Planning for low-likelihood, high-impact events

Last summer, Hurricane Irene was a wake-up call for many of us as to the vulnerability of Long Island to get hit with a major disaster. But what if the disaster only hit your business? Could your business survive if you lost your most valuable asset…you or your key employees to an accident? A fire or flood can put a business out for good if it cannot recover quickly. “Up to 40% of businesses affected by a natural or human-caused disaster never reopen.” (Source: Insurance Information Institute)

Disasters don’t always come in large scales, but having a plan will improve your company’s ability to survive and recover no matter what size disaster strikes. There’s no “tailored” plan for every business or circumstance because everyone’s business is different.

Here are some ideas to start your thinking and planning:

Backup computer data systems regularly; “Off site” backups can be backed up on servers outside of the region.

Keeping apprised of community warning systems and evacuation routes.

Identify where you and your employees may seek shelter from all types of hazards.

Determine how to communicate with employees and customers in the event of an emergency.

Collect and assemble a disaster supply kit, including a portable generator.

Document Locations – Fireproof, crush-proof safe box to store crucial documents.

Cross train personnel and have the right people in place.

Document passwords and access codes to trustworthy individuals.

Review your insurance coverage and deductibles.

Types of emergencies include earthquakes, fire, electrical or other utility outages, hazardous materials spills, tsunami, and acts of terrorism or severe storms. These are all real possibilities, most without advanced notice. Remember a disaster plan exists for safety as well as business continuity.

Here are a few websites that offer free advice to emergency preparedness:

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The Patient Protection and Affordable Care Act – Individual Mandate

The United States Supreme Court issued its decision on the constitutionality of the Patient Protection and Affordable Care Act (“PPACA”) on June 28, 2012.  The court’s decision to uphold the law (with the exception of certain Medicaid provisions) protects numerous tax provisions for individuals and businesses alike.  As we await future IRS guidance on the provisions, let’s discuss some key factors of the individual mandate portion of the legislation.


Who Is Exempt?

Beginning 2014, the PPACA requires applicable individuals to carry minimum essential health coverage for themselves and their dependents or pay a penalty for each month of noncompliance. Several groups are considered exempt, such as individuals covered by Medicaid and Medicare, those with coverage under military health plans, undocumented individuals, incarcerated individuals, health care ministry members, members of an Indian tribe, and members of a religion conscientiously opposed to accepting benefits.  Additionally, no penalty will be imposed on those individuals without coverage for a period of 90 days within a one year period nor will it be imposed on individuals who are unable to afford coverage.  An individual will be treated as unable to afford coverage if the required contribution for employer-sponsored coverage or a bronze-level plan on a state exchange program exceeds eight percent of the individual’s household income for the tax year.  If an individual’s household income is below the income thresholds for filing income tax returns, they will be considered exempt as well.


What is the Penalty?

Beginning 2014, the penalty will be phased in over a three-year period with inflation increases indexed after 2016.  The penalty will generally be calculated by taking the greater of a flat dollar amount ($95 for 2014; $325 for 2015; and $695 in 2016 and later) or calculation based on a percentage of the taxpayer’s household income (1% for 2014, 2% for 2015, 2.5% for 2016 and later).  The penalty is prorated on a monthly basis.  The flat dollar amount for individuals under the age of 18 will be 50% of the aforementioned amounts.  The penalty amount cannot exceed the national average of the annual premiums of a “bronze level” health insurance plan offered through the exchange programs.



While the individual mandate has been debated immensely, it is only one provision of the PPACA.  Individual taxpayers and employers must prepare for sweeping changes in health care in coming years.  Many of the provisions in the PPACA have already been implemented while others, such as the individual mandate, are scheduled to take effect in future tax years.  Since passage of the PPACA, the IRS and the U.S. Departments of Health and Human Services (HHS) and Labor (DOL) have issued extensive guidance on the new law. The pace of guidance is expected to accelerate now that the law has been upheld by the Supreme Court.  We will continue to update our clients on the future development of the PPACA.


IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under any taxing jurisdiction or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.


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Retirement Plans for the Self-Employed

When contemplating retirement plans for their business, the self-employed have two popular options; the Simplified Employee Pension Plan (the “SEP”) and a Keogh Plan.  The Keogh Plan may be set-up as a profit-sharing plan or a money-purchase plan.  Depending upon the circumstances of the business owner, each of the Plans has significant benefits over the other.  I will try to highlight what I feel are some of the key difference for each of the Plans.

Plan Set-up:  A SEP is generally one of the easiest retirement plans to set-up.  It can be done as simply as through your bank or brokerage house, with separate accounts for each participant.  A model SEP can be established by using IRS Form 5305-SEP.  Setting up and administering a Keogh Plan is a little more complicated than a SEP and in most cases returns may have to be filed periodically (generally through a third-party administer).

An advantage of the SEP is it can be set up and funded by the tax return due date. If a business owner determines in January, for example, that a contribution to a SEP would benefit them on their prior year tax return, they may still set up and fund one before the filing of their return.  Contributions can be made after year-end to a Keogh plan only if the plan was actually set up by the end of the previous tax year.

Contribution and Deduction Limitations: With either plan, contributions may not be based on earnings in excess of $245,000 (for 2011, indexed for inflation) per year.  For the self-employed, the money purchase Keogh will generally allow for the largest deductible contributions possible.  Under this type of Keogh the owner may contribute 100% of their earnings, up to $49,000 (for 2011, indexed for inflation).  The profit-sharing Keogh and SEP Plan allow for employer contributions at a lower percentage.  A major disadvantage of the money-purchase plan is that the employer contributions are at a set amount for each of the years of the Plan.  The other Plans discussed, however, allow contributions to vary from one year to the next, depending upon how the business is doing.  The profit-sharing Keogh is a very popular option for high earners looking to maximize their employer contribution.

Employees Covered: If your employees are age 21 or older, they are generally accepted under most plans.  With a Keogh however, employees who have not completed one year of service (two years in some cases) do not have to be covered under the Plan.  Part-timers may not be covered at all based upon how a year of service is defined within the Plan documents.  The SEP rules differ from the Keogh in that covered employees include those who have worked for the company during three of the past five years.

Vesting Benefits: An employer may set up a Keogh so that the participants of the Plan are not entitled to their accrued benefits until they have been Plan members for a certain period of years (generally 3-5 years).  Alternatively, they may be entitled to their benefits gradually over a set period of time.  If the employee leaves the company, he or she is only entitled to their “vested” benefits.  SEP participants on the other hand are immediately vested in their benefits as no such waiting period is allowed.

As you can see, there are many differences to each of the Plans.  It is important for self-employed individuals to consult with their advisors before selecting a Plan to determine which Plan will give them the most benefit.  The business owner should work closely with their tax advisor to be certain they are in compliance with the Plan documents and have met required contribution deadlines.

Please feel free to contact us with any questions regarding the above, or if you would like further information regarding retirement plans or other business and tax related matters.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under any taxing jurisidiction or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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