Friday, May 10, 2013

SOP Friday: Healthcare and Other Benefits

Most small businesses start out with no "benefits" such as health insurance, paid phones, or cars for employees. In fact, many stay that way forever. There are good reasons to add benefits, and there are good reasons to avoid it.

If you're considering offering benefits, you should prepare yourself for some serious education about what you should and shouldn't / can and can't do. At both the state and federal levels, certain benefits must be offered identically to everyone.

Disclaimer: I'm not an accountant, enrolled agent, insurance salesman, broker, Human Resources attorney, or telephone repairman. You need to do this planning in association with true professionals who can help you make the best deals while staying inside the law.

I'm going to break benefits into three separate discussions: Health Insurance, Retirement, and Other. But first a few notes about benefits in general.

First, if you have a growing business, you will have to offer some or all of these benefits at some point. So try to plan in advance - at least a year in advance. That gives you time to learn about various programs, their enrollment schedules, options, etc.

Second, whether you "want to" offer benefits or not, avoid offering them until you are certain that you can afford them. That means you are certain you can add this expense from now on forever. I recommend this because takig benefits away from employees will have a devastating effect on moral. Plus, any permanent increase in your expenses can put a serious drag on your company.

Consider health insurance. Group plans in the U.S. vary dramatically. We use an HMO/PPO plan. It varies from about $200/month for someone under 30 (most techs) to about $500/month for a 50-something year old. So a business with ten employees will add a few thousand dollars a month in expenses. Just make sure you have it.

Third, use the "pros" to educate yourself and your staff. Let three insurance sales people come in and walk you through their plans. With each one you'll learn some things you can ask the others about. Do the same with retirement plans. And when anyone makes a claim about tax benefits, ask the tax pro about that. It's not the insurance salesman's job to keep up on tax law.

Fourth, always consider how any benefit you offer will be good for your company. "Just because I want to" is a fine reason. Just be very clear that that's what you're doing. Don't pretend that you need it for competitive reasons if you don't. Some benefits are easy (cell phones) and some are more complicated (retirement). What advantage do you get because you offer this benefit?

Now for a few notes on the three topics I promised.

Health Benefits

Everybody say "Ugh."

Everything is changing on this front. But for now, here are some notes to consider if you're considering health insurance for your staff.

1) If the owners and managers all have spouses who can provide health insurance, you might not want to offer this at all. Health insurance can be expensive. When we first started offering it, about seven years ago, a 25 year old tech could be insured under a group plan in California for about $100/month. Today I pay $481 per month for my group plan insurance.

2) Everyone has to get the same options. For example, you can't have a cheapie plan for the employees and a Cadilac plan for the boss. You CAN have a cheapie plan for everyone and let everyone upgrade themselves. But that means the part you pay out of your own pocket is not a business expense and might not be deductible on your taxes.

3) Seriously consider whether you want to cover some or all of the insurance. In some cases, you can cover (for example) 50%. If employees opt out, you pay nothing.

4) Consider whether you want to cover spouses/partners and kids. Is it fair that one employee receives a benefit of $400 while another receives a benefit of $1,200 just because he has a family? That's up to you.

[See where I said you need to let the pros educate you on all this?]

5) Set a reasonable waiting period, such as 90 days. That way, you know that new hires will work out before they get this benefit.

As a general rule, if you the owner need health insurance, group health is a great option. If you are an LLC or S-Corp (not a sole proprietor) then expenses paid to the insurance program are a business operating expense. The part each employee pays out of pocket in premiums and co-pays is a personal medical expense. These days, it's unlikely that anyone will spend enough to deduct it on their taxes.

Go talk to a pro.

Retirement Options

In my opinion, if you CAN create a retirement plan through work, you SHOULD create a retirement plan through work. Some plans such as Roth IRAs are personal. You should do that. But through the business, you can offer 401Ks and other retirement options that allow you to gain a larger retirement package while some of it because a business operating expense.

As with healthcare, you have to make the same offer to everyone. So if you contribute 5% of an employee's pay to their 401k, then you have to pay 5% of all employees' pay. Having said that, you can craft eligibility a bit. And some plans have a "vesting" component so that employees don't get to keep your contributions unless they stay a specific amount of time.

Again, there are many, many options. And again, I am not a retirement planner, investment advisor, or accountant.

Go talk to a pro.

Other Misc. Benefits

I somehow thought we were ahead of the curve on paying for employee cell phones. But over the last ten years I've realized that lots of companies do this. We pay a flat fee (I think it's $50) per month to each employee for the company use of their phone. That's enough to turn the lowliest plan into one with unlimited nationwide calling. That way we don't own the phone and we're not responsible for any part of their actual bill.

We have also, from time to time, given company-owned laptops to key employees. As far as I can recall, we've never asked for one back, even when someone left the company.

Some companies have company cars that employees are allowed to take home and use during off hours. Of course some of these are "wrapped" with advertising. That sounds like a lot, but it's not really. As I mentioned last week regarding Travel Policies and awhile back regarding Employee Expenses, we reimburse for mileage. It is not uncommon at all for a technician to drive 100 miles a week for work. That's $56.50 per week. At 4.3 weeks per month, that's $242.95 per month. For many cars, that's a car payment.

There are also "intangible" and culture-oriented benefits. Many companies supply the soft drinks. We have a lot of lunch gatherings. We also have movie days and movie nights. For about five years we brewed our own beer as a group. Today, Mike and Dana make regular trips to Sam's Club and keep the kitchen stocked with coffee, soups, and snacks. You could literally live in our office.

One other category of benefits is employee training. This is something that's good for the employee and the company. And it's totally a company expense, so not taxable to the employee (see the next topic).

Note On Taxes

[See the disclaimer above. I don't actually know anything and I'm not responsible for your actions.]

Strictly speaking, some of these things are benefits that the Tax Man wants to tax. So some benefits that employees get should be reported to the IRS. As a non-tax person, the line between taxable and not taxable is not very clear.

Right now, frequent flyer miles that an employee earns while on a business trip are not taxable. But our travel policy specifically states that the employee is responsible for such taxes if there ever are any.

Talk to the Pros.

Comments welcome! I'd love to hear what other benefits folks are offering out there.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at

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