Perks Help Retain and Attract Employees
Michael McMahon, Partner, McMahon and Company
As entrepreneurs leading growth companies, we look for ways of offering perks to our key employees as a way to attract and retain them. In 2006, companies in the U.S., for the first time in many years, ranked employee attraction and retention as the most important issue that they face, even above cost control.
Medical Reimbursement Plans
The problem is that many employee perks we might consider have tax consequences. A medical reimbursement plan, such as Exec-U-Care, is one of the programs an entrepreneur might consider putting in place when looking to increase executive perks. This plan reimburses employees for medical expenses their medical plan does not reimburse. Expenses such as deductibles, coinsurance amounts, special health equipment, annual physicals, dental care, vision care, etc. could be reimbursed on a tax-free basis to those employees and their dependents.
There is a $100,000 limit in reimbursements per calendar year and a $10,000 per occurrence limit per calendar year. The premiums paid for this insurance are often tax deductible by the company as well. The plan can be completely discriminatory and is not subject to the usual highly compensated individual or two percent owner testing that occurs with Section 125 Cafeteria Plans and 401(k) plans.
Further, the employees who receive the benefit don't need to worry about deducting the medical expenses on their taxes. If you do not offer this plan, those employees are able to take deductions on their taxes for medical expenses only in excess of 7.5 percent of their income. As an example, an employee earning $200,000 would have to incur $15,000 of medical expenses before deducting additional medical expenses from a personal income tax return.
The mechanism that allows employees to benefit from this arrangement is a "transfer of risk" to the insurance company. In other words, there are limits to how much the company could pay out in claims in any given year. The minimum annual charge is $250 per insured employee, and then the company pays 111 percent of the group's total medical reimbursement claims. As a fully insured plan, though, the company has a maximum cost exposure.
For example, if you insure five employees under a $100,000 reimbursement plan (there is also a $50,000 plan option), your annual cost for the group cannot exceed $51,250 (or, $36,000 under the $50,000 plan option). In other words, for a maximum exposure of $51,250, of which only $1,250 would be fixed costs, your employees could receive total benefits of $500,000 ($100,000 each up to $10,000 per occurrence).
As with any tax-advantaged program, you need to consult with your tax professionals to ensure you and your employees can take advantage of this benefit.
Key-Man Insurance and Buy-Sell Instruments
At McMahon & Company, we often find that owners of closely held businesses, whether sole-proprietorships or partnership-type entities, do not have key-man insurance or buy-sell instruments in place. In the event an owner or a partner in a company becomes disabled or dies, there is often a question of what to do with the individual's stake in the company. The first question we ask our clients is if the operating agreement or Articles of Incorporation contemplate the departure, disability, or demise of a key person.
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