3.7% in October. Seeing as how that’s still a relatively low number, your business may be struggling to fill its open positions.

Offering equity-based compensation to job candidates is one recruitment strategy to consider. Many companies have used stock options to attract, retain and motivate executives and other key employees.

The finer points of ISOs

Stock options confer the right to buy a certain number of shares at a fixed price for a specified time. Typically, they’re subject to a vesting schedule. This requires recipients to stay with the company for a certain amount of time or meet stated performance goals.

Incentive stock options (ISOs) offer attractive tax advantages for employees. Unlike nonqualified stock options (NQSOs), which we’ll discuss below, ISOs don’t generate taxable compensation when they’re exercised. The employee isn’t taxed until the shares are sold. And if the sale is a “qualifying disposition,” 100% of the stock’s appreciation is treated as capital gain and is free from payroll taxes.

To qualify, ISOs must meet certain requirements:

• They must be granted under a written plan that’s approved by shareholders within one year before or after adoption,

• The exercise price must be at least the stock’s fair market value (FMV) on the grant date (110% of FMV for more-than-10% shareholders), and

• The term can’t exceed 10 years (five years for more-than-10% shareholders).

Additionally, the options can’t be granted to nonemployees. What’s more, employees can’t sell the shares sooner than one year after the options are exercised or two years after they’re granted.

And the total FMV of stock options that first become exercisable by an employee in a calendar year can’t exceed $100,000.

How NQSOs differ

NQSOs are stock options that don’t qualify as ISOs. Typically, the exercise price is at least the stock’s FMV on the grant date. (Various tax complications may ensue, which we won’t get into here.) The NQSO itself generally isn’t considered taxable compensation because there’s no taxable event until exercise. At that time, the spread between the stock’s FMV and the exercise price is treated as compensation.

Although NQSOs are taxed as ordinary income upon exercise, they have several advantages over ISOs. First, they’re not subject to the ISO requirements listed above, so they’re more flexible. For example, they can be granted to independent contractors, outside directors or other nonemployees. Second, they generate tax deductions for the employer and don’t expose recipients to liability for the alternative minimum tax.

Look before you leap

If you’re considering equity-based compensation, it’s important to review the pros, cons and tax implications before offering either type of stock option. Contact us for help evaluating the cost vs. benefit impact of this or any other recruitment strategy you’re considering.

© 2022

Choosing a Retirement Plan for Your Small Business

Most growing small businesses reach a point where the owner looks around at the leadership team and says, “It’s time. We need to offer employees a retirement plan.”

Often, this happens when the company is financially stable enough to administer a retirement plan and make substantive contributions. Other times it occurs when the business grows weary of losing good job candidates because of a less-than-impressive benefits package.

Whatever the reason, if you don’t have a retirement plan and see one in your immediate future, you’ll want to carefully select the one that will work best for your company and its employees. Here are some basics about three of the most tried-and-true plans.

1. 401(k) plans offer flexibility

Available to any employer with one or more employees, a 401(k) plan allows employees to contribute to individual accounts. Contributions to a traditional 401(k) are made pretax, reducing taxable income, but distributions are taxable.

Both employees and employers can contribute. For 2023, employees can contribute up to $22,500 (up from $20,500 in 2022). Participants who are age 50 or older by the end of the year can make an additional “catch-up” contribution of $7,500 (up from $6,500 in 2022). Within limits, employers can deduct contributions made on behalf of eligible employees.

Plans may offer employees a Roth 401(k) option, which, on some level, is the opposite of a traditional 401(k). This is because contributions don’t reduce taxable income currently but distributions are tax-free.

Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. With a “safe harbor” 401(k), however, the plan isn’t subject to discrimination testing.

2. Employers fully fund SEP plans 

Simplified Employee Pension (SEP) plans are available to businesses of any size. Establishing one requires completing Form 5305-SEP, “Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement,” but there’s no annual filing requirement.

SEP plans are funded entirely by employer contributions, but you can decide each year whether to contribute. Contributions immediately vest with employees. In 2023, contribution limits will be 25% of an employee’s compensation or $66,000 (up from $61,000 in 2022).

SIMPLEs target small businesses

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of plan available only to businesses with no more than 100 employees. It’s up to employees whether to contribute. Although employer contributions are required, you can choose whether to:

• Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or

• Make a 2% nonelective contribution, including to employees who don’t contribute.

Employees are immediately 100% vested in contributions, whether from themselves or their employers. The contribution limit in 2023 will be $15,500 (up from $14,000 in 2022).

A big step forward

Obviously, choosing a retirement plan to offer your employees is just the first step in the implementation process. But it’s a big step forward for any business. Let us help you assess the costs and tax impact of any plan type that you’re considering.

© 2022

How Should Your Marketing Strategy Change Next Year?

The current calendar year is winding down and a fresh 12 months lie ahead. That makes now a good time to think about how you should present yourself to customers and prospects next year.

The U.S. economy has undergone notable change in 2022. Namely, rising inflation and persistent supply chain challenges have forced companies to really contemplate how they want to do business. Your marketing strategy for 2023 should reflect “the new you” — a business that’s nimbly adjusted to the revised playing field and can still offer customers great value.

Address the audience

A good place to start is with your audience. To whom will you market your business? Consider each prospect, existing customer, or targeted group as an investment. Estimate your net profit after subtracting production, sales, and customer service costs.

More desirable customers will buy a sizable volume with enough frequency to provide a steady revenue stream rather than serve as just a one-time or infrequent buyer. They’ll also be potential targets for cross-selling other products or services to generate incremental revenue.

Bear in mind that you must have the operational capacity to fulfill prospects’ and customers’ demands. If not, you’ll have to expand your operations, costing you more in resources and capital.

Also, be wary of becoming too dependent on a few large customers. They can use this status as leverage to lowball you. Or, if they decide to pull the plug, it could be financially devastating.

Confront the pricing conundrum

Another key factor to address is pricing. It’s a tricky balance: Setting your price low may help to attract customers, but it can also minimize or even eliminate your profit margin.

What’s worse, inflation has thrown a wild card into this conundrum. Your expenses have likely risen, which could very well mean you have to adjust prices upward. But if customers and prospects get the impression you’re raising prices unreasonably, business could suffer. Your marketing strategy — specifically, communicating price adjustments to customers and prospects — is key to mitigating this risk.

In addition, think about what kind of payment terms you’re prepared to offer and promote in your marketing materials. Sitting on large accounts receivable can strain your cash flow. Strive to establish timely, feasible payment schedules that allow you to sustain your operational capacity and support the bottom line.

Get started

Of course, there are many other aspects of a marketing strategy to consider. But scrutinizing your customer/prospect base and thoroughly analyzing your pricing are good places to start. Contact us for help evaluating the cost impact of marketing, as well as calculating viable price points for your products or services.

© 2022

Supplementing Your Company’s Healthcare Plan with an EBHRA

Is your business ready to take its healthcare benefits to the next level? One way to do so is to supplement group health coverage with an Excepted Benefit Health Reimbursement Arrangement (EBHRA). Here are some pertinent details.

Rules to Follow:

Under a traditional HRA, the employer owns and funds the tax-advantaged account up to any chosen amount. However, traditional HRAs are subject to mandates under the Public Health Service Act (PHSA), which was amended by the Affordable Care Act (ACA).

Because employer contributions to EBHRAs are limited, these accounts qualify as “excepted benefits” and aren’t subject to the PHSA mandates. EBHRAs can be offered by companies or other employers of any size, but they must follow certain rules, such as:

Limited-dollar benefits. In 2022, up to $1,800 can be newly allocated to each participant per plan year to reimburse eligible medical expenses. This amount will rise to $1,950 for plan years beginning in 2023 — the first time the limit has increased since these arrangements were launched in 2020.

Carryovers, which are permitted under both traditional HRAs and EBHRAs, are disregarded when applying the limit. Amounts made available under other HRAs or account-based plans provided by the employer for the same period will count against the dollar limit unless those arrangements reimburse only excepted benefits.

Qualified reimbursements. An EBHRA may reimburse any qualifying, out-of-pocket medical expense other than premiums for individual health coverage, Medicare or non-COBRA group coverage. Premiums for coverage consisting solely of excepted benefits can be reimbursed, as can premiums for short-term limited-duration insurance (STLDI). However, under certain circumstances, federal agencies may prohibit small employer EBHRAs in particular states from allowing STLDI premium reimbursement.

Required other coverage. The employer must make other nonexcepted, non–account-based group health plan coverage available to EBHRA participants for the plan year. Thus, participants in the EBHRA couldn’t also be offered a traditional HRA.

Uniform availability. An EBHRA must be made available under the same terms and conditions to all similarly situated individuals, as provided by applicable regulations.

HIPAA and ERISA

An EBHRA’s status as an excepted benefit means only that it’s not subject to the ACA’s PHSA mandates or the portability and nondiscrimination rules of the Health Insurance Portability and Accountability Act (HIPAA).

However, EBHRAs are subject to HIPAA’s administrative simplification requirements. This includes the law’s privacy and security rules unless an exception applies — such as for certain small self-insured, self-administered plans.

And, like traditional HRAs, EBHRAs are subject to the Employee Retirement Income Security Act (ERISA) unless an exception applies — such as for church or governmental plans. Thus, reimbursement requests must be handled in accordance with ERISA’s claim and appeal procedures; EBHRA participants must receive a summary plan description; and other ERISA requirements apply.

Finally, EBHRAs must comply with nondiscrimination rules. These generally prohibit discrimination in favor of highly compensated individuals regarding eligibility and which benefits are offered.

Various Factors

When deciding whether to offer an EBHRA at your business, you’ll need to consider various factors. These include the impact on existing benefits, which employees will be covered, how much you’ll contribute and which expenses you’ll reimburse. We can help you assess the costs, advantages and risks of this or any other employee benefit you’re considering.

© 2022

Reinforce Your Cybersecurity Defenses Regularly

If you’ve been in business for any amount of time, you probably don’t need anyone to tell you about the importance of cybersecurity. However, unlike the lock to a physical door, which generally lasts a good long time, measures you take to protect your company from hackers and malware need to be updated and reinforced much more regularly.

Two common categories

Most of today’s business cyberattacks fall into two main categories: ransomware and social engineering.

In a ransomware attack, hackers infiltrate a company’s computer network, encrypt or freeze critical data, and hold that data hostage until their ransom demands are met. It’s become a highly common form of cybercrime. Just one example, which occurred in October 2022, involved a major health care system that had recently executed a major M&A deal.

On the other hand, social engineering attacks use manipulation and pressure to trick employees into granting cybercriminals access to internal systems or bank accounts. The two most common forms of social engineering are phishing and business email compromise (BEC).

In a typical phishing scam, cyberthieves send fake, but often real-looking, emails to employees to entice them into downloading attachments that contain malware. Or they try to get employees to click on links that automatically download the malware.

In either case, once installed on an employee’s computer, the malware can give hackers remote access to a company’s computer network — including customer data and bank accounts. (Also beware of “smishing,” which is when fraudsters use text messages for the same purpose.)

BEC attacks are similar. Here, cyberthieves send fake emails mainly to accounting employees saying the company’s bank accounts have been frozen because of fraud. The emails instruct employees to reply with account usernames and passwords to supposedly resolve the problem. With this information, thieves can wreak financial havoc — including initiating unauthorized wire transfers — which can be difficult, if not impossible, to reverse.

Preventative measures

Here are a few things you can do to guard against cyberattacks:

Continually train employees. Conduct mandatory training sessions at regular intervals to ensure your employees are familiar with your cybersecurity policies and can recognize the many possible forms of a cyberattack.

Maintain IT infrastructure. Instruct and remind employees to download software updates when they’re available. Enforce a strict policy of regular password changes. If two-factor authentication is feasible, set it up. This is particularly important with remote employees.

Encrypt and back up data. All company data should be encrypted and regularly backed up on a separate off-site server. In the event of a ransomware attack, you’ll still be able to access that data without paying the ransom.

Restrict access to your Wi-Fi network. First and foremost, it should be password-protected. Also, move your router to a secure location and install multiple firewalls. If you offer free Wi-Fi to customers, use a separate network for that purpose.

Consider insurance coverage. Insurers now sell policies that will help pay costs associated with data breaches while also covering some legal fees associated with cyberattacks. However, you’ll need to shop carefully, set a reasonable budget and read the fine print.

Defend your data

None of the measures mentioned above are one-time activities. On a regular basis, businesses need to determine what new training employees need and whether there are better ways to secure IT infrastructure and sensitive data. Let us help you assess, measure and track the costs associated with preserving your company’s cybersecurity.

© 2022

M&A on the Way? Consider a QOE Report

Whether you’re considering selling your business or acquiring another one, due diligence is a must. In many mergers and acquisitions (M&A), prospective buyers obtain a quality of earnings (QOE) report to evaluate the accuracy and sustainability of the seller’s reported earnings. Sometimes sellers get their own QOE reports to spot potential problems that might derail a transaction and identify ways to preserve or even increase the company’s value. Here’s what you should know about this critical document.

Different from an audit

QOE reports are not the same as audits. An audit yields an opinion on whether the financial statements of a business fairly present its financial position in accordance with Generally Accepted Accounting Principles (GAAP). It’s based on historical results as of the company’s fiscal year end.

In contrast, a QOE report determines whether a business’s earnings are accurate and sustainable, and whether its forecasts of future performance are achievable. It typically evaluates performance over the most recent interim 12-month period.

EBITDA effects

Generally, the starting point for a QOE report is the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Many buyers and sellers believe this metric provides a better indicator of a business’s ability to generate cash flow than net income does. In addition, EBITDA helps filter out the effects of capital structure, tax status, accounting policies and other strategic decisions that may vary depending on who’s managing the company.

The next step is to “normalize” EBITDA by:

• Eliminating certain nonrecurring revenues and expenses,

• Adjusting owners’ compensation to market rates, and

• Adding back other discretionary expenses.

Additional adjustments are sometimes needed to reflect industry-based accounting conventions. Examples include valuing inventory using the first-in, first-out (FIFO) method rather than the last-in, first-out (LIFO) method, or recognizing revenue based on the percentage-of-completion method rather than the completed-contract method.

Continued viability

A QOE report identifies factors that bear on the business’s continued viability as a going concern, such as operating cash flow, working capital adequacy, related-party transactions, customer concentrations, management quality and supply chain stability. It’s also critical to scrutinize trends to determine whether they reflect improvements in earnings quality or potential red flags.

For example, an upward trend in EBITDA could be caused by a positive indicator of future growth, such as increasing sales, or a sign of fiscally responsible management, such as effective cost-cutting. Alternatively, higher earnings could be the result of deferred spending on plant and equipment, a sign that the company isn’t reinvesting in its future capacity. In some cases, changes in accounting methods can give the appearance of higher earnings when no real financial improvements were made.

A powerful tool

If an M&A transaction is on your agenda, a QOE report can be a powerful tool no matter which side of the table you’re on. When done right, it goes beyond financials to provide insights into the factors that really drive value. Let us help you explore the feasibility of a deal.

© 2022

Inflation Reduction Act Expands Valuable R&D Payroll Tax Credit

When President Biden signed the Inflation Reduction Act (IRA) into law in August, most of the headlines covered the law’s climate change and health care provisions. But the law also enhances an often overlooked federal tax break for qualifying small businesses.

The IRA more than doubles the amount a qualified business can potentially claim as a research and development (R&D) tax credit to offset its payroll tax for tax years starting after 2022 — to a maximum of $2.5 million over five years. The credit allows a qualified business to leverage the substantial R&D tax benefit even if it has little to no income tax liability, potentially freeing up significant cash flow.

Background on the pre-IRA credit

The Protecting Americans from Tax Hikes (PATH) Act created a permanent incentive for eligible start-up companies to pursue R&D activities within the United States. The Section 41 tax credit for qualifying in-house and contract research activities already existed, but early-stage companies that hadn’t yet incurred income tax liability couldn’t take advantage of it.

The PATH Act revised the Sec. 41 credit to allow taxpayers to elect to apply up to $250,000 of the credit against their share of the Social Security, or FICA, tax for their employees, rather than against income tax. The revision became effective for tax years that began after Dec. 31, 2015.

The payroll tax election is available to taxpayers with 1) gross receipts of less than $5 million for the tax year, and 2) no gross receipts for any tax year more than five years prior to the end of the current tax year. The latter requirement essentially limits the payroll tax credit to start-up companies. If the taxpayer had a tax year of less than 12 months, the gross receipts must be annualized for a full year.

Be aware that not all research is eligible. To qualify for the credit, the research must be:

• Performed to eliminate technical uncertainty about the development or improvement of a product or process, including computer software, techniques, formulas and inventions,

• Undertaken to discover information that’s technological in nature (meaning based on physical, biological, engineering or computer science principles),

• Intended for use in developing a new or improved business product or process, and

• Elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.

Qualifying research expenses include wages for employees involved with the research, supplies to conduct it and amounts paid for the use of computers. They also include 65% of the amounts paid or incurred for contractors.

The credit equals the smallest amount of 1) the current year Sec. 41 credit, 2) an elected amount not exceeding $250,000, or 3) the general business credit carryforward for the tax year (before application of the payroll tax credit for the year). Note that the general business credit carryforward limit doesn’t apply to S corporations or partnerships.

The IRA expansion

Under the PATH Act, a qualified small business could elect to apply its R&D credit against only the 6.2% Social Security tax. Beginning with the 2023 tax year, eligible businesses will be allowed to apply an additional $250,000 against their 1.45% Medicare tax liability.

While the total maximum credit is now $500,000, that amount is bifurcated. You can apply no more than $250,000 against each prong of payroll tax liability — FICA and Medicare, respectively.

As under the PATH Act, you can claim the credit for no more than five years. Existing aggregation rules, which treat related entities as a single taxpayer for purposes of determining gross receipts, also continue to apply. Any credit is allocated among the entities, but each entity must make the election separately.

Claiming the credit

You can make a payroll tax credit election by having us complete the appropriate portion of Form 6765, “Credit for Increasing Research Activities,” and submit it with your income tax return. To then claim the credit, complete Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities” and attach it to your employment tax return.

You can apply the credit to offset payroll tax no earlier than the first quarter after you file the return reporting the election. The credit can’t exceed the amount of tax imposed for any calendar quarter. Unused amounts can be carried forward.

What if you were eligible for the R&D credit previously but didn’t claim it because you were unaware of it or for another reason? The IRS recently tightened the requirements to claim a refund of the R&D credit.

To be considered sufficient, a refund claim must:

• Identify all the business products and processes to which the Sec. 41 research credit claim relates for the relevant year.

• For each business product and process, identify all research activities performed, all individuals who performed each research activity and all of the information each individual sought to discover.

• Provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year. (This may be done using Form 6765.)

These so called “items of information” must be submitted when the refund claim is filed, along with a declaration signed under penalty of perjury verifying their accuracy. If your refund claim is deemed deficient, you’ll receive a letter providing 45 days to cure the deficiency.

More to come

The IRS is expected to issue guidance on the expanded small business R&D tax credit, as well as revised tax forms for 2023. Contact us if you think you may qualify, now or in the past.

© 2022

Shine a Light on Sales Prospects to Brighten the Days Ahead

When it comes to sales, most businesses labor under two major mandates: 1) Keep selling to existing customers, and 2) Find new ones.

To accomplish the former, your sales staff probably gets some help from the marketing and customer service departments. Succeeding at the latter may be more difficult. Yet perhaps the most discernible way a sales department can help boost a company’s bottom line is to win over prospects consistently and manageably.

Laser focus on lead generation

Does your marketing department help you generate leads by doing things such as maintaining an easily searchable database of potential customers for your products or services? If not, it’s probably time to refine or possibly even overhaul your lead generation process.

Customer relationship management (CRM) software can help. When salespeople have a clear picture of a likely buyer, they’ll be able to better focus their efforts. If you haven’t invested in CRM software, or significantly upgraded yours in a while, this is something to strongly consider.

Reduce wasted time and effort

There’s really no aspect of a business that can’t be improved by waste reduction. Effective salespeople spend their time with prospects who are the most likely to buy from them, not with those who might maybe buy something someday but will take a monumental effort to win over.

A worthy prospect generally has clearly discernible and fulfillable needs, a readily available decision maker, strong and verifiable financials, and a timely need or desire to buy. Apply these qualifications to any person or entity with whom you’re considering doing business. If a sale appears highly doubtful from the get-go, it’s probably best to move on.

Ask the right questions, then listen

When talking with prospects, your sales team must know what draws buyers to your company. Sales staffers who make great presentations but don’t ask effective questions about prospects’ needs are typically doomed to mediocrity.

They say the most effective salespeople spend 20% of their time talking and 80% listening. Whether these percentages are completely accurate is hard to say but, after making their initial pitch, a good salesperson actively listens to the prospect’s responses and then asks insightful questions based on solid research.

Be a problem solver

Your sales staff needs to know — going in — how your product or service can solve a prospect’s problem or accomplish a goal. Without a clear offer of a solution, what motivation does the prospect really have to spend money?

Preparation is key. Be sure you’re adequately investing in industry and market research, as well as the continued education of your sales team, to position yourself as a problem solver for your customer base.

The sales are out there

Businesses face great challenges right now in the form of inflation, rising interest rates and persistent supply chain slowdowns. Nonetheless, the economy soldiers on and there are customers out there looking to buy. Contact us for help quantifying your sales process so you can identify feasible ways to improve it.

© 2022

Formalizing Your Business’s BYOD Policy

When the pandemic hit about two and a half years ago, thousands of employees suddenly found themselves working from home. In many cases, this meant turning to personal devices to access their work email, handle documents and perform other tasks. Even before COVID, more and more businesses were allowing employees to use their own phones, tablets and laptops to get stuff done.

By now, many companies have established firm bring-your-own-device (BYOD) policies. Other businesses, however, have taken a more informal approach, allowing their policies to evolve with minimal documentation. Whichever camp your company falls into, it’s a good idea to regularly review and, if necessary, formalize your BYOD policy.

Key questions

A comprehensive BYOD policy needs to anticipate a multitude of situations. What if a voluntary or involuntary termination occurs? What if a device is lost, shared or recycled? What if it’s infected by a virus or malware? How about if a device is synced on an employee’s home cloud? Other key questions to address include:

Who pays the bill? Payment policies vary widely. For example, an employer might pay for an unlimited data plan for employees. Any charges above that amount are the employee’s responsibility.

Who owns an employee’s cell phone number? This is a big deal for salespeople and service representatives — especially if they leave to work for a competitor. Customers may continue to call a rep’s cell phone, leading to lost sales for your business.

Are employees properly password-protecting their devices? A policy should require employees to not only use passwords, but also implement two-factor authentication if feasible. In addition, users need to set up their devices to lock if left idle for more than a few minutes.

Legal ramifications

A BYOD policy needs to address the fact that using a personal device for work inevitably opens the door for an employer to access personal information, such as text messages and photos. State that the company will never intentionally view protected items on a device, such as privileged communications with attorneys, protected health information or complaints against the employer that are permitted under the National Labor Relations Act.

In case your business becomes involved in a lawsuit, its data retention policies should address how data is stored on mobile devices and gathered during litigation. Keep in mind that Rule 34 of the Federal Rules of Civil Procedure covers all devices, including personal ones that access a company’s network.

Financial impact

Formalizing your BYOD policy should involve spelling it out in a written user’s agreement that all participants must sign. Consult a qualified attorney in drafting such an agreement. Contact us for help assessing the tax and financial impact of allowing employees to use personal devices vs. buying technology assets and providing them to your workforce.

© 2022

Want to See into the Future? Delve Deeper into Forecasting

For a company to be truly successful, its ownership needs to attempt the impossible: see into the future. Forecasting key metrics — such as sales demand, receivables, payables, and working capital — can help you manage overhead, offer competitive prices and keep your business on firm financial footing.

Although financial statements are often the starting point for forecasts, you’ll need to do more than just multiply last year’s numbers by a projected growth rate in today’s uncertain marketplace. Here are some tips to consider.

Pick your time frame 

Forecasting is generally more accurate in the short term. The longer the period, the more likely it is that customer demand or market trends will change.

Quantitative methods, which rely on historical data, are typically the most accurate. However, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.

Define your demand 

Weather, sales promotions, safety concerns, and other factors can cause sales to fluctuate. For example, if you sell ski supplies and apparel, chances are good your sales tend to dip in the summer.

If demand for your products or services varies, consider forecasting with a quantitative method. One example is “time-series decomposition,” which examines historical data and allows you to adjust for market trends, seasonal trends, and business cycles.

You also might want to invest in forecasting software. These solutions allow you to plug other variables into the equation, such as the short-term buying plans of key customers.

Assess your data 

Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use “exponential smoothing,” a simple yet fairly accurate method that compares historical averages with current demand.

If you want to forecast for something you don’t have data for, such as a new product or service, you might use qualitative forecasting. Alternatively, you could base your forecast on historical data for a similar product or service in your lineup.

Get intensive for inventory

If you operate a business with extensive inventory, forecasting is particularly critical. As you’ve likely learned over time, you’ve got to establish accurate methods of counting inventory and adjust levels as appropriate to best manage cash flow.

For peak accuracy, take the average of multiple forecasting methods. To optimize inventory levels, consider forecasting demand by individual products as well as by geographic location.

Craft your crystal ball

The optimal forecasting approach for any business will depend on multiple factors, such as its industry and customer base. Contact us to discuss the forecasting practices that make the most sense for your company.

© 2022

The Inflation Reduction Act Includes Wide-Ranging Tax Provisions

The U.S. Senate and House of Representatives have passed the Inflation Reduction Act (IRA). President Biden signed the bill into law on August 16th. The IRA includes significant provisions related to climate change, health care, and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is projected to reduce the deficit by around $90 billion over the next 10 years.

Although the IRA falls far short of Biden’s originally proposed $2 trillion Build Back Better Act, the $430 billion package nonetheless is a sprawling piece of legislation bound to affect most Americans over time. Here’s an overview of some of what the bill includes.

SIGNIFICANT TAX PROVISIONS

For starters, how is the federal government going to pay for all of it? Not surprisingly, new taxes are part of the equation (along with savings from, for example, lower drug prices). But the bill is designed to not raise taxes on small businesses or taxpayers earning less than $400,000 per year. Rather, wealthier targets are in the crosshairs.

The first target is U.S. corporations (other than S corporations) that have more than $1 billion in annual earnings over the previous three years. While the current corporate tax rate is 21%, it’s been well documented that many such companies pay little to no federal income tax, due in part to deductions and credits. The IRA imposes a corporate alternative minimum tax of 15% of financial statement income (also known as book income, as opposed to tax income) reduced by, among other things, depreciation and net operating losses. The new minimum tax is effective for tax years beginning after December 31, 2022.

Private equity firms and hedge funds are exempt from the minimum tax. They could have been covered by a provision that generally includes subsidiaries when determining annual earnings. The tradeoff is that the IRA now will extend the excess business loss limitation for certain businesses for two years.

Although the initial bill language also closed the so-called “carried interest” loophole that permits these interests to be taxed as long-term capital gains rather than ordinary income, the loophole ultimately survived. Democrats agreed to remove the provision closing it to secure the vote of Sen. Kyrsten Sinema (D-AZ) — but they added another tax to make up for the lost revenue. The IRA will now impose a 1% excise tax on the fair market value when corporations buy back their stock.

The IRA also provides about $80 billion (over 10 years) to fund the IRS and improve its “tax enforcement activities” and technology. Notably, the IRS budget has been dramatically slashed in recent years, dropping by 20% in 2020, compared to 2010. The CBO estimates that the infusion of funds will allow the IRS to collect $203 billion over the next decade from corporations and wealthy individuals.

CLIMATE AND ENERGY PROVISIONS

The IRA dedicates about $370 billion to combating climate change and boosting domestic energy production. It aims to reduce the country’s carbon emissions by 40% by 2030.

The legislation includes new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, the bill provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.

CLEAN VEHICLE CREDIT

The current tax credit for qualified plug-in electric vehicles has been significantly revised in the IRA. Currently, a taxpayer can claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year. The maximum credit amount is $7,500. Certain vehicle requirements must be met.

The credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the IRA, the plug-in vehicle credit has been renamed the clean vehicle credit and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022.

The bill changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral and battery component requirements. There are also price and income limitations. The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, sport utility vehicles and pickups, and above $55,000 for other vehicles.

The clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household.

The IRA also contains a tax credit for a used plug-in electric drive vehicle purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations.

HOME ENERGY IMPROVEMENTS

Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems. And a “Clean Energy and Sustainability Accelerator” will use public and private funds to invest in clean energy technologies and infrastructure.

HEALTH CARE PROVISIONS

The IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps Medicare enrollees’ annual out-of-pocket drug costs at $2,000 and monthly insulin costs at $35 and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the program.

The IRA also should reduce health care costs for Americans of all ages who obtain health insurance coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies — in the form of refundable premium tax credits — under the America Rescue Plan Act through 2025. These subsidies had been scheduled to expire at the end of 2022.

MUCH MORE TO COME

The IRA is a sweeping piece of legislation that affects many sectors of U.S. business, as well as most citizens. Additional information, guidance and regulations related to its numerous, far-reaching provisions are inevitable. We’ll keep you up to date on the developments that could affect your finances and federal tax liability.

© 2022

Evaluating An ESOP From A Succession Planning Perspective

If you’ve been in business for a while, you’ve probably considered many different employee benefits. One option that might have crossed your desk is an employee stock ownership plan (ESOP).

Strictly defined, an ESOP is considered a retirement plan for employees. But it can also play a role in succession planning by facilitating the transfer of a business to the owner’s children or employees over a period of years in a tax-advantaged way.

Not a buyout

Although an ESOP is a retirement plan, it invests mainly in your own company’s stock. ESOPs are considered qualified plans and, thus, subject to the same IRS and U.S. Department of Labor (DOL) rules as 401(k)s and the like. This includes minimum coverage requirements and contribution limits.

Generally, ESOP distributions to eligible employees are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put” options or an “option to sell” — at fair market value during certain time windows.

While an ESOP involves transferring ownership to employees, it’s different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control gradually. During the transfer period, owners’ shares are held in an ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders.

Mandatory valuations

One big difference between ESOPs and other qualified retirement plans is mandated valuations. The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan.

The fair market value of the sponsoring company’s stock is important, because the DOL specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP essentially provides a limited market for its shares.

Costs and entity choice

Although ESOPs can be an important part of a succession plan, they have their drawbacks. You’ll incur costs and considerable responsibilities related to plan administration and compliance. Plus, there are costs associated with annual stock valuations and the need to repurchase stock from employees who exercise put options.

Another disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to the corporate form to establish one of these plans. This raises a variety of financial and tax issues.

It’s also important to consider the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans.

A popular choice

There are about 6,500 ESOPs and equivalent plans in the United States today, with roughly 14 million participants, according to the National Center for Employee Ownership. So, if you decide to launch one, you won’t be alone. However, careful planning and expert advice is critical. We can help you evaluate whether an ESOP would be a good fit for your business and succession plan.

© 2022

Key aspects of a successful wellness program

Wellness programs have found a place in many companies’ health care benefits packages, but it hasn’t been easy. Because these programs take many different shapes and sizes, they can be challenging to design, implement and maintain.

There’s also the not-so-small matter of compliance: The federal government regulates wellness programs in various ways, including through the Health Insurance Portability and Accountability Act and the Americans with Disabilities Act.

Whether your business is just embarking on the process of creating one or simply looking for improvement tips, here are some key aspects of the most successful wellness programs.

Simplicity and clarity

“Welcome to our new wellness program,” began the company’s memo. “Attached is a 200-page guide, featuring a complex point system that will determine whether you qualify for incentives, and a lengthy glossary of medical terminology.”

See the problem here? The surest way to get a program off to a bad start is by frontloading it with all sorts of complexities and time-consuming instructions. Granted, there will be an inevitable learning curve to any type of wellness program. But the simpler the design, the easier it will be to explain and implement. Remember that you can update and increase a program’s complexity as it becomes more ingrained in your company’s culture.

Clarity of communication is also paramount. Materials should be well-organized and written clearly and concisely. Ideally, they should also have an element of creativity to them — to draw in participants. However, the content needs to be sensitive to the fact that these are inherently personal health issues.

If you don’t have anyone in-house who can handle these criteria, consider engaging a consultant. In addition, have your attorney review all materials related to the program for compliance purposes.

Carefully chosen providers

At most companies, outside vendors provide the bulk of wellness program services and activities. These may include:

• Seminars on healthy life and work habits,

• Smoking cessation workshops,

• Fitness coaching,

• Healthful food options in the break room and cafeteria, and

• Runs, walks or other friendly competitive or charitable events.

It’s critical to thoroughly vet providers and engage only those that are skilled and qualified. Neglecting to do so could mean that, even if you create and communicate a solid program, the initiative will likely fail once employees show up to participate and are disappointed in the experience.

Return on investment

Of course, there will be upfront and ongoing costs related to a wellness program. Contact us for help assessing these costs while designing or revising a program and tracking them over time. The ultimate sought-after return on investment of every wellness program is a healthier, more productive workforce and more affordable health care benefits.

© 2022