By Brian Bruggeman, CFP®
The business landscape has changed dramatically over the last year, emphasizing the importance for business owners to carefully weigh available options to optimize benefits and strategically position their companies for the future. Business owners should review their buy-sell agreements, estate plans, health insurance plans, retirement plans and any other employee benefits they offer. They should also look into the new COVID-19 relief bill.
Understand the New COVID-19 Relief Bill
Many business owners and advisors are currently working to fully understand the new COVID relief bill and how they might benefit. Business owners should proactively reach out to their lender and tax advisor to see if any of the changes impact them.
Some businesses will be eligible for a second draw from the Paycheck Protection Program (PPP) that could potentially be larger than their first if they are in the hospitality industry. Although the eligibility rules have changed, Congress included provisions that may allow business owners, particularly those who were shut down or partially shut down, to benefit from an employee retention tax credit.
In the CARES Act, business owners were forced to choose between the PPP and the tax credit. The new bill allows business owners to potentially benefit from both programs retroactively and moving forward into 2021. The rules are complex and business owners would be wise to seek advice from their team of advisors.
Review Buy-Sell Agreements
A buy-sell agreement typically spells out what happens to each business owner’s share of the business if they were to die, become incapacitated, or otherwise exit the business. Typically, it will also assign a value to each partner’s interest and include other provisions that work together to ensure an orderly transition.
Here is one simple example: Two business owners establish a buy-sell agreement where the business is valued at $2 million and in the event one of the owners dies, the surviving owner purchases the deceased owner’s 50% interest for $1 million. The purchase proceeds might be paid to the deceased owner’s spouse, providing him or her with liquidity while keeping the management of the business with the remaining owner. If 15 years pass and that same business is now worth $15 million dollars, the original buy-sell agreement may no longer meet the business owners’ needs. Developments such as additional owners or changing needs of the owners can easily be overlooked if the buy-sell agreement has been tucked away in a drawer for several years.
In addition, many buy-sell agreements are funded using life insurance. If the business is now worth substantially more, additional life insurance might be necessary. Overall, as time passes from when the buy-sell agreement was first put into place, it becomes more important to review it to make sure it still fits the business owners’ needs.
Review Estate Plans
The Tax Cuts and Jobs Act of 2017 roughly doubled the amount of wealth that individuals could transfer free of gift or estate tax from around $6 million to $12 million per individual. But in 2026, the increased exemption amount is set to revert to $6 million. Many business owners are looking at ways of locking in their increased exemption through gifting interests in their business. There are a whole host of strategies available to individuals depending on their situation, but most of them focus on reducing the value of the business for gift tax purposes and transferring that interest to the next generation.
Shop Group Health Insurance Options
Health insurance is a cost that tends to steadily increase for business owners. According to a Kaiser Family Foundation survey, the average annual employer premium contribution for family coverage was $9,773 in 2010; $12,591 in 2015; and $15,754 in 2020. Yet, many business owners do not regularly shop for coverage. We’ve seen instances where employers who hadn’t shopped in several years reduced their premiums by 30% to 40% though exploring different options and proposals.
One option that is gaining popularity is an individual coverage health reimbursement arrangement (HRA). With an HRA, employers pay a certain dollar amount to employees, and the employees search for coverage on their own. The difference between traditional health insurance coverage and an HRA is like the comparison between a pension plan and a 401(k). With an HRA and a 401(k), the burden and the cost of selecting a plan is shared between the employer and employee, and there are more options for employees to consider.
Evaluate Your Group Retirement Plan
In addition to health insurance, it’s important for business owners to evaluate retirement plan offering(s). This year, it’s especially crucial, given proposed changes that could impact both employers and employees. For example, President-elect Biden has proposed plans that address an “automatic 401(k)” as well as potential tax credits for small businesses related to establishing a plan. While we await news and developments here, there are steps you can take to ensure you are getting a good deal from your 401(k) provider. BrightScope is one resource that can help. It evaluates 401(k) plans based on factors including fees and compares them to plans for similar-sized companies.
Consider Other Employee Benefits
Outside of healthcare and retirement plans, there are additional employee benefits business owners can consider. Benefits related to childcare are particularly relevant, with many parents adjusting to a changing work environment. One potential consideration here is a dependent care flexible spending account (FSA). It’s important to note that these accounts are separate from healthcare FSAs. With dependent care FSAs, individuals or married couples who file taxes jointly can contribute up to $5,000 pre-tax per year to use toward childcare.
Taking a step back and looking more broadly at employee benefits, it’s important to talk with your human resources department to go over the suite of options your business provides. You may want to also survey your employees to see what potential benefits are attractive to them. Providing a very comprehensive health insurance plan to your workforce that consists mostly of younger employees might miss the mark. It’s also important that those employees understand what is already available to them. While the benefits discussed here are just some of the key items to review in 2021, they are good items to make a note to review each year. Working with a financial advisor can help you address these items from a financial planning standpoint and expand your checklist as you navigate the new year.
About the author: Brian Bruggeman, CFP®
Brian Bruggeman, CFP®, CTFA, is vice president and director of financial planning at Baker Boyer in Walla Walla, Washington. He has over 10 years of experience in financial services and expertise in estate planning, individual income tax, behavioral finance, portfolio construction, retirement planning, financial technology and financial industry practice management. Brian works with high-net-worth and ultra-high-net-worth individuals, high-earning young professionals and business owners. Throughout his career, Brian has focused on helping clients remain confident as they work through complex financial decisions.