Health Insurance Reimbursements: What You Can and Cannot Do

December 8th, 2015

© Tang90246 | Dreamstime.com - Can Do Toggle Switch PhotoSince the advent of the Affordable Care Act, small businesses have scrambled to find ways to make sure their employees have health coverage. Many have found it impossible to offer their own coverage because of price. They have tried to find other alternatives. The IRS isn’t making it easy.

Reimbursements for individual coverage

As I’ve written about before, the IRS has said that reimbursing an employee for his or her premiums is a violation of the law that results in a $100 per day per employee penalty. Earlier this year, the IRS said it would not impose the penalty on these reimbursements through June 30, 2015. No further guidance has been provided despite calls from small business owners and advocacy groups for additional relief.

Permissible. You can increase a worker’s pay with the idea that he or she will use the money to obtain health coverage. As long as the added amount isn’t conditioned upon using it to buy the coverage, this is one way to help employees obtain coverage. They may be able to obtain it through HealthCare.gov and qualify for a subsidy in the form of the premium tax credit, costing them less than they might otherwise have to pay as their share of any employer-provided coverage. Of course, the additional pay is obviously taxable compensation, and subject to employment taxes.

Reimbursements for coverage under a spouse’s plan

Some small businesses offer coverage but employees may decline because they can get better, or cheaper, coverage through a working spouse’s plan offered by his or her employer. The IRS has ruled that if the working spouse pays for the added cost of the employee on an after-tax basis, then a reimbursement of this cost is tax free to the employee (and free from employment taxes). It has provided six scenarios, some of which are after-tax and some of which are pre-tax to the working spouse. The IRS said that “[t]he fact that the insured group health plan is provided by [the spouse’s] employer and not by [the employee’s] employer does not change the results.”

Take this case (based on one of the IRS’s scenarios). Say you have an employee, A, who has a working spouse, B. B receives self-only coverage from her employer but is allowed to buy coverage for a spouse; she pays out-of-pocket to cover A. A receives a reimbursement from his employer to cover the spouse’s out-of-pocket cost. This is treated as tax-free employer provided health coverage for A; the reimbursement is not income to him even though the coverage is through another employer’s plan.

If, however, the spouse pays for the coverage on a pre-tax basis (i.e., through a cafeteria plan), then the employee is taxed on the reimbursement and the reimbursement is subject to employment taxes.

What does this informal IRS ruling tell us? In all of the situations described in the informal ruling, the employer offered some type of coverage. There was no stand-alone reimbursement offered. Because this informal ruling followed the expiration of the penalty relief described earlier, does this mean that a reimbursement arrangement for small businesses offering some type of coverage that fits one of the IRS-approved scenarios escapes the penalty? You tell me.



Writing Off Tangible Property Purchases the Easy Way

December 3rd, 2015

© Violka08 | Dreamstime.com - Income Tax PhotoUsually, when you acquire any tangible property expected to last more than a year, you must recover the cost through depreciation allowances claimed over a number of years. You may be able to elect to expense the cost (up to a set dollar limit), although there are restrictions on this Sec. 179 deduction. Or you may be able to write-off the cost using an IRS-created de minimis safe harbor.

Background

In 2013, the IRS finalized the so-called “repair” regulations that included an optional de minimis safe harbor designed to ease compliance for businesses. Under this safe harbor, rather than capitalizing costs or treating them as materials and supplies, businesses can elect to treat them as ordinary and necessary business expenses (i.e., currently deductible).

The regulations imposes a dollar amount for the de minimis safe harbor that depended on whether a business had an applicable financial statement (AFS), such as an SEC filing, audited financial statement.

  • With an AFS: $5,000 per item or invoice
  • Without an AFS: $500 per item or invoice

The IRS received more than 150 comments to the regulations saying that the $500 limit was too low to effectively reduce the administrative burden of complying with the regulations’ requirements, and the IRS responded favorably to these comments.

The IRS recently announced that effective January 1, 2016, businesses without an AFS have a dollar limit of $2,500 per item or invoice.

Making the safe harbor election

In order to use this option, you must have a policy for your books and records reflecting the de minimis rule. (Businesses with an AFS must have a written accounting procedure in place at the start of the year in order to use the de minimis safe harbor.) And you must apply the de minimis safe harbor to all expenditures meeting the criteria for the election in the taxable year.

The election is made by attaching a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” to the timely filed original federal tax return including extensions for the taxable year in which the de minimis amounts are paid. The statement should include your name, address, and taxpayer identification number, as well as a statement that you are making the de minimis safe harbor election. This is not a change in accounting method that requires notification to the IRS.

Conclusion

If your business buys tangible property other than supplies and you think this tax-favored rule may be helpful to you, discuss the matter with your tax advisor now. Doing this will help ensure that you use the appropriate treatment for these items in your books and records at the start of the year.



“Gig Economy” and Worker Classification

December 1st, 2015

© Alexeyboldin | Dreamstime.com - Uber App On IPhone In Man Hands And Uber Website On Macbook Pro PhotoSen. Mark Warner (D-VA) is focusing attention on the new sharing economy. (An article on the sharing economy can be found in Big Ideas for Small Business®, June 2015.) He estimates that about one-third of U.S. workers now participate in this on-demand economy through Uber, Airbnb, TaskRabbit, and other venues. To paraphrase him, people are monetizing their extra resources and free time.

He believes that we need to learn more about this sector by getting better data and then addressing the issues and concerns of workers in this sector. Getting this information may be challenging, as suggested in a Fusion article last summer. The reason: people may not be reporting this income and so are unwilling to share their gig information. Many gig workers have full-time jobs and are merely supplementing their income through this underground economy.

Safety nets for workers

Self-employed individuals include a wide array of workers, including unincorporated professionals, freelancers, and independent contractors. As self-employed business owners know, there is no government safety net when things go wrong. There is no unemployment insurance, workers’ compensation, or government-provided short-term disability.

Workers in the sharing economy are currently treated as self-employed individuals, although some workers are challenging this classification in an attempt to garner employee benefits and rights. For example, this past summer a former Uber driver was classified as an employee by the California Employment Development Department.

What is the solution for so-called “gig workers”?

Here are some of my questions:

Should gig workers be reclassified as employees in Uber-like arrangements?

Should gig workers have the choice of classification as an employee or independent contractor, or should the government make determinations?

Should there be a new worker classification for gig workers, with new rights and benefits created specifically for the class?

Can the government offer voluntary protections, such as allowing gig workers to opt in for workers’ compensation and short-term disability?

Do gig workers with full-time jobs really need any additional benefits and protections for their gig work?

I don’t have the answers, but, as Sen. Warner suggests, it’s time to have a conversation about this.

Thanksgiving: Why I’m Grateful to be a Small Business Owner

November 26th, 2015

Last week was Global Entrepreneurship Week, a worldwide celebration of entrepreneurship in which 160 countries participated. It was an opportunity to see what’s going on entrepreneurship-wise in the U.S. and abroad.

Here are some reasons why I’m grateful to be a small business owner in the U.S.

© Yuliadavidovich | Dreamstime.com - Assorted Pumpkins In A Wooden Tray And Yellow Flowers, Isolated PhotoFreedom

In the U.S. just about anyone can become an entrepreneur. All it takes to get started is an idea and some capital. In other countries, students are pigeon-holed early in their lives and may become locked into careers that don’t support entrepreneurship.

Statistics in the U.S. show that whether you’re a women, minority group member, veteran, foreign born, or any other so-called minority, you have virtually the same chance of making it in small business as anyone else. In fact, the SBA’s Office of Advocacy reported “[t]he business ownership rate is higher for immigrants than non-immigrants. “

Opportunities

Entrepreneurship is celebrated and supported in many quarters. Some examples:

Doing good

Small business owners contribute substantially to the economy and their communities in a number of ways, including:

  • Employing workers. Small businesses employ more than half of all workers (56.1%) in the U.S., according to the SBA.
  • Creating jobs for others. Small businesses help create jobs in other companies by utilizing their goods and services. The existence of small businesses in a community helps improve the local economy and, thus, jobs there.
  • Doing charitable work. Small businesses contribute cash, property, and time to help various charities.

Conclusion

I could certainly gripe about some things, like over regulation and taxes. But there’s a lot to be thankful for. I am!


Health Care Confusion for Small Businesses

November 24th, 2015

© Justaa | Dreamstime.com - Choices Of A Businessman Concept PhotoThe Affordable Care Act, or ACA, also known as Obamacare, was intended to bring down the cost of coverage for small businesses and encourage them to provide health insurance for their workers. How’s that going?

Things are very confusing and many anecdotally report that their cost savings haven’t materialized (at least to the extent expected). Here are some confusing issues that I’d like to comment on, and hopefully offer some clarity.

Coverage flexibility

The government created a health insurance marketplace exclusively for small businesses called the Small Business Health Options Program (SHOP). Employers who obtain coverage for their staff through the SHOP may be eligible for a 50% tax credit for their premiums (no credit if purchasing coverage outside of the SHOP).

The confusion: The purpose of the SHOPs was to give employees the flexibility of choosing their own plans from a menu of options (as long their plans were within the same metal level, such as silver or bronze). The reality is that there just isn’t a choice in many locations; there is only one option within a metal level. There are no good statistics about signups on the SHOPs but, as discussed in Forbes earlier this year, they appear to be very, very low compared with projections.

The answer: It’s really up to employers to find a health care solution that works best for their staff. This may mean going outside of the SHOP (e.g., accessing private exchanges or directly to insurers). Whatever solution chosen, make sure it complies with ACA requirements for minimum essential coverage and affordability.

Reporting

ACA requires applicable large employers (ALEs), which are those with 50 or more full-time and full-time equivalent employees, to report health coverage. The form used for this purpose is IRS Form 1095-C. Instructions to this form are provided by the IRS.

The confusion: In 2015, those with 50 to 99 employees are not penalized for failing to offer health coverage. However, they are still considered ALEs for purposes of the information returns.

The answer: Per instructions to the form, all ALEs, including those exempt from the penalty in 2015, must file the form for employees. Failure to do so can result in a non-filing penalty. Owners are advised to speak with their CPAs or payroll providers now to make sure they have amassed the necessary information to complete the forms.

Note: Non-ALEs that offer self-insured health plans, such as health reimbursement arrangements, must file Form 1095-B. Non-ALEs with only insurance coverage for staff do not have to file; the insurance companies complete the forms. Again, if you have to complete Form 1095-B, make sure you have the information that you’ll need to enter (or provide to your CPA or payroll provider for entry).

Reimbursements

It has been the practice for many years for some small businesses to reimburse employees for the cost of their individual health coverage rather than providing a company benefit. These small businesses saw it as a cost saver even though the reimbursement is taxable to employees while employer-provided health insurance is nontaxable.

The confusion: The IRS previously concluded that the reimbursement arrangement violates ACA requirements and, thus, triggers a $100 per employee per day penalty. However, back in February, the IRS said  it wouldn’t impose the penalty for reimbursements through June. Potentially, the penalty applies for reimbursements on or after July 1, 2015.

The answer: Many are hoping that the IRS revisits this matter and extends the penalty waiver. Hopefully, Congress can address this problem directly and carve out an exemption ACA rules for these reimbursement arrangements. In the meantime, those who want to reimburse employees can do so safely if the amount of the added compensation isn’t tied to health coverage and employees are not required to buy health coverage with the reimbursements.

Conclusion

Now is the time of the year to focus on getting health care in place for 2016. If you’re confused, experts that can help include:

  • ACA-certified insurance agent
  • CPAs
  • Payroll providers



Apprenticeships: Can They Work for Your Business?

November 19th, 2015

© Rawpixelimages | Dreamstime.com - Diversity Professional Occupation Workers Togetherness Concept Photo

Ball clubs have farm teams that they use to develop talent. Small businesses can do the same with apprenticeships to cultivate well-trained employees.

Recently the U.S. Department of Labor proposed revisions to the equal employment opportunity regulations; they haven’t been updated since 1978. Here are some thoughts that you can use to consider implementing apprenticeships at your company and what government rules apply.

Overview of apprenticeships

Apprenticeships were common practice starting in the middle ages. In 1937, the Fitzgerald Act was created to regulate apprenticeships and on-the-job training programs. Then, in 1977, the National Apprenticeship Act, which amended the original act, directed the U.S. Department of Labor to promulgate regulations for a national apprenticeship program.

The federal government is making an investment in apprenticeships, according to Labor Secretary Perez. This is being done through grants and outreach.

Government restrictions

Federal law prohibits discrimination in recruitment, selection, employment, and training of apprentices on the basis of race, color, religion, national origin, or sex. The proposed rule would add disability, age (40 or older), sexual orientation, and genetic information for protected groups; it would clarify that sex discrimination includes discrimination on the bases of gender identity and pregnancy.

The proposed rule would apply to registered apprenticeship sponsors (defined later) with five or more apprentices. However, small businesses implementing their own apprenticeship programs would be well advised to adhere to these nondiscrimination rules in order to protect against possible litigation. Comments to the proposed rule are being accepted through January 5, 2016. It remains to be seen when a final rule will be adopted. Find more information about the proposed rule from the DOL.

A registered apprenticeship is a program that is approved by the U.S. Department of Labor Office of Apprenticeship. Such a program may qualify for federal funding. Under a registered program, the apprenticeship typically lasts three to five years, with the sponsor (employer) providing a structured training/mentoring program that is usually combined with classroom education.

Apprenticeships for small businesses?

Do you want to create a registered program? Going this route depends, of course, on your needs and ability to provide the necessary training oversight.

Short of having a registered program, however, you can create on-the-job training programs to suit your situation. Even an internship can be beneficial in developing skills for a potential employee. Keep in mind that even though you are offering training, you still must adhere to the Fair Labor Standards Act with respect to minimum wage and overtime rules (even for interns). If you create an apprenticeship program for your company, be sure to discuss it with a knowledgeable employment law attorney to make sure you meet federal and state law standards.


Equity Crowdfunding Now?

November 17th, 2015

© Andreypopov | Dreamstime.com - Word Crowdfunding On Piece Of Torn Paper PhotoIn April 2012, the JOBS Act authorized the SEC to promulgate regulations that enable businesses to raise capital from the public without going through extensive and costly registration. Variations on this crowdfunding theme have been clarified since then (as discussed later).

On October 30, 2015, the SEC published the final rule for crowdfunding. Understand what the regulations allow small businesses to do and then decide whether this funding option makes sense if you need capital now.

Investors

Under the final rule, businesses can seek up to $1 million in a 12-month period from non-accredited investors without requesting SEC permission (accredited investors can also participate here). The $1 million limit is the gross amount that can be raised; after paying the expenses of crowdfunding the company nets less. The funding can be debt (loans) or equity (investments) funding.

  • Who is a non-accredited investor? Non-accredited investor under the final rule is someone with annual income or net worth below $100,000. An accredited investor is someone with annual income or net worth of $100,000 or more.
  • How much can an accredited investor lend or invest? Such individuals can invest 10% of the lesser of income or net worth. The maximum amount is capped at $100,000 for all crowdfunding offerings.
  • How much can a non-accredited investor lend or invest? The limit is the greater of $2,000, or 5% of the lesser of annual income or net worth. Again, the maximum amount is capped at $100,000 for all crowdfunding offerings.

Procedures

Businesses cannot raise this capital on their own; they must use a funding portal (a website) that’s obtained SEC and FINRA approval. These portals must include educational materials; investors must indicate that they have actually read the materials and that they understood them.

Companies using this final rule must disclose their financial condition. They also have to provide financial statements. Depending on the amount offered, the statements must be reviewed by a CPA or audited. Those offering more than $500,000 but not more than $1 million would be permitted to provide reviewed, rather than audited, financial statements, unless financial statements are available that have been audited by an independent auditor.

Crowdfunding and other investment options

The final rule is designed for the companies with small capital needs. Other ways to raise capital include:

Bottom line

Small businesses seeking capital have a lot of alternatives. The new Final Rule from the SEC is yet another option to consider.


Is It Time to Make Changes in Your Business?

November 12th, 2015

© Cacaroot | Dreamstime.com - New Mindset New Results Concept PhotoAlbert Einstein said:

“Insanity: doing the same thing over and over again and expecting different results.”

Many small business owners try to grow their business or overcome problems by putting in more hours and working harder. Is this insanity? A better course of action is to know when it’s time to make changes and find workable solutions that will move you forward.

Identify when you need to make changes

There are many different indicators that you can use to determine when it’s time to make changes. Here are some:

  • Your revenue is dropping. Monitor your financial statements regularly to detect trends so you can address issues before they develop into catastrophes. Maybe a certain product line isn’t moving and you need to drop it. Maybe your prices are too high or too low for the services you’re offering. Pinpoint the cause of a drop in sales, declining profits, or a cash flow problem.
  • There’s high turnover. Why is it that some companies can retain employee loyalty for years while others see people continually come and go? Are you treating employees well by providing training, listening to their concerns, and offering fair pay and good benefits?
  • You face new laws or regulations. This is bound to happen. Just be sure to identify the changes you have to make. For example, the Affordable Care Act requires companies with 50 or more full-time and full-time equivalent employees to offer affordable health coverage or pay a penalty. The penalty for those with 50 to 99 employees starts in 2016, so if you fall in this category you may need to change your compensation packages, institute new record-keeping rules, and find ways to pay for the added cost of coverage.
  • There’s new technology. Is it a game changer in your industry? Is it a device or software that can help you? What would it cost you to implement it (and can you afford not to)?

ACE Metal Crafts, a stainless steel fabrication company that I referred to in a previous blog post, had moved operations to an alternate facility. Its business was growing, which is a good thing. But because of growth its prior systems were no longer working. This company knew it needed a change.

Seek the right solutions

While many people discuss their personal problems with their barbers or hairdressers, it’s probably not a good idea to take business advice from them. Instead, there are various types of people from whom you can find solutions to your business problems:

  • Your customers. Ask them what do they want and need? This can help you change your business offering.
  • Experts. You may need to bring in outside help to make significant changes in your operations. For example, ACE that I mentioned earlier used the Toyota Production System (TPS) with the help of folks from Toyota to make the changes it needed in its new facility. This system taught the company to use a philosophy of continuous improvement to make necessary changes that helped the company gain control and continue to grow its revenue and people. You can view a short film about the Toyota Effect to learn more about how TPS helps make changes.
  • Your competitors. While you likely won’t engage in intimate conversations, you can see what they’re doing and you’re not. This will show you which changes may be helpful to your business.
  • Mentors. It’s always helpful to seek advice from someone who’s been where you are now and can guide you through changes. The SBA has suggestions on finding a mentor. You may want to join a business group, such as Vistage, where other business owners co-mentor each other.

Conclusion

Ernest Hemingway said:

“Never confuse movement with action.”

Working harder won’t fix problems. Identifying what needs to be done and finding great solutions that you can implement will lead to change.

This post was created in partnership with Toyota. All opinions expressed in the post are my own and not those of Toyota.


Remember Our Veterans

November 10th, 2015

© Martin951martin | Dreamstime.com - American Damaged Flag And Veterans Day Celebration Eps10 Photo

Veterans Day is November 11, a day to remember all of our veterans. It is a federal holiday, and there are parades and celebrations in many localities across the U.S.

For me, it’s a day to express gratitude to those who have fought to protect my freedom. As a small business owner, there are some tangible things that can be done to show this gratitude.

Offer discounts

If you have a retail establishment, restaurant, or bar, consider offering discounts to those who can show they are now in or have been in the military. Many large companies are offering discounts or giveaways. For example, Applebee’s is offering a free meal from a limited menu. Outback Steakhouse is offering a free Bloomin’ Onion on Veterans Day and a 15% discount from November 12 through December 31. Lowe’s and Publix are offering a 10% discount. Veterans have free access to all national parks on Veterans Day.

Hire veterans

If you need more help, consider hiring a veteran to fill your slot. Many military skills can translate into the private sector. What’s more, hiring a veteran may entitle you to claim the work opportunity tax credit (assuming the credit is extended for 2015 as expected). Find details about the WOTC from the IRS.

You can post jobs and search resumes of veterans here. You can also work with a Veterans Employment Representative from the American Job Center (the Department of Labor is a partner with this network).

Make sure to be accessible

There is an estimated 21 million veterans in the U.S., many of whom are suffering from service-related injuries. The Americans with Disabilities Act requires your business to be accessible to those with disabilities.

Even if there were no law, it makes good business sense to see that your store, office, restaurant, and website are usable by these veterans. Making changes may entitle you to tax breaks, such as the disabled access credit for small businesses and the deduction for removing architectural barriers for the handicapped. Find information from the IRS.

Conclusion

If you’re a veteran, I thank you for your service. If you’re a business owner, you can express your thanks to veterans on Veterans Day and throughout the year in some very tangible ways.


Helping Employees Save if You Don’t Offer a Retirement Plan

November 5th, 2015

© Hatman12 | Dreamstime.com - Simple Savings Growth Plan Or Retirement Planning PhotoMany small businesses offer 401(k)s or other qualified retirement plans so that owners and employees can save for retirement on a tax-advantaged basis. However, start-ups and struggling companies may be unable to offer this benefit. There’s now a way for these companies to help low- and middle-income employees begin to save for retirement; it’s called a myRA (pronounced MY-RA).

Background

In the 2014 State of the Union address President Obama proposed a retirement savings account akin to Roth IRAs. The Treasury launched a pilot program to implement the proposal. The pilot program has been completed and myRAs now go nationwide.

Rules for myRAs

Think of myRAs as mini-Roth IRAs, with annual contributions capped at the same amount as traditional and Roth IRAs (e.g., $5,500 for 2015 and 2016, or $6,500 for those who are age 50 or older by year end). Contributions can be in any amount chosen by the employee (e.g., $2, $20, or $200). There are no fees for myRA accounts. Contributors do not have to make any investment decisions; their contributions earn interest which is the same as the rate for investments in the Government Securities Fund (the average annual return was 3.19% over a 10-year period ending December 2014).

There are three ways for employees to make contributions:

  1. Payroll withholding
  2. Direct transfers from personal bank accounts to the Treasury
  3. Application of federal tax refunds

A number of Roth IRA rules apply to myRAs:

  • Contributions are not tax deductible. Earned are tax deferred and can become tax free.
  • Contributions can be withdrawn penalty free at any time. Because they are made with after-tax dollars, the withdrawals are tax free. However, withdrawals of earnings prior to age 59 ½are usually taxable and subject to penalty (there are exceptions).
  • Income limits govern eligibility to make contributions

It’s not yet clear whether contributors can claim the retirement savers credit, which effectively helps a lower-income employee use this savings plan. The draft to the 2015 version of Form 8880, which is used for the credit, does not include myRAs, but the final version could be changed.

What employers can do

Companies do not have to adopt any plan or sign any documents to initiate the myRA option. There are only two actions for employers to take:

  1. Inform employees about the availability of myRAs. You can provide information or direct them to government resources. The Treasury has tools to help you.
  2. Enable payroll withholding for employees who want to contribute to myRAs. You then remit the withholding to the Treasury.

Employers can find more information about myRAs from myRA.gov.

Conclusion

myRAs are not intended to supplant qualified retirement plans. According to government sources, they are merely meant to help people get used to saving for retirement when they don’t have access to company savings plans.

Whether myRAs will catch on for employers that can’t afford to offer qualified retirement plans remains to be seen. From the employee perspective, a myRA can’t hurt, but as a meaningful retirement savings tool, it’s not much.