benefits & highly compensated employees - Posted by jenv

Posted by jenv on July 31, 2003 at 13:06:38:

>I have to say I’m not a CPA or attorney, but relating to you what I’m doing, with professional advice in some cases.

I appreciate it.

>But the written “Corporate Health Plan” mentioned is a benefit for “Corporate Directors”, and did not mention employees

Your “director’s health plan” isn’t taxable compensation and avoids top-heavy plan rules? Slick. I though only employees got tax-free fringe benefit treatment.

>You expressed concerns with 401K programs, and problems with high paid employees.

Health insurance plans and medical reimbursement plans have the same issues, so I’m also (actually more) interested in workarounds for those. Life was so simple before I saw the ASG rules. I’m also wondering whether employee failure to enroll in a health plan triggers the top-heavy penalty like it does in a 401k (re: your idea about encouraging non-participation through monthly fees).

benefits & highly compensated employees - Posted by jenv

Posted by jenv on July 28, 2003 at 04:09:15:

A FindLaw article on fringe benefits had this to say about health benefits: “A separate nondiscrimination test applies to key employees. If key employees receive more than 25 percent of the nontaxable benefits provided to all participants under the plan, benefits received by the key employees will be taxed to them”.

If you have a 1-person corp, this implies that the health plan is taxable to you because more than 25% (100% in this case) of benefits are received by key employees. Since I’ve been told benefits aren’t taxable in this case, what’s the exception to this rule?

They also said this about SIMPLE plans: “If a plan discriminates in favor of highly compensated employees as to either eligibility to participate or benefits enjoyed, it will lose its nontaxable status for highly compensated employees. Therefore, if lower-paid employees do not participate or participate only marginally, the tax-free benefits are lost to key or highly compensated employees.”

This appears to be saying that the IRS believes if an employee chooses not to participate, they have been discriminated against because they enjoy no benefit from the plan. Thus unless you can convince your employees to contribute to the plan, you get screwed. Is this really the case?

Re: benefits & highly compensated employees - Posted by Frank Chin

Posted by Frank Chin on July 28, 2003 at 10:19:49:

Hi Jenv:

I own active business with 8 employees. I also have a “C Corp” that I operate as a RE management Company for my RE business. I recently had a discussion with my CPA regarding this issue of benefits, and health insurance in particular.

I wanted the active business, with more cash flow to fund the health insurance , and additonal perks. But I also have to watch out for the requirement of offering all employees the health benefit, as you mentioned.

According to my CPA there’s two ways for me to do it.

1- I can have the active business with the employees pay the “C Corp” for business services performed, just like my RE business. My benefits would then be paid via the “C Corp” with me being the only employee.

2- I can poll current employees to see who is interested in having a health plan, and how much they are willing to pay. Usually, working couples where one spouse works for a small businss has the other work for a large company, government, or a job with a good union plan.

I polled my employees and found that several have union plans, and other plans thru the spouse’s employer. The retired part timers has medicare, and one semi retired gentlemen is still under his former employers union plan.

Given the above, if I offer everyone a plan requiring an employee payment of $100 plus/month - no one will be interested to participate except myself. I will then pay a $100.00 non tax deductable payment, with the rest paid via the business.

The CPA observed that its cleaner with a “C Corp” but I wind up doing separate Federal, State, City returns each year. I also maintain separate bank accounts for it. But I’m already have the separate set of books, bank accounts, and file my own tax returns for the “C Corp”.

By doing it thru the active business, I wind up with paying a nominal amount ($100/month) myself. In this case, I might not need the “C Corp” for benefits.

As to small $100/month charge, I have to charge enough, or everyone would sign up for the plan if its offered for free.

According to by Health Insurance broker, health plans offered thru “Companies” have better features than individual plans. Indeed, the plan that I’m currently under have no exclusions.

On the other hand, a friend of mine, who’s business owner, got an individual plan which excludes pre existing conditions such as cancer treatment for his wife, and the ulcer conditions that he has.

Frank Chin

Re: benefits & highly compensated employees - Posted by jenv

Posted by jenv on July 28, 2003 at 15:37:33:

>According to my Health Insurance broker, health plans offered thru “Companies” have better features than
>individual plans. Indeed, the plan that I’m currently under have no exclusions.

Which vehicle did you choose to buy insurance, the C-Corp or your other business? Given that your employees have adequate health insurance through other means, that $1,200/year seems a foolish cost. Can single-person corps get “company” plans? My insurance guy claimed that 1- or 2-person companies only get individual plans, but maybe he was just angling for a higher commission.

Re: benefits & highly compensated employees - Posted by Frank Chin

Posted by Frank Chin on July 31, 2003 at 05:32:27:

Hi Jenv:

I still have my health insurance under the “C Corp” which has one employee, “me”.

What sparked my review of getting insurance thru the active business with 8 employees is the passage of a new law in NY that allows insurance companies to “surcharge” rates for one employee companies by as much as 20%. My insurance plan applied for the surcharge, but was rejected for the current year. They can try again next year.

I’m told that “technically”, I can go into a group of “2 to 50” for my active business as long as I can submit federal or state withholding returns documenting the number of employees. I can then enter the plan even if eventually I was the ONLY ONE signed up, as I offered the plan to everyone who turned it down. The process of offering the plan to everyone is also the satisfy the “anti discrimination” requirement of federal law.

While insurance plans are “state specific”, I know that even here in NY, the guidance from health insurance brokers vary widely. A freind of mine, a computer consultant who operates a one man company, was placed in a “union plan” because his broker didn’t know any better.

You might try checking with several brokers, and try trade associations in your area to see what’s out there.

When my frind and I compared rates, I was shocked that I was paying the same rate as he, legitimately, compared to the shady way he was done.

Having said that, finding plans for “one employee companies” is difficult, as most standard plans here are for “2 to 50”, and beyond 50 employees, the firm is big enough to negotiate a plan of its own.

In my case, my broker found an agent that negotiated plans for “one employee companies” from two insurance companies in my state, and in turn offered it to its clients through a group he organized. Two years ago, he had four plans for “one employee companies”

The agent has a WEBsite:

http://www.leaderassociates.com

The group is called “ABLE”, and you’ll have to check the plans under ABLE. Also you’ll note that plans for downstate NY is quite expensive, compared to upstate, where plans cost half as much.

Keep in mine that the plans are for my area, and you’ll have to find plans for your state, and your area.

Then, other business people I know use MSA’s, with super cheap plans, not state approved, for catastrophic coverage as health insurance.

I read an article in a local paper that highligted the problem with the super cheap unregulated plans. Several business owners went to the hospital, and the plan ran out of money, and they found themselves personal liable for the hosptiable bills, running into tens of thousands of dollars.

Under the laws of NY state, health care providers are forbidden to go after patients if they are covered under “state approved insurance plans”, and if the plan runs out of money, all health insurance companies are surcharged to make up the payments, and hopitals and doctors are required to take a part payment.

This later aspect is very important to me from the “asset protection” view as I don’t want to get a super cheap unreulated plan and find myself liable for large hosptial bills.

Frank Chin

Re: benefits & highly compensated employees - Posted by jenv

Posted by jenv on July 31, 2003 at 06:09:09:

How did you deal with the “affiliated service group” rules?

From http://www.polycomp.net/pdfs/FAQ’s%20on%20Related%20Employers.pdf.

FAQ?s on Related Employers

Does a business owner need to be concerned if he or she owns all or part of two different businesses and only wants to cover the employees of one of the businesses with a 401(k) plan or pension plan?

Yes. For example, Ed Jones owns 100% of a real estate sales office and 90% of a coffee shop. If Ed wants to establish a 401(k) plan for his real estate office, he will probably need to offer the plan to the employees of the coffee shop. The real estate office and the coffee shop are ?related employers.?

How much ownership can a business owner have and not have to be concerned about being a related employer?

It is not a simple question to answer. It depends on the relationship of the employers and whether or not it is a controlled group or an affiliated service group.

What is a controlled group?

A controlled group of businesses is a group of related employers. A controlled group of businesses may be comprised of corporations, unincorporated businesses, partnerships, limited liability companies, sole proprietorships, tax-exempt organizations, or any other form of organization doing business.

How are the employers related?

A controlled group relationship exists if the businesses have a ?parent-subsidiary? relationship or a ?brother-sister? relationship.

What is a Parent-subsidiary relationship?

A parent-subsidiary relationship exists when one business owns at least 80% of one or more other businesses. For example, Corporation X owns 95% of Corporation Y. X and Y constitute a controlled group.

What is a Brother-sister relationship?

A brother-sister relationship exists if 5 or fewer common owners satisfy an 80% common ownership test and a 50% identical ownership test.

What is an affiliated service group?

An affiliated service group is another type of group of related employers. This type of group includes two or more organizations that have a service relationship and in some cases, an ownership relationship.

What is an example of an affiliated service group?

A classic example of an affiliated service group is a law firm that is structured as a partnership. There are four partners. Each partner is incorporated as a professional corporation. Each corporation has a 1/4th partnership interest in the law firm. In this case, the partnership and the four professional corporations constitute an affiliated service group.

What is the effect of being a controlled group or an affiliated service group?

If two or more organizations are part of a controlled group of businesses, or an affiliated service group, the organizations are treated as a single employer when applying qualified plan requirements.

Re: benefits & highly compensated employees - Posted by Frank Chin

Posted by Frank Chin on July 31, 2003 at 08:35:33:

Hi Jenv:

I have to say I’m not a CPA or attorney, but relating to you what I’m doing, with professional advice in some cases.

I signed myself up for a "one employee plan with the “C Corp”. But the written “Corporate Health Plan” mentioned it is a benefit for “Corporate Directors”, and did not mention employees. Technically, I did not offer employees the health plan, though I’m a Director as well as employee. I told this to my CPA, and he thought it was a bit sneaky, and laughed.

Your post is interesting reading for folks in my situation owning more than one entity.

You expressed concerns with 401K programs, and problems with high paid employees. I was the “IS manager” at a company where I had to prepare reports for this issue some years ago, so I’m familair with the issue, but I don’t at this point recall whether or not low paid employees have to participate or not in calculating the ratios.

But I could tell you how a company my wife’s worked for handled the problem.

She told me that the company was top heavy management with big salaries mixed with low paid employees. As I recall the story, many if not all of the low paid employees also chose not to participate, which contributed to the problem. Their highly paid employee ratio was too high.

So management re-arranged things by having the 401K entirely company contibuted. I recall management salaries were lowered as the 401K was no longer deducted, and then paid directly by the company. The company then contributed the employee portion. Now everyone had the 401K. New employees were quoted slightly lower salaries, but wer told there’s a 100% company contributed 401K.

I’ll be looking into a SEP plan myself shortly, and I’ll be discussing the issues with an agent who’s been bugging me (same guy who sold me the health plan).

Frank Chin