September 2016

ERISA Basics for Employers

Posted on September 29, 2016July 23, 2024 by Debra Barcuch

ERISA Basics for Employers

If you’re a U.S. employer and you offer any kind of pension benefit to your employees, it’s critical that you have an understanding of the Employee Retirement Income Security Act of 1974 (ERISA). The failure to know and fulfill your obligations and responsibilities under the landmark law may lead to significant liability.

Background and Origin

ERISA established a set of standards and rules that regulated the pension industry and how employers provide retirement benefits to their workforces. The law allows favorable tax treatment for money contributed to pension plans, but it also sets forward a series of requirements as well. Specifically, to qualify for favorable status under ERISA, a plan can’t discriminate entirely in favor of executives and management, and it must extend such benefits to rank-and-file employees.

Pensions

ERISA doesn’t require employers to provide pension benefits at all. But if a pension is offered, for it to qualify for ERISA protection, it must meet a number of demands. Among them:

Employees’ pensions must vest to their benefit within a certain number of years.
Employers must keep defined benefit pensions sufficiently funded to meet expected benefits, based on the actuarial assumptions in the plan.
Income benefits for married couples must be calculated on the joint life expectancy of the couple, not just on the life expectancy of the employee — unless both spouses waive the requirement in writing.

ERISA also created the Pension Benefit Guaranty Corporation (PBGC). This is a quasi-government entity that acts as a backstop for pensions that run into financial trouble and serves to provide workers some security against the possibility of the failure of a pension plan.

All qualified pensions in the country must pay an insurance premium to the PBGC. If a covered pension plan becomes insolvent, the PBGC steps in, takes over the assets and ensures that workers in the plan receive promised benefits, up to certain monthly limits.

Requirements

Employers who provide ERISA-qualified pension plans must file a form 5500 with the Department of Labor. This includes both defined benefit (traditional) pension plans and defined contribution pension plans like the popular 401(k).

You must also provide every employee beneficiary or participant with a plan summary on request. This includes calculations of vested benefits and accrued balances and income benefits.

The Fiduciary Standard

ERISA established a fiduciary standard for plan sponsors, trustees and administrators. This means that those sponsoring or in charge of a plan or its assets are held to the highest standards of conduct, fair dealing and utmost good faith recognized in U.S. law. This is critical, because if plan sponsors fail to understand and abide by their responsibilities as plan fiduciaries, it could lead to significant civil liability and federal fines.

As a fiduciary, your responsibilities include:

Acting solely in the best interests of plan participants and their beneficiaries
Exercising prudence in carrying out your responsibilities
Avoiding any unreasonable plan expenses
Making investment and administrative decisions in accordance with plan documents
Diversifying investments

Health plans

ERISA also affects the administration of employer health plans. Specifically, to qualify for a full deduction of premiums paid on behalf of employees, the employer must extend benefits and eligibility not just to executives but also to all full-time employees.

A later amendment to ERISA, the Consolidated Omnibus Budget Reconciliation Act (commonly known as COBRA), requires employers to provide limited continuation health insurance coverage to all employees who leave service.

For more information about your obligations and responsibilities under ERISA, contact your employee benefits specialist at Cornwell Jackson.

Time to Audit Your Receiving Dock

Posted on September 27, 2016 by Debra Barcuch

Receiving Dock Audit, Manufacturing Audit

The receiving dock is an often-neglected cash leak for manufacturers. Shipment delays, poor labeling and confusing packaging can severely slow production and cut your profitability.

Take a hint from retailers: Set up a standardized vendor compliance program.

Start by talking with your receiving employees for suggestions on what can be done to speed up the process. Some of the steps retailers take that you can consider are:

Itemizing products and quantities before they arrive with advanced shipping notices.
Demanding that deliveries are made on the day and at the time specified on the order.
Sticking a packing slip on the lead carton.
Packing products in cartons and on pallets that fit storage racks.
Shrink-wrapping and packing on pallets of all cartons above a certain number or weight.

Retailers don’t stop there. They also impose fees for shipping violations on the grounds that they incur costs when a vendor fails to meet standards or deliver as promised. For example, one retailer charges $100 for shipping by the wrong carrier, plus the freight differential.

Improved labeling can also cut your costs. Ways to accomplish this include:

Standardizing the spot on cartons and pallets where labels are applied.
Conforming all the data on labels.

You may find room for improvement on your labels. General Motors, for example, developed the 1724a label, which uses a PDF-418 symbol to encode the part number, quantity, carton weight, distribution and handling data, and shipment information as well as a serialized container license number. The license number lets staff track contents back to the production line.

Once you’ve established your needs, present your program to your vendors. Some negotiation is inevitable, particularly if you’re asking them to make changes.

Then, set up a trial period to evaluate how well the program works and what adjustments might be needed. The trial period also gives vendors time to get up to speed.

By standardizing shipments, you can:

Unload trucks faster.
Clear the docking area quicker.
Maximize your use of storage space.
Cut the time it takes to get materials onto the production line.

Check with your accounting team at Cornwell Jackson. They may have additional suggestions for putting a program into place that can strengthen your bottom line.

Got Questions about the New Overtime Rule?

Posted on September 26, 2016July 23, 2024 by Debra Barcuch

The Department of Labor’s Wage and Hour Division recently released some Q&As about the new federal overtime rule, which goes into effect on December 1, 2016.

Under the final rule, the standard salary level used to determine whether executive, administrative, and professional (EAP) employees are eligible to receive overtime will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) for a full-time worker.

As you know, employers are unique and have questions about what the impact may be on their industries and businesses. Here are some highlights from the Q&As:

Question	WHD Answer
Are agricultural workers affected?	They aren’t affected by the final rule, unless they qualify for one of the “white collar” exemptions.
Are blue collar workers affected?	Workers like mechanics won’t qualify for exempt status because they do not pass the duties requirements for exemption, so they are entitled to overtime pay unless another exemption applies.
What about commissioned employees working at a retail establishment?	There has been no change to the exemption for commissioned employees working at a retail establishment.
How are computer professionals affected?	The hourly salary for a computer professional to be exempt from overtime is still $27.63. However, the weekly standard salary amount will increase from $455 to at least $913 per week on December 1.
Motor carriers	Drivers, drivers’ helpers, loaders who are responsible for proper loading, and mechanics working directly on motor vehicles, which are to be used in transportation of passengers or property in interstate commerce, may be exempt from the overtime rule.
Outside sales employees	The old and new salary requirements do not apply to outside sales employees.
What about part-time workers?	The standard salary level to qualify for exemption is $913 per week on December 1. whether a worker is full-time or part-time.
Are employees with J-1 visas included?	The new rule applies to foreign nationals in the U.S. with J-1 visa status such as alien physicians and research scholars.
What about a seasonal business that is only open, say, eight months a year?	During the eight-month period, the employer would need to guarantee that at least $913 per week is paid to an employee exempt from receiving overtime. The employer needs to be concerned with the $913 weekly threshold, not the $47,476 annual threshold.
What’s the difference between discretionary and non-discretionary bonuses — and how are they affected by the new rule?	The final rule allows employers for the first time to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level. Non-discretionary bonuses and incentive payments are forms of compensation promised to employees, for example, to induce them to work more efficiently or to remain with the company.By contrast, discretionary bonuses (may not be used to satisfy up to 10% of the standard salary level test) are those for which the decision to award the bonus and the amount is at the employer’s sole discretion and not in accordance with any pre-announced standards. An unannounced holiday bonus is a discretionary bonus, because the bonus is entirely at the discretion of the employer, and therefore may not satisfy any portion of the $913 standard salary level. A non-discretionary bonus applies to the quarter it is paid rather than the period it relates to. An employer may make one final catch-up payment sufficient to achieve the required level no later than the next pay period after the end of the quarter.
What are some ways that an employer can comply with the new overtime rule?	Employers have a range of options. For each affected employee newly entitled to overtime, they may: Increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status; Pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked; Reduce or eliminate overtime hours; Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or Use some combination of the options above.
Can free housing be used to meet the minimum salary threshold?	For executive, administrative, and professional employees to qualify for exemption from overtime, an employee must earn the minimum salary amount “exclusive of board, lodging, or other facilities.” The phrase “exclusive of board, lodging, or other facilities” means “free and clear” or independent of any claimed credit for non-cash items of value that an employer may provide to an employee.
The rules are different in my state. What should my business do?	The federal Fair Labor Standards (FLSA) doesn’t prevent a state from establishing more protective standards. If a state has a more protective standard than the FLSA, the higher standard applies there. To the extent the new minimum salary amount of $913 per week under the final rule is higher than the state requirement, the employer in that state must comply with the higher standard and pay not less than $913 per week to an exempt white collar employee.
Are comp time programs still allowed? Meaning that any hours over 40 can be banked to use later to either take time off or maybe get paid at end of year at straight time?	Only employers that are public agencies under the FLSA (for example, a state government) can provide comp time in lieu of overtime premium payments.
Do teachers fall under the new rule?	Special rules apply to teachers. Here’s some guidance.
What are the penalties for non-compliance of the new overtime rule?	Under the FLSA, employers in violation of the law may be responsible for paying any back wages owed to their employees, as well as additional amounts in liquidated damages, civil money penalties, and/or attorney fees.

These questions only cover some of the provisions of the new overtime rule. Time is running out for employers to understand what will be expected as of December 1. For more information in your situation, contact your payroll advisor.

Your Company May Benefit from a PTO Bank

Posted on September 26, 2016July 23, 2024 by Debra Barcuch

PTO Bank

WorldatWork, the HR professional society, has been surveying its members for over a decade on this topic. In its most recent “Paid Time off Programs and Practices” report, within some demographic groups, a majority of employers now merge those paid time off (PTO) components. That creates a “combined bucket of available days to be used by employees … at their own discretion.” One benefit of this approach is that employers are no longer put in a position to have to judge whether leave is used appropriately.

Specifically, 51% of privately held companies have jumped on the PTO bank train. In the health care and “social assistance” industry sector, 79% of those surveyed have embraced this plan. In contrast, just over one-third of manufacturers are using PTO banks, so far.

Use of PTO banks also varies considerably by employer size. Here’s an overview.

Among employers having fewer than 100 workers, about 59% use PTO banks.

For employers in general, about half use PTO banks. This takes in all sizes of companies, except one.

In that one category, defined as 10,000 to 19,000 employees, more than two-thirds use PTO banks. Growing Prevalence

Overall the choice to use this method of distributing paid time off is growing. A decade ago, only one in three companies used it, while today the overall figure is 43%. Of those surveyed more than one in four are at least considering a move to this system.

Here are the primary motivations for the employers that have already made the switch, and how frequently they were identified, according to the survey:

1. Greater flexibility for employees (63%),

2. Ease of administration (55%),

3. The ability to stay competitive with other companies (29%),

4. Reduced absenteeism (23%),

5. Improved employee morale (22%), and

6. Increased cost effectiveness (20%).

Although reducing absenteeism ranked fourth on that list, it’s noteworthy that 41% of survey respondents reported reduced absenteeism after a PTO program was adopted. That led researchers to believe the drop in absenteeism might be most dramatic right after the program was implemented.

Also noteworthy in the survey is the fact that employers using PTO banks, on average, give employees fewer total paid days off, than those that set individual limits for vacation, sick leave and personal days. As with traditional vacation policies, PTO bank policies allow more paid days off as employee tenure increases.

The accompanying table tells the story.

Average Number of Days Off by Paid Time Off Policy	Traditional	PTO Bank
< 1 year of service	20	16
1-2 years of service	23	17
3-4 years of service	24	18
5-6 years of service	28	22
7-8 years of service	28	22
9-10 years of service	29	23
11-15 years of service	32	25
16-19 years of service	34	26
20+ years of service	37	27
Source: 2016 WorldatWork Paid Time Off Programs and Practices Survey

Few employers vary their paid time off policies by employee rank, job classification, worksite or department.

Additional PTO Uses

A handful of employers with PTO bank policies expect workers to use their PTO allotments for certain purposes beyond vacation, personal days and sick days. Examples include:

Generally recognized federal and state holidays
Bereavement
Jury duty

On the other hand, a large number of companies that use PTO banks expect employees to use their paid time off hours for parental leave and to do volunteer or community work.

Nearly one-fifth of employers offer family leave benefits that are more generous than that required by the Family and Medical Leave Act (FMLA) and local laws (if applicable). Some do so by keeping such employees on the payroll when they aren’t required to do so. Common “beyond FMLA” family leave benefits include offering:

A longer duration of job-protected leave,
Leave for “a broader set of new-parent circumstances” than required by law, and
Leave with fewer administrative and documentation requirements.

Who’s Eligible?

Employers with those more-generous-than-required time off policies for new parents generally did not distinguish between benefits for mothers, fathers or adoptive parents. Nearly three-fourths also offered them to domestic partners of parents, and about half did so for foster parents.

Whether a PTO bank policy is appropriate for your organization will depend on your employee demographics, human resource philosophy and how you feel about policing the reasons why employees miss work.

A first step in examining whether instituting such a policy makes sense — assuming you haven’t already done so — might be comparing your total average employee days away from work to the average PTO allowances (by employee tenure) revealed in the WorldatWork survey. If the number is higher, and you don’t have an unusually unhealthy workforce, it might be a good idea to give the PTO bank concept a careful look.

Tax Hang-Ups for Employee Cell Phone Use

Posted on September 23, 2016 by Debra Barcuch

Employee Cell Phone Use

It’s hard to imagine life without cell phones.

These devices have become essential for just about everyone, and in particular many businesses, whose employees are often required to use one.

But in the cases of companies, there are tax ramifications that depend on whether the firm or the employee owns the phone. Strict substantiation requirements have been removed, so it’s easier for employer-provided cell phones to qualify for tax-free treatment. Otherwise, your firm’s payroll professionals will report amounts as taxable income to employees.

In some cases, employees occasionally will use a personal cell phone for business purposes, mainly for their convenience. There’s nothing wrong with that, but this article is devoted to times when employees are required to use cell phones for their jobs. (Employees paying their own costs may be eligible for miscellaneous expense deductions on their personal tax returns.)

2 Ways to Go

Assuming that cell phone use is part and parcel of the job, the starting point is to decide who owns the phones, employer or employee. Generally there are advantages to your company to furnishing cell phones for business use. It helps to keep a lid on costs, protect confidential information and it offers legal advantages. But this route may still be full of problems. With that in mind, here are the two most common ways to approach the issue:

1. Employer-owned cell phones. You call the shots on the plan being used. In other words, you pay only what you think the company needs based on the job. This includes voice, text and data services. Typically, but not always, business rates are lower than those for personal cell phone plans.

What’s more, you will own the phone numbers, so you are less likely to miss important calls if an employee leaves the company.

Also, remember that you are often responsible for client data. This is a critical legal issue. By owning the cell phones, you can set passwords and use applications for greater protection. Conversely, if employees own their cell phones, it’s more likely that problems will occur, especially when they control decisions on carriers and services.

Finally, if you purchase phones for employees, tech support will be simplified. It’s recommended that you use a single platform for a small-to-midsized business. This will further improve security and reduce exposure to outside hackers.

2. Employee-owned cell phones. Despite the advantages outlined above, owning cell phones is not always a slam-dunk for employers. Consider the following:

Cost. Employee-owned phones may be less costly for employers, particularly if the employee has a family plan, or a spouse’s employer covers the entire cost. When analyzing the costs, be sure to take all the relevant factors into account.
Personal use. Face it — the phones belong to the employees and they will be using them for personal reasons. If you’re uncomfortable with that, you might choose to reimburse employees for business use. Besides, do you really expect employees to carry two phones?
Data use. Personal use may push employees over the allotment. That means a line-by-line examination of the bills will be necessary.
Deactivation. If a departing employee refuses to give up a company-provided phone, you’ll have to take steps to deactivate it and re-route the number to another person. This hassle won’t exist with employee-owned phones.
Usually, employers reimburse employees for substantiated business use, but not for personal use. As an alternative, you could use another form of reimbursement, such as a flat monthly amount of $50 or $100. If an employee doesn’t have a cell phone and can’t afford to buy one, you could arrange to pay for the phone initially and have the employee take over the payments at a later time.

Tax Consequences of Reimbursements

The Small Business Jobs Act made it easier to qualify for tax-free treatment. The IRS explained the basic guidelines in Notice IR-2011-93. As long as certain requirements are met, the value of employer-provided cell phones or reimbursements may be treated as a “working condition fringe benefit.”

But this tax break isn’t automatic. To qualify, the cell phones must be provided to employees for “noncompensatory business reasons.” In other words, there must a bona fide business purpose. The tax exclusion is extended to employer-paid cell phone plans.

The IRS provides three common examples of noncompensatory business reasons.

1. The employer must be able to contact the employee at all times for work-related emergencies,

2. The employer requires the employee to be available to speak with clients or customers at all times when away from the office, or

3. Employees must speak with clients located in other time zones at times outside the regular work time.
If the employer reimburses employees with personal cell phones for business use, it can count as a noncompensatory business reason. However, the amounts must be limited to the cell phone charges. Any excess should be returned to the employer or it will be treated as taxable compensation. Rely on your payroll providers to determine the taxable value.

Also, the value of personal use of an employer-provided cell phone used primarily for noncompensatory business reasons is a tax-free de minimis fringe benefit, provided such use is minimal.

In a memorandum to examiners, the IRS outlined an administrative approach for small businesses that provide cash allowances and reimbursements. Employers that require employees to use personal cell phones primarily for noncompensatory business reasons may treat reimbursements as being tax-free.

If there isn’t a noncompensatory business reason for cell phone use, the value is reported to the IRS as taxable income. Employees may owe tax, which is relatively small, but otherwise they get the phone for free. You may want to set up this arrangement when you want to:

Boost morale among employees,
Encourage new-hires,
Add to the compensation of employees, or
Reimburse or pay international coverage for a service technician with only local clients or customers.

IRS examiners have been instructed to ferret out reimbursement arrangements that appear out of the norm. For example, reimbursements that are substantially back-loaded to the end of the year could be disguised compensation. Consult with your Cornwell Jackson payroll provider to determine which route your company should take to avoid any problems.

Buy America Rules May Be Harsh On Federal Construction Contractors

Posted on September 22, 2016July 22, 2024 by Debra Barcuch

Federal Construction Contractors

Many people support the ideal of buying American-made products. That’s reflected in marketing that appeals to our patriotism. In addition, certain laws and regulations govern federal contractors and “Made in the USA” business activity. And during this election year, there’s an emphasis on supporting American businesses.

However, what could be a boon for certain sectors could hinder others. According to some observers, the construction industry is a prime example of an industry that could be hurt.

Federal Restrictions

Buy America features are prominently spotlighted in three areas of federal legislation:

1. Buy American Act. This federal law was passed during the Great Depression and has been modified and updated several times over the years. But its main thrust remains the same — that the U.S. government give preference to U.S.-made products in its purchases.

Currently, the law requires that more than half (at least 51%) of the components of a product be made within the borders of the United States. In addition, the product must be substantially transformed in some way, shape or form by laborers in this country.

Although federal government contractors generally must comply with the Buy American Act, there is an out. Under the Government Procurement Agreement (the GPA), signatory countries of the World Trade Organization, of which the United States is one, can treat products made in other GPA countries as homegrown if they satisfy a minimum value threshold. For instance, a U.S. company can take advantage of that exception if a federal contract is valued at $5 million or more.

There are ways to get waivers but you can’t just say, “It costs too much” (see box below).

2. Buy America Act, which is part of the Surface Transportation Assistance Act, not to be confused with the Buy American Act described above. This legislation is a highway spending bill that includes requirements for federal government contractors to buy in the United States. The provision applies to certain projects financed by the U.S. Department of Transportation, and typically involves purchases of iron and steel, although it may include other manufactured goods.

“Buy America provisions ensure that transportation infrastructure projects are built with American-made products,” explained Secretary of Transportation Anthony Foxx.

The standards in this law are very tough. Notably, made in America generally means that 100% of the components used must be melted, poured, shaped and coated in a U.S. steel mill. Currently, there are fewer than a dozen of these “integrated” steel mills in the country. All of them are in the eastern part of the country and some don’t produce construction materials.

Another difficulty for some contractors is that the law precludes the use of GPA products.

3. Environmental protection regulations. Rules pertaining to the Environmental Protection Agency (EPA) also cast a giant shadow over the construction industry. For instance, the EPA’s American Iron and Steel rule applies to products such as manhole covers. Recipients of assistance from the Clean Water State Revolving Fund and the Drinking Water State Revolving Fund are required to use iron and steel products produced domestically. This applies to the construction, alteration, maintenance, or repair of a public water system or treatment works.

Observers in the industry have complained that while buying domestically-produced materials is a popular message, the broad scope of the governance ignores the reality of today’s global economy.

Impact on Construction

The rules may hurt construction firms in several ways:

As in the case of integrated steel mills, companies may wind up vying to show which one is more patriotic. Moreover, when a construction firm needs steel for a project, it may have to use a mill on the other side of the country. This increases shipping costs and other tangential expenses,

Requiring domestically sourced materials may affect trade relationships with other countries. As an example, even our strongest trading partners, such as the European Union and Canada, might restrict purchases of U.S. products in kind.

Projects may be delayed or even halted. Recently, a high rail system planned between Las Vegas and Los Angeles was scuttled because of plans to use railroad cars made in China. (There are exceptions for certain “rolling stock” items like railroad cars, but they still must be produced 60% in the United States.) Special attention should be paid to the “red tape” associated with the EPA regulations. First, construction firms must determine which rules apply to them and to what extent. Second, they must adopt procedures to ensure that they meet the requirements and then spend time and money on execution and supervision.

Government contractors may hire outside professional help, including legal counsel. And while this can remove many of the headaches, it adds to costs.

Yet another compliance problem can occur when obtaining manufacturer certifications that the products or materials were actually made in America. In a classic example, the Metropolitan Transportation Authority of New York City had to rip out and replace a fire suppression system that was part of a renovation when it found that some of the components originated in Finland. This happened even though the contractor had certification that it was an American-made system.

Looking to the Future

Barring any significant changes after the presidential election, contractors are likely to have to follow these rules for the foreseeable future. If anything, the buy America theme is picking up more steam and has much political support. So consult with your advisors for help devising was to remain compliant and cope in a cost-efficient manner.

Waivers May Be Obtained

Federal government contractors may be able to obtain a waiver from the requirements of the Buy American Act and the Buy America Act to use domestic material if their application has certain elements including:

1. They’re unreasonably expensive.

2. They aren’t available in sufficient quantity or volume.

3. They aren’t within the public interest. Requirements may also be waived by the President or a delegated authority, to support reciprocal agreements with other countries in the Trade Agreements Act, the North American Free Trade Agreement and the World Trade Organization.

Here’s a fact sheet about the requirements and available waivers from the U.S. Department of Transportation.

The Federal Trade Commission’s “Made in USA” Policy

The Buy American Act and the Buy America Act should not be confused with the Federal Trade Commission’s (FTC’s) “Made in USA” policy, which applies to all businesses — not just federal government contractors.

The FTC Act gives the commission the power to bring law enforcement actions against false or misleading claims that a product is of U.S. origin. Generally, the FTC requires that a product advertised as “Made in USA” be “all or virtually all” made in the United States. That means the product should contain no (or negligible) foreign content.

20 Questions that Underscore the State of U.S. Manufacturing

Posted on September 21, 2016 by Debra Barcuch

u-s-manufacturing

The manufacturing sector in the U.S. is in a strong position as it heads toward the close of 2016.

It has been one of the lone bright spots in a lengthy economic recovery, creating more economic value and supporting more new jobs than any other sector. And it attracts significant investment from overseas.

To highlight the current state of the sector, the National Association of Manufacturers (NAM) assembled data from a variety of sources. The following list of economic questions is adapted from the NAM’s Top 20 Facts About Manufacturing.

How much does manufacturing contribute to our economy?

Quite a lot. According to the most recent data available, manufacturers contributed $2.17 trillion to the U.S. economy in 2015, up from $1.70 trillion in the second quarter of 2009, the end of the Great Recession. During that same time, value-added output from durable goods manufacturing grew from $0.87 trillion to $1.18 trillion; nondurable goods increased from $0.85 trillion to $0.99 trillion. In 2015, manufacturing accounted for 12.1% of U.S. gross domestic product (GDP). (Bureau of Economic Analysis.)

How much does the sector add to the American economy?

For every $1 spent in manufacturing, $1.81 is added to the economy. That’s the greatest multiplier effect of any economic sector. In addition, for every worker in manufacturing, another four are hired elsewhere. (NAM calculations using economic impact modeling.)

How large are most manufacturing companies?

Actually, they’re quite small. In the most recent data, there were 251,857 firms in the manufacturing sector in 2013, with all but 3,702 firms considered to have fewer than 500 employees. Three-quarters of those firms had fewer than 20 employees. (U.S. Census Bureau, Statistics of U.S. Businesses.)

What’s the business structure of most manufacturers?

Nearly two-thirds (65.6%) of manufacturers are organized as either S corporations or partnerships. When self-employed manufacturers are added to the mix, the percentage rises to 83.4%. (Internal Revenue Service, Statistics of Income.)

How many workers are employed in manufacturing?

Currently, there are 12.3 million manufacturing workers in the United States, accounting for 9% of the workforce. There are 7.7 million workers in durable goods manufacturing and 4.6 million workers in nondurable goods manufacturing. (Bureau of Labor Statistics.)

How much do those workers earn?

In 2014, the average manufacturing worker earned $79,553 a year, including pay and benefits. In wages alone, they earned nearly $26 an hour. The average worker in all industries earned $64,204. (Bureau of Economic Analysis, Bureau of Labor Statistics.)

Do most manufacturers provide health benefits?

Yes, 92% of manufacturing employees were eligible for health insurance benefits in 2015. This is significantly higher than the 79% average for all U.S. companies. Of those who are eligible, 84% participate in their employer’s plan (the take-up rate). There are only two other sectors with higher take-up rates: government (91%) and trade, communications and utilities (85%). (Kaiser Family Foundation.)

How has manufacturing growth compared with other business sectors over the past few decades?

Manufacturers have experienced enormous growth, becoming more “lean” in the process and more competitive globally. Worker output per hour has increased more than 2.5 times since 1987. In contrast, productivity is roughly 1.7 times greater for all non-farm employers.

Durable goods manufacturers have seen even greater growth, almost tripling labor productivity over the same time frame. This growth has pushed down unit labor costs 8.4% since the end of the Great Recession, with even larger declines for durable goods makers. (Bureau of Labor Statistics.)

What is the expected demand for manufacturing workers in the next decade?

It’s likely that almost 3.5 million manufacturing jobs will be needed. In fact, 2 million jobs likely won’t be filled due to a skills gap. According to a recent report, 80% of manufacturers see a moderate or serious shortage of qualified applicants for skilled and highly skilled production positions. (Manufacturing Institute.)

How do exports affect manufacturing jobs?

Favorably. Jobs supported by exports pay, on average, 18% more than other jobs. Furthermore, employees in the most trade-intensive industries earn an average pay of nearly $94,000 — more than 56% higher than in firms less engaged in trade. (MAPI Foundation, using data from the Bureau of Economic Analysis.)

How fast have U.S. exports grown?

They’ve quadrupled over the past 25 years. In 1990 exports totaled $329.5 billion in goods. That number doubled by 2000 to $708 billion and hit a record $1.403 trillion in 2014, despite slowing global growth.

That was the fifth record in a row. Since then, however, economic problems have damped demand, and exports are down 6.1% in 2015 to $1.317 trillion. (U.S. Commerce Department.)

Where are U.S. goods shipped?

Since 1990, exports have grown substantially to the country’s largest trading partners, including Canada, Mexico and China. Also, free trade agreements (FTAs) have become an important factor in opening markets. The United States showed a $12.7 billion manufacturing trade surplus with its FTA partners in 2015. (U.S. Commerce Department.)

How much in manufactured goods is exported to countries that have FTAs with the United States?

Almost half. In 2015, U.S. manufacturers exported $634.6 billion in goods to FTA countries – 48.2% of the total. (U.S. Commerce Department.)

How much has global trade of manufactured goods expanded since 2000?

It more than doubled between 2000 and 2014 — from $4.8 trillion to $12.2 trillion. World trade in manufactured goods greatly exceeds that of the U.S. market for those goods. Domestic consumption of manufactured goods (domestic shipments and imports) equaled $4.1 trillion in 2014, about 34% of total global trade. (World Trade Organization.)

How strong is the manufacturing economy in the United States?

Taken alone, U.S. manufacturing in the United States would be the ninth-largest economy in the world. With $2.1 trillion in value added from manufacturing in 2014, only seven other nations rank higher in terms of GDP. (Bureau of Economic Analysis, International Monetary Fund.)

What about investments from foreign sources?

In 2014, foreign direct investment (FDI) in manufacturing exceeded $1 trillion for the first time. Between 2005 and 2014, FDI has more than doubled from $499.9 billion to $1.05 billion. That figure is expected to continue to grow, particularly as several announced ventures come online. (Bureau of Economic Analysis.)

How many U.S. workers are employed by foreign manufacturers?

Affiliates of foreign multi-national enterprises employ more than 2 million workers in the United States — almost one-sixth of total manufacturing employment. In 2012, the most recent year with data, sectors with the largest employment from foreign multi-nationals included:

Motor vehicles and parts (322,600),
Chemicals (319,700),
Machinery (222,200),
Food (216,200),
Primary and fabricated metal products (176,800),
Computer and electronic products (154,300), and
Plastics and rubber products (151,200).

(Bureau of Economic Analysis.)

What effect has manufacturing on innovation?

U.S. manufacturers drive innovation more than any other sector, performing more than three-quarters of all private-sector research and development (R&D) in the nation. R&D in manufacturing has increased from $126.2 billion in 2000 to $229.9 billion in 2014. In the most recent data, pharmaceuticals accounted for nearly one-third of all manufacturing R&D. That amounted to spending of $74.9 billion. Aerospace, chemicals, computers, electronics and motor vehicles and parts were also significant contributors. (Bureau of Economic Analysis.)

How does manufacturing affect energy consumption?

Manufacturers consume more than 30% of the nation’s energy. Industrial users consumed 31.5 quadrillion BTU of energy in 2014, 32% of the total. (U.S. Energy Information Administration, Annual Energy Outlook 2015.)

How has regulation affected manufacturing?

This has become a critical issue. The cost of federal regulations falls disproportionately on manufacturers, especially smaller firms. On average, manufacturers pay $19,564 per employee to comply with federal regulations, nearly double the $9,991 per employee cost for all firms. Small manufacturers with fewer than 50 employees spend 2.5 times the amount of large manufacturers. Environmental regulations account for 90% of the difference in compliance costs between manufacturers and the average firm. (Crain and Crain 2014.)

Watch Out for Fake ACA-Related Tax Bill E-mails

Posted on September 19, 2016 by Debra Barcuch

Hand writing the text: IRS Scam

In a new alert, the IRS warned taxpayers to be on guard against bogus emails telling recipients that they owe money for taxes related to the Affordable Care Act (ACA). The IRS has received numerous reports from around the country about scammers sending a fraudulent version of CP2000 notices for tax year 2015. The scam usually includes a fake CP2000 as an attachment to the email.

What Is a CP2000?

A CP2000 notice is mailed by the IRS to a taxpayer if income reported from third-party sources (such as an employer) doesn’t match the income reported on the person’s tax return. It is sent through the United States Postal Service and is never sent as an email.

Importantly, a CP2000 notice isn’t a bill. It informs a taxpayer about an issue and how it affects an individual’s tax situation. The notice contains instructions on what a taxpayer should do if he or she disagrees with the information. It also requests that a check be made out to “United States Treasury” if the taxpayer agrees additional tax is owed. Or, if an individual is unable to pay, the notice provides instructions for payment options, such as installment payments.

What Does the Fake CP2000 Notice Email Say?

Here are some other aspects of the fake emailed CP2000s:

The fraudulent CP2000 notice included a payment request that taxpayers mail a check made out to “I.R.S.” to the “Austin Processing Center” at a Post Office Box address. This is in addition to a “payment” link within the email itself.
They appear to be issued from an Austin, Texas, address.
The underreported issue is said to be related to the ACA requesting information regarding 2014 coverage.
The payment voucher lists the letter number as 105C.

Scams Take Many Forms

This scam is just the latest in a long series of IRS impersonation schemes. They can involve threatening telephone calls, phishing emails and demanding letters. If you receive this scam email (or others), you should forward it to phishing@irs.gov and then delete it from your email account.

You should beware of any unsolicited emails, phone calls and other communications purported to be from the IRS or any unknown source. Never open an attachment or click on an email link sent by sources you don’t know. Contact the tax team at Cornwell Jackson if you have questions.

ACA and the Small Employer vs. Large Employer Challenge

Posted on September 14, 2016July 23, 2024 by Debra Barcuch

When it comes to Affordable Care Act compliance reporting of eligible employee health coverage for the 2016 tax year, the difference between a small employer and an applicable large employer (ALE) isn’t so clear-cut.

ALEs are defined as organizations with 50 or more employees in the previous year, including full-time equivalent employees. However, the IRS considers subsidiaries or related entities with fewer than 50 employees to be part of the parent company when defining an ALE. Bottom line: the parent and its related entities are all subject to ACA reporting.

Then there are self-insured employers, which are basically regarded as insurance companies by the IRS. These employers are required to submit Form 1095 regardless of the number of people they employ or provide with health care insurance.

In addition to proper reporting, self-insured employers are subject to two fees as part of the ACA that are adjusted annually and have different deadlines for payment. The Transitional Reinsurance fee is paid into a federal fund that could provide reimbursements for insurance carriers that experience financial losses when participating in federal- or state-sponsored health care exchanges. The Patient-Centered Outcomes Research Institute Fee (PCORI) goes toward research of care outcomes and practices at various health care organizations; the goal is to create a central federal database to help patients make the best choices for health care. Although the Transitional Reinsurance fee is expected to go away after 2016, the PCORI fee will continue in 2016 with an expected sunset for plan or policy years ending on or after October 1, 2019.

Plan ahead to avoid penalties later.

Especially for small entities of large employers, Form 1095 can be confusing when listing the proper legal entity that employs each eligible employee. Listing the parent company or the name most people recognize as the company name can trigger a filing rejection. The same goes for the choice of address and a corresponding employer identification number (EIN), a number assigned by the IRS to identify employer tax accounts. Entities that don’t have an EIN have to request one from the IRS in order to complete Form 1095 properly.

In addition, revised Department of Labor overtime rules that go into effect December 1, 2016, could hinder proper reporting as the number of employees eligible for health care coverage shifts. Employers that choose to bump up salaries for key employees may end up increasing the number of eligible employees. Alternatively, maintaining a larger number of part-time or non-exempt employees could lead to higher levels of overtime pay.

Employers that choose payroll outsourcing and knowledgeable benefit brokers can get support to plan ahead for ACA reporting. They can confirm whether or not the employer (or any affiliated entities) is subject to ACA reporting. Then, their advisors can help improve payroll administration and coordinate a schedule for collecting and reporting data by the January 31, 2017, filing deadline. Employers can face penalties for noncompliance with ACA requirements as well as for missing tax forms — risks that can be mitigated when benefits brokers, CPAs and payroll administration cooperate early in the year.

What if you don’t have to comply with ACA for 2016?

Small employers that are not yet required to either provide affordable health care coverage or report on coverage under ACA can eventually fall under requirements if employment hits 50 employees (or fte) or if they merge or are acquired. Working closely with an ACA compliant payroll provider, benefits broker and your CPA can help your company prepare to respond to those changes in the future.

Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.comor 972-202-8000.

Sharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements.

It’s Time to Review Your Financial Planning Options

Posted on September 13, 2016 by Debra Barcuch

Fall is a good time to pause and review your financial planning strategy. A lot can happen in a year. If your personal life, market conditions or tax laws have changed, you may need to revise your long-term financial plans. Here are some retirement and estate planning considerations that may be worthwhile.

IRS Proposal Threatens Discounts on Transfers of Family-Owned Business

For years, proactive taxpayers have used family limited partnerships (FLPs) and other family-owned business entities in estate planning. If properly structured and administered, these estate-planning tools allow high net worth individuals to transfer their wealth to family members and charities at a substantial discount from the value of entities’ underlying assets. Examples of assets that may be contributed to an FLP include marketable securities, real estate and private business interests.

Important Note. The FLP must be set up for a legitimate purpose (such as protecting assets from creditors and professional-grade asset management) to preserve valuation discounts.

Valuation discounts on FLPs relate to the lack of control and marketability associated with owning a limited partner interest. These interests are typically subject to various restrictions under the partnership agreement and state law.

The IRS has targeted FLPs and other family-owned businesses in various Tax Court cases. To strengthen its position in court, the IRS issued a proposal in August that could significantly reduce (or possibly eliminate) valuation discounts for certain family-owned business entities. Among other changes, the proposal would add a new category of restrictions that would be disregarded in valuing transfers of family-owned business interests.

If finalized, the proposed changes won’t go into effect until 2017 (at the earliest). So there still may be time to use these estate-planning tools and be grandfathered in under the existing tax rules. If you’ve been considering setting up an FLP or transferring additional interests in an existing one, it may be prudent to act before year end.

Contact your estate planning advisor for more details on this proposal — or to utilize this strategy before any new restrictions go into effect.

Roth IRAs

Do you understand the key differences between traditional and Roth IRAs? Roth IRAs can be an effective retirement-saving tool for people who expect to be in a higher income tax bracket when they retire. Here’s how it typically works.

You open up a Roth IRA and make after-tax contributions. The tax savings come during retirement: You don’t owe income taxes on qualified Roth withdrawals.

As an added bonus, unlike with traditional IRAs, there’s no requirement to start taking annual required minimum distributions (RMDs) from a Roth account after reaching age 70 1/2. So you’re free to leave as much money in your Roth account as you wish for as long as you wish. This important privilege allows you to maximize tax-free Roth IRA earnings, and it makes the Roth IRA a great asset to leave to your heirs (to the extent you don’t need the Roth IRA money to help finance your own retirement).

The maximum amount you can contribute for any tax year to any IRA, including a Roth account, is the lesser of:

Your earned income for that year, or
The annual IRA contribution limit for that year. For 2016, the annual IRA contribution limit is $5,500, or $6,500 if you’ll be age 50 or older as of year end.

If you’re married, both you and your spouse can make annual contributions to separate IRAs as long as you have sufficient earned income. For this purpose, you can add your earned income and your spouse’s earned income together, assuming you file jointly. As long as your combined earned income equals or exceeds your combined IRA contributions, you’re both good to go.

Unfortunately, your ability to make annual Roth contributions may be reduced or eliminated by a phaseout rule that affects high-income individuals. But you may be able to circumvent this rule by making an annual nondeductible contribution to a traditional IRA and then converting the account into a Roth IRA. In this indirect fashion, high net worth individuals can make Roth contributions of up to $5,500 if they’re under age 50 or up to $6,500 if they’re at least 50 and younger than 70 1/2 as of the end of the year. (Once you hit 70 1/2, you become ineligible to make traditional IRA contributions, and that shuts down this strategy.)

If you’re married, you can double the fun by together contributing up to $11,000 or up to $13,000 if you’re both at least 50 (but under age 70 1/2). There are various rules and restrictions to using this strategy, and it may be less advantageous if you have one or more existing traditional IRAs. So, consult with your tax advisor before attempting it.

Self-Directed IRAs

Self-directed IRAs expand the menu of investment options available in a typical IRA. For instance, with a self-directed IRA you may be able to include such alternatives as hedge funds, real estate and even equity interests in private companies. These types of investments often offer higher returns than traditional IRA investment options.

But self-directed IRAs aren’t a free-for-all. The tax law prohibits self-dealing between an IRA and “disqualified” individuals. For example, you can’t lend money to your IRA or invest in a business that you, your family or an IRA beneficiary controls. The consequences for self-dealing can be severe, so consult with your financial advisor before making the switch.

Deductible Losses on Underperforming Stocks

Do you own stocks and other marketable securities (outside of your retirement accounts) that have lost money? If so, consider selling losing investments held in taxable brokerage firm accounts to lower your 2016 tax bill. This strategy allows you to deduct the resulting capital losses against this year’s capital gains. If your losses exceed your gains, you will have a net capital loss.

You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment income, alimony and interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2017 and beyond.

Gifts of Appreciated Assets

Suppose you are lucky enough to have the reverse situation: You own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. Taxpayers in the 10% or 15% income tax brackets can sell the appreciated shares and take advantage of the 0% federal income tax bracket available on long-term capital gains. Keep in mind, however, that depending on how much gain you have, you might use up the 0% bracket and be subject to tax at a higher rate of up to 20%, or 23.8% when considering the Medicare surcharge that may apply.

While your tax bracket may be too high to take advantage of the 0% rate, you probably have loved ones who are in the lower tax brackets. If so, consider gifting them assets to sell.

Important Note. Gains will be considered long-term if your ownership period plus the gift recipient’s ownership period equals at least a year and a day.

Giving qualified-dividend-paying stocks to family members eligible for the 0% rate is another tax-smart idea. But before making a gift, consider the gift tax consequences.

The annual gift tax exclusion is $14,000 in 2016 (the same as 2015). If you give assets valued at more than $14,000 (or $28,000 for married couples) to an individual during 2016, it will reduce your $5.45 million gift and estate tax exemption — or be subject to gift tax if you’ve already used up your lifetime exemption. Also keep in mind that if your gift recipient is under age 24, the “kiddie tax” rules could potentially cause some of his or her capital gains and dividends to be taxed at the parents’ higher rates.

Charitable Donations

Charitable donations can be one of the most powerful tax-savings tools because you’re in complete control of when and how much you give. No floor applies, and annual deduction limits are high (20%, 30% or 50% of your adjusted gross income, depending on what you’re giving and whether a public charity or a private foundation is the recipient).

If you have appreciated stock or mutual fund shares that you’ve owned for more than a year, consider donating them instead of cash. You can generally claim a charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

If you own stocks that are worth less than you paid for them, don’t donate them to a charity. Instead, sell the stock and give the cash proceeds to a charity. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Life Changes

Have there been any major changes in your personal life, such as a recent marriage or divorce, the birth or adoption of a new child, or a death in the family? If so, you may need to revise the beneficiaries on your retirement accounts and life insurance policies. You also may need to update your will and power of attorney documents.

Life changes can be stressful, and it’s very common for these administrative chores to be overlooked. But failure to update financial plans and legal documents can lead to unintended consequences later on, either when you die or if you become legally incapacitated and need someone else to make certain decisions on your behalf.

Got Questions?

These are just a handful of financial issues to consider at year end. Your financial and legal advisors can run through a more comprehensive checklist of planning options based on your personal circumstances. Call Cornwell Jackson to schedule a meeting as soon as possible, before the hustle and bustle of the holiday season starts.

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