Business – Tower Financial Group, Inc.

Loss of a Key Employee

admin — Wed, 05 Jul 2017 15:40:23 +0000

Business owners accept without question the wisdom of insuring the firm against the loss of its property values. We take care to insure the physical assets against fire, tornados and other disasters. Yet, protection from the loss a key executive may be far more important.

First, the probability of losing a key employee is far greater than a fire loss. It has been estimated that the chances of death of a key executive is 14 times greater at age 45 than a loss due to fire. It increases to 17 times at age 50, and to 23 times at age 55. Further, about one out of every three individuals dies in the working period of life with a consequent loss to his/her business.

Second, the loss due to a fire is temporary. Plants and factories can be rebuilt. Inventory can be replaced. The new building is likely to be more useful and valuable than the old. On the other hand, a new hire may need several months or even years to become as productive as her/his predecessor. The deceased employee may be impossible to replace.

Who Is Key

Every corporation has at least one key executive or an employee who makes a substantial contribution to the operation, profitability and success of the business. Any individual that has critical intellectual information, sales relationships, bank relationships, product knowledge, and/or industry contacts that may adversely affect profits in the event of their absence, may be considered key.

Life Insurance

Although life insurance cannot ever fully replace the value of a key employee, it can indemnify the business for the financial setbacks that can occur. Life insurance can provide the business with needed funds to keep the business running, to assure creditors that their loans will be repaid, to assure customers that business will continue operations, to cover the special expenses of finding, hiring, and training a replacement.

How It Works

There is no particular form of agreement or special contract needed by the business to obtain key employee insurance on an executive or owner. However, the board of directors should authorize the maintenance and payment of the policy.

The applicant is the business. The application is signed by an officer of the business other than the insured. Generally, the premiums will be paid by the business on an after-tax basis and are not deductible as a business expense. The business will be designated as the beneficiary and the insurance proceeds received upon the death of a key executive are not subject to federal income tax.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

Implementing a Cafeteria Plan

admin — Wed, 05 Jul 2017 15:39:43 +0000

Internal Revenue Code 125 allows an employer to implement an employee benefit plan which allows employees to se1ect the benefit programs they prefer.

The plan offers two or more options and the employee chooses the option most appropriate for him or her. Because of the “menu” of benefits available, the plan is referred to as a “Cafeteria Plan”.

Cafeteria Plans, along with 401(k)’s, are among the most popular employee benefit plans of the past decade. The tax benefits to the employer and employees far exceed the minimal required government reporting.

Benefit Options

In general, the IRS allows the following benefits to be present in a Section 125 plan:

Group-term life insurance (in excess of $50,000)
Accident and health plans
Long and short term disability benefits
Dependent child care costs
CODA [401(k) plans]
Dependent group life and accident and health insurance
Vacation
Health Savings Accounts (HSA)
Public transportation and parking expenses

Employee Tax Aspects

Basically, the plan allows expenses that normally would be paid by the employee on an after-tax basis to be paid via salary reductions on a pretax basis. This allocated income will not be subjected to FICA or income taxes. The result is that taxable dollars have been converted to nontaxable dollars – thereby increasing the employee’s take-home pay.

Employer Tax Aspects

Generally, employer contributions to a plan are income tax deductible. In addition, contributions on behalf of the employees, if such contributions are not included in the employee’s income, are not subject to FICA (Social Security) or FUTA (Federal Unemployment Tax Act). This can result in significant savings to the company’s bottom line.

The employer must file an annual information return (IRS Form 5500) stating plan participation, cost and business type.

Choosing a Business Continuation Plan

admin — Wed, 05 Jul 2017 15:39:15 +0000

The death of a major shareholder in a closely-held corporation can seriously interrupt continuity and profitability of the business. Surviving shareholders must struggle with how to continue the company as a profitable business with the loss of a key player. Heirs must concern themselves with how to replace the income that the shareholder had earned and how to extract their inherited portion of the company value.

To minimize the areas of conflict and to realize a smooth transition, company owners should enter into an agreement while the parties are still living. This is called a buy-sell agreement. Stock purchase plans are generally arrangements through which shareholders agree to sell their stock interests in the event of specific triggering events such as death, disability, or retirement.

Stock purchase plans are generally classified into three categories: stock redemption plans, cross purchase plans, and hybrid plans.

Plan Types

Under a stock redemption plan, the corporation agrees to purchase all or part of the stock interest of a shareholder. There are three approaches to stock redemptions – full redemptions, partial redemptions and Section 303 redemptions.

In a cross purchase agreement, the remaining shareholders buy the stock interest of a single shareholder. They can either distribute the shares proportionally to what they had before the triggering event occurred or non-proportionally according to what is outlined in the buy-sell agreement.

A hybrid plan, or wait-and-see approach, gives the corporation the first chance to buy. If the corporation does not buy in within a specified time frame (90 days say), the other stockholders will have the option to buy. If that option is not exercised then the corporation must buy.

Factors to Consider

Many factors need to be considered when determining the best type of stock purchase plan to implement, cost factors, psychological factors, ease of administration, tax implications, and transfer for value rules to name a few. You should seek the advice of financial and legal counsel to help implement your plan.