Employees Need to Know About 401(k) Required Minimum Distributions

Posted on February 24th, 2020

Effective January 1, 2020, your employees must withdraw at least the minimum amount from their employer-sponsored 401(k) and IRAs (Individual Retirement Accounts) by age 72. The required minimum distribution (RMD) age was formerly 70½. The RMD amount is determined by applying a life expectancy factor set by the IRS to the employees’ account balance at the end of the previous year.

Account-holders who are taking an RMD for the first time may wait until April 1 of the year after the year they turn age 72. For 401(k) plans, they can wait until 72 or until the year they retire, if they don’t have a five percent or more ownership stake in their employer. After that, account holders’ RMD for a given year must be withdrawn by Dec. 31, either in a lump sum or in installments.

If they decide to delay taking their first RMD until the next year, they’ll have to take two minimum distributions during that calendar year. This can put them in a higher tax bracket for that year, which may significantly increase their taxes. They also could have to pay a 50 percent excise tax on the amount that was not withdrawn. That is 50 percent of the difference between the required distribution and the actual distribution. There also is a penalty for not withdrawing the full amount.

Employees can find out how much of their RMD will be taxable by visiting the IRS website.

The RMD deadlines apply even if the account owner dies. The beneficiaries must take the regularly required minimum distribution the year in which the account holder dies. The following year, the required minimum distribution will depend on the age of the beneficiary.

Remember, the more your employees know about their 401(k) accounts, the better informed they’ll be when making decisions about how much to save.

Talk to your local broker about how best to communicate this information. 

When Workers’ Compensation Costs Balloon, Company Turns to a Captive Solution

Posted on February 24th, 2020

Experiencing healthy growth is a great thing! Over a nine-year period, our client grew its revenue from $15 to $170 million. To keep up with the growth during this time, the company’s workforce grew significantly.

A fast-growing workforce with fast-growing expenses

When companies grow quickly, it is all too easy for employee costs to soar. As its revenue approached $170 million, its workers’ compensation premium ballooned to $1,284,000 to support its growing workforce. Leadership rightfully focused on meeting demand, revenue growth, and getting the growing team up to speed as quickly as possible. But this is also a critical time to watch for opportunities for efficiencies. In anticipation of this situation, Orion engaged ownership about how to reduce workers’ compensation expenses and free capital for other uses.

Captives can provide control over total cost of risk

Working closely with all of its partners, ownership decided that an insurance captive would be an efficient, effective way to gain control over its workers’ compensation costs. A captive is a wholly-owned subsidiary providing risk financing and management services to the parent company for specific risks. It is not unlike a Health Savings Account (HSA), but on a much larger scale. Rather than paying traditional premiums to an insurance company, the business sets aside money to prefund future claims to cover its own risk.

Captives are best leveraged by middle-market companies that have medium to high exposures to loss, such as manufacturing, distribution, and construction firms with 250 or more employees. The organization’s workers’ compensation needs made it a great fit.

To manage the transition to a captive, our “Educate to Innovate for Results” approach proactively explained the process and answered questions well in advance of the anticipated changes. This method allowed for detailed planning, an easier implementation, and a more rewarding experience.

Results are realized quickly and continue over time

By the end of the first year after its transition, our client was able to:

  • Reduce its Total Cost of Risk, including risk financing costs and retained losses, to $580,000 (a 55 percent reduction)
  • Recapture $704,000 of profit for reinvestment opportunities and owner equity
  • Reduce its cost burden for a competitive advantage

The leadership team was thrilled with these results, both financially and in terms of efficiencies.

If you are interested in learning more about insurance captives, we can help. At Alera Group, we focus on helping organizations lower their overall cost of risk, not just their insurance premiums – an approach that often creates a competitive advantage and significant opportunities for meaningful savings over time.

Learn more about our collaborative approach to property and casualty HERE.

Making the Business Case for an Insurance Captive

Posted on February 18th, 2020

Most companies, including mid-sized organizations, tend to think of only one insurance model – pay an insurance company a premium for coverage and to help manage specific risks. This is a sunk cost that you may have little control over. Insurance captives provide a different model, removing the sunk cost, while still obtaining the necessary coverage and property and casualty services with greater control. Many executives are aware that making the change from a traditional insurance model to a captive is the correct move for qualifying businesses, but they lack information or have misconceptions about how they work.

What is an Insurance Captive?

A captive is a wholly-owned subsidiary providing risk financing and management services to the parent company for specific risks. In some ways, captive insurance is not unlike a Health Savings Account (HSA), just on a much larger scale. Rather than engaging an insurance company to assume risk, an organization sets aside money to pre-fund future claims.

Captives are primarily used by business owners for workers’ compensation, general liability, and/or automobile exposures, as well as product recall, construction defect and warranty coverage. A captive deploys company capital more efficiently than traditional insurance by reducing the total cost of risk, generating more profit and shareholder value.

How to Present an Insurance Captive to the C-Suite

In her article “How to Blow a Presentation to the C-Suite,” Sabina Nawaz identifies several specific areas to be aware of when presenting to corporate executives. Our “Educate to Innovate for Results” approach aligns with the author’s points to help the c-suite fully understand the benefits and drawbacks of an insurance captive.

  1. Define the problem. Too often, there is excitement around a good idea and the presentation is focused entirely on the solution… without considering the context of the problem and a pathway for the answer to be successful. In order to provide a thorough understanding, we must ensure the audience has a clear knowledge of all aspects of the problem being solved. How much money is currently sunk into insurance premiums? How would this change help grow the business in the future? Does the current insurance broker have the required expertise?
  2. Present the solution to the problem, and how it will support the business. First, we give an explanation of what an insurance captive is and how the business will utilize one. Then we show the financial and time investment for administration: How much money will be diverted away from insurance premiums and into the captive? How will that look in the future? What are the cash flow and tax benefits? What is the ROI?
  3. Leave plenty of time for interaction. Forming a captive for the first time may seem like a radical solution (though most organizations are thrilled with the results). Several meetings with in-depth analytic pro forma, continued discussion and questions will ensure the solution receives the attention it deserves and help executives to visualize the change before it occurs.

The importance of data, research, and preparation cannot be overstated. Taking the time to think through the details in the business case will make all the difference in both a successful initial discussion, and a rewarding transition.

If you are interested in learning more about insurance captives, we can help. At Alera Group, we focus on helping organizations lower their overall cost of risk, not just their insurance premiums – an approach that often creates a competitive advantage and significant opportunities for meaningful savings over time. Learn more about our collaborative approach to property and casualty at URL.

Sources:

Top 5 Workers’ Comp Fraud Schemes

Posted on February 14th, 2020

According to the National Insurance Crime Bureau, fraud costs insurers and employers over $7 billion a year. Studies show 10 percent or more of all property/casualty insurance claims are fraudulent. The most common fraud schemes are:

1.   Fraudulent billing and billing codes. The provider bills for visits or services that never happened or bills separately the workers’ comp insurer and the patient’s health insurance for the same incident, also known as double-billing or double-dipping.

2.   Unnecessary treatments. The provider does provide services, but the services are not related to the claim.

3.   Illegal kickbacks. When providers receive payments in exchange for a referral.

4.   Soliciting on behalf of colleagues. Providers work with runners, cappers or steerers, to direct injured workers to a certain medical provider.

5.   Pharmaceuticals and medical equipment. Pharmacies bill for brand-name prescriptions but the patient receives generic drugs or is billed for medical equipment that was never utilized.

Medical fraud perpetrators may be single providers but may also act as part of organized crime rings conducting multimillion-dollar schemes. Data and new technologies are helping carriers to identify these schemes and watch out for new potential frauds. But employers and other stakeholders also need to be aware of these practices.

If you would like more information, please contact us! 

 

How Life Insurance Works in Divorce Settlements

Posted on February 12th, 2020

Of the two main types of life insurance, permanent and term, only permanent is usually a significant part of a divorce settlement.

Permanent life insurance — whether whole life or universal life — provides coverage for the lifetime of the insured as long as premiums are paid, though Universal allows greater flexibility in terms of payments and death benefits. The biggest distinction is that with whole life, savings grow at a guaranteed rate; with Universal life insurance, savings vary depending on the premium structure and market performance.

During divorce proceedings, attorneys and the court will investigate whether the couple has permanent or term life insurance, and the extent to which the insurance is needed as part of the settlement.

Term Insurance

Term life, which lasts for a set period, has lower premiums than permanent, but no cash value. Because it has no cash value, it’s not usually considered an asset when dividing property during the divorce process.

However, there is an exception. In some states, if one spouse is ordered by the court to provide life insurance, and that person is uninsurable but has a term life insurance policy, the existing policy may be considered a marital asset.

Beneficiaries

When a life insurance policy is considered an asset in the divorce, the divorce will not automatically change the policy owner, the insured, or the policy beneficiary. However, the final decree may include language that invalidates a spouse as a beneficiary under a policy or stipulates that the parties take specified actions with respect to obtaining or changing existing life insurance policies. For example, the final decree can also specify that joint or survivorship policies be split into separate policies for each spouse.

Unless otherwise specified by the court in the final decree, divorcing couples can make changes as to who the beneficiaries are. For example, if a husband owns a life insurance policy that insures him and lists his soon-to-be ex-wife as the beneficiary, the husband can change the beneficiary. Again, however, the divorce agreement may say otherwise. The judge might have agreed to constrain the husband from changing the beneficiary if the husband owes the spouse alimony or child support.

The cash value of a permanent life policy will often be part of the settlement. But if it’s not part of the settlement, it may also be a source of funds to help with divorce-related expenses.

Ex-spouses May Be Required to Purchase Insurance

Divorcing couples who don’t have permanent life insurance might want it stipulated that the ex-spouse purchase it to protect alimony payments, child support payments and pension or retirement funds. This is one way to ensure that those financial obligations are met even if the breadwinner dies.

If a divorce decree is issued requiring court-ordered life insurance, the ex-spouse, who is paying for the policy, usually will receive a deadline. If so, it’s best to apply for the insurance immediately because it can take four to six weeks to get a signed policy.

In these situations, both ex-spouses need to work together along with their attorneys to set up the policy to decide who will be the owner; the term, the coverage amount and who will pay the premiums. Attaching riders to the policy may also be considered, such as adding a long-term care rider to the policy to pay for in-home or nursing home care.

Once the details are finalized and the policy is obtained, a signed copy of the application must be provided to the court as proof of compliance.

For help understanding how life insurance can be a resource for financial planning and special situations, please contact us. 

CMS Extends Transition Relief for Non-Compliant Plans through 2021

Posted on February 10th, 2020

On January 31, 2020 the Centers for Medicare & Medicaid Services (CMS) announced a one-year extension to the transition policy (originally announced November 14, 2013 and extended six times since) for individual and small group health plans that allows issuers to continue policies that do not meet ACA standards.  The transition policy has been extended to policy years beginning on or before October 1, 2021, provided that all policies end by January 1, 2022.  This means individuals and small businesses may be able to keep their non-ACA compliant coverage through the end of 2021, depending on the policy year.  Carriers may have the option to implement policy years that are shorter than 12 months or allow early renewals with a January 1, 2021 start date in order to take full advantage of the extension.

Background

The Affordable Care Act (ACA) includes key reforms that create new coverage standards for health insurance policies. For example, the ACA imposes modified community rating standards and requires individual and small group policies to cover a comprehensive set of benefits.

Millions of Americans received notices in late 2013 informing them that their health insurance plans were being canceled because they did not comply with the ACA’s reforms. Responding to pressure from consumers and Congress, on Nov. 14, 2013, President Obama announced a transition relief policy for 2014 for non-grandfathered coverage in the small group and individual health insurance markets. If permitted by their states, the transition policy gives health insurance issuers the option of renewing current policies for current enrollees without adopting all of the ACA’s market reforms.

Transition Relief Policy

Under the original transitional policy, health insurance coverage in the individual or small group market that was renewed for a policy year starting between Jan. 1, 2014, and Oct. 1, 2014 (and associated group health plans of small businesses), will not be out of compliance with specified ACA reforms.  These plans are referred to as “grandmothered” plans.

To qualify for the transition relief, issuers must send a notice to all individuals and small businesses that received a cancellation or termination notice with respect to the coverage (or to all individuals and small businesses that would otherwise receive a cancellation or termination notice with respect to the coverage).

On January 31, 2020 the Centers for Medicare & Medicaid Services (CMS) announced a one-year extension to the transition policy (originally announced November 14, 2013 and extended six times since) for individual and small group health plans that allows issuers to continue policies that do not meet ACA standards.  The transition policy has been extended to policy years beginning on or before October 1, 2021, provided that all policies end by January 1, 2022.  This means individuals and small businesses may be able to keep their non-ACA compliant coverage through the end of 2021, depending on the policy year.  Carriers may have the option to implement policy years that are shorter than 12 months or allow early renewals with a January 1, 2021 start date in order to take full advantage of the extension.

Background

The Affordable Care Act (ACA) includes key reforms that create new coverage standards for health insurance policies. For example, the ACA imposes modified community rating standards and requires individual and small group policies to cover a comprehensive set of benefits.

Millions of Americans received notices in late 2013 informing them that their health insurance plans were being canceled because they did not comply with the ACA’s reforms. Responding to pressure from consumers and Congress, on Nov. 14, 2013, President Obama announced a transition relief policy for 2014 for non-grandfathered coverage in the small group and individual health insurance markets. If permitted by their states, the transition policy gives health insurance issuers the option of renewing current policies for current enrollees without adopting all of the ACA’s market reforms.

Transition Relief Policy

Under the original transitional policy, health insurance coverage in the individual or small group market that was renewed for a policy year starting between Jan. 1, 2014, and Oct. 1, 2014 (and associated group health plans of small businesses), will not be out of compliance with specified ACA reforms.  These plans are referred to as “grandmothered” plans.

To qualify for the transition relief, issuers must send a notice to all individuals and small businesses that received a cancellation or termination notice with respect to the coverage (or to all individuals and small businesses that would otherwise receive a cancellation or termination notice with respect to the coverage).

The transition relief only applies with respect to individuals and small businesses with coverage that was in effect since 2014. It does not apply with respect to individuals and small businesses that obtain new coverage after 2014. All new plans must comply with the full set of ACA reforms.

One-year Extension

According to CMS, the extension will ensure that consumers have multiple health insurance coverage options and states continue to have flexibility in their markets. Also, like the original transition relief, issuers that renew coverage under the extended transition relief must, for each policy year, provide a notice to affected individuals and small businesses.

Under the transition relief extension, at the option of the states, issuers that have issued policies under the transitional relief in 2014 may renew these policies at any time through October 1, 2021 and affected individuals and small businesses may choose to re-enroll in the coverage through October 1, 2021. Policies that are renewed under the extended transition relief are not considered to be out of compliance with the following ACA reforms:

  • Community premium rating standards, so consumers might be charged more based on factors such as gender or a pre-existing medical condition, and it might not comply with rules limiting age banding (PHS Act section 2701); 
  • Guaranteed availability and renewability (PHS Act sections 2702 & 2703); 
  • If the coverage is an individual market policy, the ban on preexisting medical conditions for adults, so it might exclude coverage for treatment of an adult’s pre-existing medical condition such as diabetes or cancer (PHS Act section 2704);
  • If the coverage is an individual market policy, discrimination based on health status, so consumers may have premium increases based on claims experience or receipt of health care (PHS Act section 2705);
  • Coverage of essential health benefits or limit on annual out-of-pocket spending, so it might not cover benefits such as prescription drugs or maternity care, or might have unlimited cost-sharing (PHS Act section 2707); and
  • Standards for participation in clinical trials, so consumers might not have coverage for services related to a clinical trial for a life-threatening or other serious diseases (PHS Act section 2709).

 

About the Authors.  This alert was prepared for Alera Group by Marathas Barrow Weatherhead Lent LLP, a national law firm with recognized experts on the Affordable Care Act.  Contact Stacy Barrow or Alyssa Oligmueller at sbarrow@marbarlaw.com or aoligmueller@marbarlaw.com.

The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our lawyers or our clients.  This is not legal advice.  No client-lawyer relationship between you and our lawyers is or may be created by your use of this information.  Rather, the content is intended as a general overview of the subject matter covered.  This agency and Marathas Barrow Weatherhead Lent LLP are not obligated to provide updates on the information presented herein.  Those reading this alert are encouraged to seek direct counsel on legal questions.

© 2020 Marathas Barrow Weatherhead Lent LLP.  All Rights Reserved.

Alera Group Names Vice President of Carrier Partner Management

Posted on February 5th, 2020

Alera Group has appointed Tina Santelli as Vice President, Carrier Partner Management for Alera Group Employee Benefits nationally, effective January 1, 2020.

In this role, Santelli will be responsible for leading key top-tier partnerships at Alera Group, strategically developing relationships with preferred carriers. She will be responsible for maintaining and strengthening existing carrier relationships, as well as identifying new strategic partnerships that will benefit Alera Group’s clients across the country.

With each of these partners, Santelli will focus on working collaboratively to provide business solutions that align with Alera Group’s goals. Additionally, she will continue to increase Alera Group’s value proposition by identifying the right combination of specialty benefits that enhance the core service offerings.

“I am excited to have Tina working on Alera’s behalf to lead our carrier partnerships,” said Sally Prather, Employee Benefits Practice Leader of Alera Group. “Her ability to build partnerships and collaborate for our success is unparalleled in the industry.”

Santelli’s previous experience includes serving as Vice President of Specialty Benefits with GCG Financial, where she provided clients with ancillary solutions. Before her time with GCG, she worked with Unum for 13 years on the sales and service side.

As Vice President, Carrier Partner Management, Santelli joins Alera Group as the latest member of an industry-leading team of professionals who are dedicated to Alera Group’s collaborative growth across the United States. For more information about Alera Group, visit www.jmjwebconsulting.com.

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About Alera Group

Based in Deerfield, IL, Alera Group’s over 1,900 employees serve thousands of clients nationally in employee benefits, property and casualty, retirement services and wealth management. Alera Group is the 15th largest independent insurance agency in the country. For more information, visit www.jmjwebconsulting.com or follow Alera Group on Twitter: @AleraGroupUS.

Ways to Make Saving Easier for Your Employees

Posted on February 3rd, 2020

Employees know they should save for retirement, but it’s not always easy. Many worry they don’t have enough money to put into retirement savings because they’re having difficulties paying bills.

You can help employees save and maximize their savings. As an employer, you are well positioned to remove barriers to saving for retirement and you can provide important retirement education.

One of the ways to maximize employees’ interest in a 401(k) is to structure it to make it more appealing. Talk to a qualified professional, but here are some ideas:

•    Automatically enroll employees into your 401(k) plan. Automatic enrollment in retirement plans has proven to greatly boost plan participation. With automatic enrollment, employees often don’t even think about the money that’s being withdrawn. However, if they do object, they can choose to not participate.

•    If you don’t do automatic enrollment, consider shorter or no waiting periods. Employees are more likely to enroll during their orientation meetings when you have their full attention and can explain the benefits of saving for retirement.

•    No one turns down free money, and employer matching contributions encourage employees to save — and to save more — if they know you also will be contributing and helping their savings grow more quickly.

•    Allow employees to take out loans or hardship withdrawals so they know they can access their money if there’s an emergency.

•    Provide a variety of investment options. The average plan has more than 10 options — but 20 options can be too many and can cause confusion.

Another key factor is communication.

The better employees understand the importance of investing and how it works, the more likely they are to participate in the plan.

•    Hold regular 401k meetings. Quarterly meetings are great opportunities to communicate plan benefits and features. Or, have an investment advisor meet one-on-one to help participants meet their retirement goals.

•    Use emails, newsletters, internet and intranet to provide easy-to-understand messages for employees with different levels of income and financial knowledge.

•    In addition, send personalized statements. These include enrollment materials and other forms of communication. For example, if you are providing enrollment material to 20-year-olds, the ideas and data should be targeted to their life circumstances. Most investment companies can provide personalized communications materials, which help convey the importance of saving as employees watch their accounts grow. According to Watson Wyatt’s latest 401k Value Index™ research, companies that use personalized statements to inform employees about their 401k plan have on average a six percent higher participation rate compared with those that don’t.

•    Many people in debt need help forming a financial plan. Provide budget templates or budget apps to teach employees ways to save. Once the employee has a budget, encourage them to start saving in small increments and then make gradual increases that add up to long-term savings.

•    Encourage employees who think it’s too late to save to contribute the maximum. Provide them with a financial advisor to learn how to earn a higher rate of return. They also may want to consider retiring later as a way to increase their savings.

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