Benefits by Design Insurance Services Blog Archives - Benefits by Design Insurance Services

Health Savings Accounts: How Do They Work?

December 16, 2024

Health savings accounts can be advantageous when your goal is to recruit new hires or improve existing employees’ job satisfaction. They are an incredible benefit that you can offer to people who work for you.

Your employees will have the opportunity to save pretax dollars and put them toward qualified medical expenses, including copays, prescriptions, dental care, contacts, eyeglasses and X-rays, as well as retirement.

Are HSA contributions tax-exempt?

Yes! HSA contributions are tax-exempt. This means you will not have to apply any payroll tax laws to any of the money that you deposit into each employee’s HSA. And because these are considered pretax contributions, they also lower how much your employees will owe in taxes on the federal level.

How can you utilize HSAs as an employer?

HSAs let you contribute — either with or without an IRS Section 125 cafeteria plan — benefits employees choose from, such as life insurance, adoption or dependent care assistance, and accident benefits. You can even offer an HSA as a separate benefit, meaning you will decide how contributions will be made.

For example, you can contribute a lump sum of money at the start of the year to your employees’ HSAs or you can spread out your contributions by breaking them down into a percentage of the grand-total contribution each pay period.

There’s also the hybrid approach. In this situation, you would deposit 40% to 50% as a lump sum and then make smaller contributions every pay period. This scenario can reduce your administrative burden while protecting you from employees who quit immediately after receiving the lump-sum contribution.

What if employees don’t need the money in their HSAs?

If employees do not need the money in their HSAs because they do not have any immediate medical expenses to pay for, they can choose to save or invest their HSA funds until they need them.

This is how HSAs differ from flexible spending accounts, which must be spent by the end of the plan year. FSA funds cannot be invested nor can they be carried over when workers are no longer employed by you.

How does offering HSAs as an employer benefit you from a tax perspective?

By offering HSAs to your employees, you can lower your total payroll taxes. Since your contributions are both tax-free and exempt from FICA taxes, you will save an additional 7.65% per tax year. Additionally, you can deduct post-tax contributions from your employees’ HSAs.

Ultimately, your contributions to your employees’ HSAs can be viewed as 401(k) matches for their health. Even though your employees will not receive a tax deduction due to your contributions to their HSAs, the extra money that you extend to them can be invested, which is another avenue for financial growth.

Why are HSAs considered tax-advantaged for employees?

HSAs are considered tax-advantaged for employees because contributions reduce their taxable income. This is true even if the money in the HSA account earns interest or investment returns over time. As long as the funds are used for qualified medical expenses, employees will not owe taxes when they withdraw money from their HSAs.

Now, HSAs coincide with an HSA-eligible health plan, and together they create a cash cushion that offsets the higher deductibles that most HSA-eligible health plans usually have. As early as the age of 65, employees will not face any penalties if they use money in their HSA for nonqualified medical expenses.

That said, they may have to pay income tax under the following circumstance: Prior to the age of 65, people who withdraw from their HSA and use the money for nonmedical expenses will face a 20% penalty as well as be responsible for any applicable taxes on said withdrawal.

Under what conditions can employees contribute to an HSA?

Even if your employees are enrolled in an HSA-eligible health plan, they might not be eligible to contribute to an HSA. One exception is if your employees are not enrolled in a health plan that is sponsored by a spouse or parent who is not part of an HSA-eligible health plan.

Contributions can also be made if your employees are not enrolled in Medicare or if those who work for you cannot be claimed as a dependent on another person’s tax return.

What are the financial advantages of HSAs?

Employees can deduct contributions from their taxes if they contribute to their HSAs with after-tax dollars during the tax year and claim a tax deduction when it’s time to file. If contributions are made through payroll deductions, your employees will also avoid paying Medicare and Social Security taxes on the money put into their HSAs.

Furthermore, HSAs allow employees to invest a portion of their funds, which can help grow their savings over time. This can be especially helpful for employees who are concerned about how they will cover their medical expenses later in life. It’s also an opportunity to build a financial emergency fund for any health-related needs that arise over time.

Unlike other financial accounts, HSAs do not have a “use it or lose it” rule. In other words, employees can carry forward any unused funds year after year, so they will not lose money that is not spent within a given year.

Additionally, you can offer FSAs alongside HSAs. For example, a limited-purpose FSA can be used to pay for dental- or vision-related expenses while the funds in an HSA can be put toward other medical expenses.

When you decide to offer HSAs as part of your company’s benefits package, you, as an employer, will lower your total health insurance premium expenses. This is because the premiums for HSA-eligible high-deductible health plans tend to be less costly than premiums for other health plans.

From there, you can use the funds you save on premiums to contribute to your employees’ HSAs.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

Knowing What’s What With Sick Days

December 16, 2024

Sick days aren’t always used for physical illnesses. Many employees will use this time off to take mental health days or avoid coming to work when they’re feeling burned out. Why is this an epidemic in the workplace? In order to curb the misuse of sick days, experts suggest you focus on ways to make your employees less stressed on a daily basis. Here are some ideas.

Create a wellness initiative. Wellness programs can be for both physical health, such as screenings or flu shots, as well as stress management. Programs that help reduce stress in the office will allow your employees to also use these techniques in their personal lives. When a company makes time for these issues, the employees are likely to follow suit.
Offer flexible hours. The stress of the morning commute can be enough to drive anyone to distraction. Is there any way you can offer flexible start and end times? Parents will be able to leave early to get their kids from school, and others may prefer to work later to miss the traffic on the way home.
Create “work from home” options. Another possibility is to allow your employees to work from home part or all of the time. We have access to incredible technologies that can allow employees to stay connected while away from the office, so tap into them to keep employees from missing too much work.
Provide results-based incentives. If you’re concerned that people are using their sick days inappropriately, rethink the way you recognize the work they do. Provide incentives for their results rather than concentrating too hard on the individual steps. If they feel micromanaged, they may use sick days to avoid the process.

Do you have rules regarding sick days in your office?

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

It’s Open Enrollment Time for Medicare

November 18, 2024

When’s the Medicare Open Enrollment Period?

Every year, Medicare’s open enrollment period is October 15 – December 7.

What’s the Medicare Open Enrollment Period?

Medicare health and drug plans can make changes each year—things like cost, coverage, and what providers and pharmacies are in their networks. October 15 to December 7 is when all people with Medicare can change their Medicare health plans and prescription drug coverage for the following year to better meet their needs.

How do people know if they need to change plans?

People in a Medicare health or prescription drug plan should always review the materials their plans send them, like the “Evidence of Coverage” (EOC) and “Annual Notice of Change” (ANOC). If their plans are changing, they should make sure their plans will still meet their needs for the following year. If they’re satisfied that their current plans will meet their needs for next year and it’s still being offered, they don’t need to do anything.

When can people get information about next year’s Medicare plans?

Information for next year’s plans will be available beginning in October.

Where can people find Medicare plan information or compare plans?

1-800-MEDICARE or Medicare.gov.

Where can CMS partners find information to help people with Medicare with open enrollment?

We have outreach and media materials for English-speaking, Spanish-speaking, and other audiences that can help you to help others with Medicare open enrollment.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

IRS Adjusts HSA Amounts

November 18, 2024

In Rev. Proc. 2024-25, the IRS made changes for health savings accounts for 2025. The maximum annual HSA contribution is:

$4,300 for an eligible individual with self-only coverage.
$8,550 for family coverage.

HSAs are used in conjunction with a High Deductible Health Plan. The 2025 maximum annual out-of-pocket amount for HDHP self-only coverage is $8,300. For HDHP family coverage it’s $16,600.

For HSA-compatible HDHPs, the 2025 minimum deductible amounts are:

$1,650 for self-only coverage.
$3,300 for family coverage.

For the full details, see the IRS revenue procedure.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

The Most Unusual Benefits

November 18, 2024

So, your company wants to differentiate itself from the pack. That’s smart, but how do you craft a benefits package that establishes your business as a destination place of employment?

It all comes down to showing that you are supportive of your employees. You can’t put a price tag on that, and it will appeal to those in search of somewhere to work.

Ultimately, a one-size-fits-all approach to benefits is no longer sustainable. It may have worked in years prior, but nowadays it’s important to recognize that you are hiring people from all types of backgrounds, from a wide array of cultures and from a range of age groups.

As a result, your benefits package should be as adaptable and diverse as your staff members.

What benefits are at the forefront of employees’ minds?

From pharmacy benefits to personal time for nonwork-related responsibilities, many employees are eager for accessible and affordable benefits that make them feel like you see them as people.

Before the pandemic, perks such as free lunches, fitness centers and Ping-Pong tables were appealing in their own way. However, today’s distributed workforce demands benefits that actually improve their lives on a grander scale. It’s become normal to expect more innovation when it comes to the benefits that are offered, and this change in the tides will influence how much people believe your company cares about its employees.

Your company can do something about the frustration that many workers experience as a result of sub-par benefits. In turn, you will draw more attention from candidates in search of a company that understands how to support its workforce.

Benefit ideas that your employees will actually appreciate

Here are a handful of ways you can effectively express your appreciation for your employees in the modern workplace:

Financial planning and advice

Financial planning goes beyond just offering a 401(k). It can also help employees manage debt, budget for everyday expenses and save for larger purchases. This type of program can have a significantly beneficial impact on your employees, especially because financial stress is known to affect people immensely.

Financial stressors not only negatively impact work performance but also hurt the physical health, mental well-being and interpersonal relationships of your employees. When you offer finance-related advice and educational opportunities on topics such as home buying and identity theft protection, you can empower your employees to make informed decisions.

Additionally, student debt is a growing concern for many. However, with a financial planning program, you can assist your employees by helping them manage their own debt or preventing them from falling into more debt while trying to get out of their current situation.

Professional development budgets

A professional development budget, such as an education stipend, is another way to show that you are committed to your employees’ growth. This type of stipend has the power to pay for an array of educational opportunities, such as online courses, in-house training, mentorship programs or attending industry events. You can also support employees who want to obtain English as a Second Language certification, earn their high school diploma or pursue an advanced degree.

Mental health perks

Mental health perks are a great way to support your workforce. Examples include offering extra vacation days, extending the weekend to three days and providing time off for birthdays and half-days throughout the summer.

Consider adding therapy sessions, mindfulness apps and meditation classes to the mix. You can also extend your employee assistance program to include counseling for anxiety, grief, trauma or substance abuse, among other difficulties that your employees may face.

Healthy meal deliveries and fitness app subscriptions

An amazing way to encourage your employees to maintain peak physical health is by equipping them with subscriptions for healthy meal delivery services, coupons for local fitness classes, or reimbursements for physical activity and wellness programs.

Providing personal training at gyms or supporting family-planning options, such as fertility treatments and adoption assistance, are other ways to show that you care about the holistic well-being of those who work for you.

Solid opportunities for families

As a way of supporting those employees who are also parents, why not offer a childcare allowance? Flexible work arrangements and on-site childcare options can also make a big difference for parents who work for your company.

Access to help for remote and hybrid employees

For remote and hybrid employees, lack of socialization is a common issue. Creating interactive spaces, such as Slack channels, virtual game nights or annual trips for team bonding purposes, can help bridge that gap. Telehealth and on-demand apps for stress management are also valuable resources.

Voluntary benefits

Voluntary benefits, such as pet insurance, long-term care insurance and discounts, can give your employees the flexibility they need to choose what matters most to them while opting out of benefits that may not apply to their lives.

Addressing gaps that have existed in previous benefits packages, such as fertility support, student debt assistance and paternity leave, can make your company’s benefits appear more well-rounded. Attention to these opportunities for improvement can also serve as a way of showcasing your support for your employees as people, not just workers.

From self-improvement and career mobilization to tuition reimbursement and certifications, there are many ways to demonstrate that you believe in advancing and developing the careers of your employees. Just remember: The more you can contribute to your employees’ sense of fulfillment, the better.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

What Is A PEP — And Is It Right For You?

November 18, 2024

A pooled employer plan is a defined contribution plan, like a 401(k), that multiple employers can participate in. A PEP outsources many fiduciary responsibilities along with plan management and administrative functions to a third-party pooled plan provider.

PEPs were introduced via the SECURE Act of 2019. Changes to PEP participation were added in the Secure 2.0 Act of 2022. These changes allowed smaller firms to compete for talent with larger companies and their comprehensive benefits packages.

When you participate in a PEP, you have three main responsibilities:

To determine a plan design that’s appropriate for your workforce and company.
To work with a payroll system or provider to transfer retirement plan contributions and data.
To monitor the PPP to make sure it’s meeting its own responsibilities.

The previous incarnation of the pooled plan provider was multiple employer plans. MEPs allowed participation if your company shared an industry or geography with other plan participants. PPPs are different. It sets its own eligibility requirements. Your business doesn’t have to operate in the same industry or geographical area.

Choosing a PPP with proficient plan administration and investment management that acts in the best interests of your employees is the trick. Look for a PPP that:

Manages plan documentation, government filings and ongoing compliance.
Bundles communication and coordination with the recordkeeper, custodian, investment adviser, trustee and auditor.
Works with your payroll service provider to streamline and monitor employee payroll deductions.

How do you choose among PPPs?

The first step is to issue a request for proposals seeking information about the capabilities of each PPP, along with detailed information on cost and fee structures. Be sure to ask for information about plan design flexibility.

You might also consider looking for independent third-party evaluation firms to help navigate the selection process. These third-party evaluators can compare different PPPs and the specifics of each PEP across a range of criteria.

Next, be sure to understand the following:

Cost and cost assessment with an apples-to-apples comparison.
Different approaches to fees — asset-based fees, fixed fees or per-participant fees.
Total annual plan costs — compare service provider and fund manager fees side by side.
Investment management capabilities of the PPP — is it managed internally or outsourced?

Further, the PEP plans offered by the PPP should provide plan participants with an investment menu that allows them to build well-diversified portfolios at any stage of their career, from early-career employees just starting their savings journey to near retirees drawing down savings for income and everyone in between.

What are the negatives?

With a single-employer retirement plan, you have more flexibility to customize the plan design to meet the needs and retirement goals of your employees. You won’t be dependent on the actions or decisions of others and can access information and resolve problems directly. You have the freedom to choose a different service provider, move your plan or negotiate pricing if you’re unsatisfied with the cost or quality of service.

While a PEP provides several advantages over a single-employer plan — one-stop shopping, ease of implementation, reduced fiduciary exposure and administrative costs, access to expertise that you probably don’t have in-house — the drawbacks include limited or no ability to choose recordkeepers within the plan, limitations on investment choices and inflexibility in plan design.

Tax credits

To offset PEP start-up costs, for the first three years of participation you may be eligible for a tax credit of $5,000 annually with an additional $500 available if you set up automatic enrollment. Another credit of up to $1,000 per employee for your contributions may apply if you had up to 50 employees in the preceding taxable year. The credit phases out from 51 to 100 employees.

However, rules can change quickly with little notice, so check with a qualified financial expert for the current details and suitability guidance.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

The Best and Most Unusual Employee Benefits

November 18, 2024

Today, top-tier talent can negotiate for — and get — some pretty cool perks from their jobs, according to Employee Benefits Advisor. Here are the 20 most unusual:

Unlimited vacation days.
Surfing permitted during the workday.
Bimonthly massages.
VIP treatment at sporting events.
A personal assistant.
Pet insurance.
Free mechanical bull rides at the bar across the street.
Free season passes to a local ski resort.
All the snacks you can carry.
Discounts on homeowners and auto insurance.
Free lunch daily.
Fridge stocked with snacks.
Apple laptop and workstation.
Free beer on Fridays.
Housing provided.
Two hours of free housecleaning services a month.
Bring your dog to work.
“We promise not to poke you with a sharp stick.”
Free gym membership.
Unlimited usage of the company Ping-Pong table.

Gone are the days when job seekers were happy just to be hired. Today, companies want to set themselves apart from the crowd by offering a smorgasbord of employment benefits and letting workers choose their own selections.

Don’t judge

And not all benefits are frivolous. There’s a company that’s offering parents help with autistic children. Suppose your company is located in a rather remote place and so are your employees. Having a way to get help for their autistic children in such a setting is worth a great deal to these parents.

In this vein, just having access to a doctor in the office is a benefit, as are on-site medical centers or telemedicine services that let employees consult long-distance with doctors and nurses. Also becoming popular are on-site fitness centers.

How about a geriatric care manager? Or a free consultation with a geriatric care manager, plus help with coordinating services, support for respite care and flexible time off? Employers like Johnson & Johnson and Duke University are providing such benefits.

And for a wrap-up of other off-the-beaten-track perks, how about:

Green rewards (for solar panels, for example).
On-site kindergarten.
Dog walking.
Car incentives or alternative transportation options.
Concierge and laundry service.

Think about what your employees might like, and consider adding some additional benefits to your list to attract new employees and retain the ones you have.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

3 Employee Benefits Worth Thinking About

November 18, 2024

Tuition Reimbursement

Many companies help reimburse employees for classes they take. (These are classes employees take on their own time, distinct from company-provided job training, typically done during business hours.) Employees get the benefits of increasing their knowledge, and the company gets a better-trained and educated workforce.

Companies often add limitations to the benefit. For example, there is typically a dollar limit to the amount an employee can submit each year. Also, management will likely want to approve the course of study, to make sure it is relevant to the job the employee has or is likely to be promoted into. It’s appropriate for a bookkeeper, for example, to take classes in accounting, but not in English literature. Many companies also set goals, requiring a minimum grade for full reimbursement.

Some companies are nervous about offering this benefit, fearing that they’ll pay to educate employees who will quickly depart for fresher fields, thanks to their new degrees. But a well-run company will provide additional challenges — and promotions — to better-educated staff, so few will need to leave to find better opportunities.

Extra Holiday Time

Companies may be able to grant this benefit at little cost to themselves. With travel and family plans, everyone gets a little busy at the end of December. Although some businesses, like retail stores, are extra busy, others find themselves in a lull. For example, a publisher that specializes in scholarly books shuts down from Christmas to New Year’s Day, while keeping everyone on full salary. The company’s authors and potential customers are academics, who have left their campuses, so there was little work getting done. It built up enormous goodwill at little cost to the business itself.

And this benefit doesn’t have to be limited to December. A business that is busy in the winter but faces summer doldrums can close the week of July 4.

Gym Membership

This is like the tuition reimbursement plan in that it helps the company and the employees: If you work out, you’ll probably be healthier and take fewer sick days. Some may come early for a basketball game, do a lunchtime aerobics class or run laps after work. An opinion piece in the New York Times says that when employees exercise more often and eat better, morale improves, productivity increases and health care costs go down.

Companies can pay a flat monthly reimbursement fee or sometimes even strike a deal with a local gym or health club for employee discounts. Larger companies, of course, may even provide a gym on-site for employees.

Not every benefit is workable for every company, but companies that do go above and beyond in what they offer may see improvement in morale. They may also find they have a recruiting edge when hiring new staff — many people are motivated by benefits other than money.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

How to Address the 7-Year Itch

November 18, 2024

What would you do on the first Monday of your sabbatical? Be clear about what you expect to achieve. You might want to include a secondary goal, such as starting to write a book or blog or learning a language. Not only will you make personal discoveries, but you will also establish a project to continue working on when you return to your regular life.

Adjusting balance is key to better physical and spiritual health. Your time off can provide you the chance to reduce stress and reassess your life, as well as for realizing aspirations. So how should you set an ideal date and time frame for your adventure?

First, forget traditional notions. Your sabbatical can last a week, a month or a year, as long as you structure it around a beginning, middle and end, plus deadlines. You could even occasionally go into your office to attend to a matter. You might leave a short window of time in case you truly need to delay your plans, but once you set the plan in motion, you must protect it.

If your business or company experiences extra active seasons, you may want to consider scheduling the sabbatical to coincide with a less busy interval. For instance, accountants recognize that client work tends to wind down after April 15. Or, as an entrepreneur running your own business, you will expect typical cycles. Alternatively, your dates might coincide with projects, such as the ideal travel season in locations you want to visit. Moreover, if your plan includes a partner or spouse, you may need to coordinate with them.

Making the case for your me-time

When the moment comes to negotiate with your CEO, manager or business partner, you need a strategy to convince them why and when you are leaving. You might ask for paid leave (although there are advantages to unpaid time too, including less pressure) or you may be looking for confirmation that your job will still be there for you on your return.

Build a case for why leaving may help you become a better employee, whether through increasing your productivity and engagement or addressing your possible burnout and diminishing returns. Although it may be difficult to create a tangible metric, the bottom line usually comes back to the retention of your talent. From the employer’s side, the most compelling argument is competition within an industry, such as technology or consulting, especially if others are awarding free-time benefits.

Some companies offering sabbaticals include:

PayPal (four weeks every five years).
Deloitte (three to six months at reduced pay).
BetterUp (one month after five years).
Citi (up to 12 weeks of leave, with a portion of base pay and benefits).
Intel (eight weeks after seven years; four weeks after four years).
McDonald’s (eight weeks every 10 years).
Morningstar (six weeks every four years).

Planning your exit strategy

Reentry mode must be managed, too. Maintain any professional licenses and keep in touch with your company. Particularly toward the end of your break, communicate your timeline, reach out to industry contacts, and update your resume and your digital presence. Come back onto the scene gradually. It’s not like turning on a light switch. You might benefit from taking a few final days to reflect on how your experience has changed your life.

Unless your employer is willing to subsidize your time off, you must make careful financial plans, both to cover any loss of income and to pay for extra expenses such as travel. Health care will be a priority; confirm whether you need to purchase your own insurance for the duration of your leave. If you are a parent, you might also require child care or, if you are leaving town, caretaker services for your home’s upkeep.

Add up all those charges and take them to your financial planner to run the numbers in order to calculate both short- and long-term impacts.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

ESOPs: Are They Right for You?

October 4, 2024

If you’re thinking about offering ESOPs to your employees, you might find them appealing because of the way they can help reward those employees who helped you build your business. After all, an ESOP is an aspect of an employee’s retirement plan, and like other tax-advantaged retirement accounts, your employees won’t owe taxes on any money in their ESOP account until money is withdrawn, making it an enticing benefit in the eyes of employees as well.

Why are ESOPs an attractive benefit?

An ESOP can serve as a mighty powerful motivator for employees. Every employee who participates in this benefits-focused plan will own a stake in the corporate ownership of the company. This can be particularly significant if your company is successful.

How do ESOPs work?

With this type of benefits plan, you’ll start by establishing a trust that allows for stocks in your company. Each year, you’ll make tax-deductible contributions that will serve as shares in your company. The trust account that you created will allocate your company shares to the accounts of employees who are participating in the ESOP.

The advantages of an ESOP

If a company is owned by multiple people, an ESOP can only purchase shares from owners who want to sell theirs. This differs from outside buyers who typically want to obtain full ownership of a company.

With an ESOP, owners can sell their shares of the company to ESOPs at their own pace. This makes it possible to gradually withdraw from the company, whether that means stepping into a more limited role or exiting the company entirely, which is a level of flexibility that is hard to achieve with other business sale methods.

That said, even after you sell your shares to an ESOP, you can still stay involved with the company. For instance, you can remain on the company’s board of directors or take on a role that provides guidance to the company.

If your business is a C corporation and you choose to sell your shares of the company to an ESOP, you can defer capital gains taxes indefinitely. According to Internal Revenue Code Section 1042, all you need to do is reinvest the proceeds in the form of stocks and bonds for U.S.-based companies.

On the other hand, since an S corporation does not typically pay corporate income taxes, you — as the S corporation owner — can sell any amount of your company shares to an ESOP and elect to sell even more later if you wish.

If you decide that you only want to sell a portion of your stake in the company, an ESOP provides the opportunity to purchase any percentage of your company’s shares while upholding the option to buy even more over time. This is particularly ideal if private investors are not interested in purchasing stakes in the company.

The disadvantages of an ESOP

One of the limitations of an ESOP is that you can only establish them for C corporations or S corporations, not businesses that are classified as partnerships. Furthermore, private companies with ESOPs must buy back shares from employees who depart from the business, and this can be costly if many employees leave at once or multiple employees retire simultaneously.

ESOPs can be expensive to set up, though they are often less costly than alternative options. Just note that legal fees for the establishment and maintenance of ESOPs typically start at a base level of $125,000.

For companies that employ fewer than a few hundred people, the annual costs associated with ESOP administration and valuation range from $20,000 to $35,000. That said, a simple ESOP that only receives shares or funds to purchase other shares is relatively less expensive.

Furthermore, the tax benefits of an ESOP tend to outweigh the maintenance costs over time. Also, an ESOP cannot pay more than the fair market value for shares. This value is determined by an independent valuation expert, especially when your stock is not publicly traded, so an ESOP might not match a higher offer from a motivated buyer.

You cannot use ESOPs as a means of rewarding specific employees while denying participation to others. Instead, all eligible employees must be included in ESOPs. Also, note that ESOPs require ongoing cash contributions, and your company might need to contribute more to the ESOP than you would to other retirement plans.

If you have an ESOP loan in place, your company will subsequently have limited flexibility in terms of managing cash flow and the timing of payments. Additionally, private companies are responsible for repurchasing shares from former employees once they are vested and have left the company.

For very small companies that employ no more than 20 people, the costs of an ESOP may outweigh the benefits. Therefore, ESOPs are most suitable for companies with sufficient profits as this will give the company the means to afford setup expenses and maintenance costs while still operating successfully and making all necessary ESOP contributions.

As you can see, ESOPs are a way to establish a transition plan. They create a market for your company’s stock, and, in this way, you can then sell your business gradually instead of having to exit suddenly.

Pam Morton
Benefits by Design Insurance Services
415-524-8959 Larkspur, CA office
760-696-3573 Carlsbad, CA office
PamM@benefitsbydesignca.com
www.benefitsbydesignca.com
© 2024 Industry Newsletters

12 3 4

Category: Blog