Health Plan Options

Business Type & Taxes

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This article by Bart Jackson & Michele Alperin was prepared for the June 16, 2004 edition of U.S. 1 Newspaper. All rights reserved.

Keeping Pace In the Techno-Race

Remember the Alta Vista search engine? Eighteen months ago it was on the cutting edge of Internet technology. Today it has dropped to an also ran, replaced by the next novelty. Within that same span of time, Intel has brought out five new Pentium processors. Technology descends across the business scene like a raging flood. Those who think that they can hop on one floating piece and ride out a career are swept away in the tide of innovation. Employees must be involved in a constant state of retraining to be of value to their company.

Drawing from an analogy in the ever-evolving world of manufacturing, Mercer County Community College and the New Jersey Technology Council present “Just-in-Time Information Technology Skills” on Thursday, June 17, at 4 p.m. at the MCCC campus. Cost: $40. Visit www.NJTC.org or call 856-787-9700. The event, led by Ray Ingram, MCCC’s information technology director, addresses what skill sets employees need now and are likely to need in the future — and how they can get them.

Ingram is a technology veteran who has shifted through changes ranging from mainframe computer punch cards to wireless. Born in a small town north of London, Ingram obtained the closest thing then-available to a computer science degree from Hatfield Polytechnical Institute. He recalls the days when he fed cards into a room full of machines whose group power was about one hundredth of his present desktop PC.

In l978 he moved across the pond and took a job writing programs for Mathematica, where he eventually directed all support operations both domestic and international. He now serves both on the New Jersey Technology Council board and the MCCC faculty, while keeping his eyes on the latest technological developments.

Ingram says that most companies have yet to come to grips with the promise — and demands — of technology. One of the biggest issues now facing companies of all types is: How can we blend people with the machines to make them each a worthwhile investment?

Import export anomaly. The United States in general, and New Jersey in particular, have a long history of technological export. We invent it, we make it, and the world takes it. “But there is a real skills mismatch going on here,” says Ingram. “We do not have the highly skilled technology workers to keep up with demand.” As proof, he cites New Jersey’s recent request that accommodations be made for the import of 40,000 high tech workers to fill the needs we cannot fill domestically.

Corporate downsizing has boosted the numbers of unemployed, but few firms are training even current employees for future needs. “It’s a simple matter of cost effectiveness,” says Ingram. Within 10 years virtually every task currently performed will be obsolete or changed beyond recognition. Does it make sense to keep on hiring those expensive, slow-to-adjust imported workers, when the individual already in your plant needs only a week’s training?

Techies uncloseted. Gone are the days when you could have a programmer slaving away in the back room and could simply extract and use his information. Companies today are web driven, with customers talking directly to those back room boys. Clients get their answers and aid from the people who are establishing the websites. Everybody has to represent the company.

This requires a broader knowledge for everybody. Former managers must know how to use technology tools — and talk the technology talk — and tech-specialists must learn about customer requirements, business in general, and all aspects of their product. “Hey, mister, don’t ask me, I just write the programs here” is a response guaranteed to send clients elsewhere.

Productivity versus innovation. “Technology does not drive business,” reminds Ingram. “It’s supposed to serve it.” To get a return on both machine and human investments, technical firms have to do what manufacturing learned years ago. They must continually train all people for a multitude of tasks. The outmoded assembly-line approach, where each person becomes an expert in one job, just invites bottlenecks and breakdowns.

“We are not talking about 12 weeks of training per person,” says Ingram. “One to two weeks of learning new skills or upgrading current skills once a year will raise total productivity enormously.” A good way to cut the cost of this training is to form a consortium of area businesses and custom tailor courses.

But before switching to the latest system stop to ask: Do we need it? After a thorough cost analysis, does the productivity saving translate into an appreciable return?

If the answer is yes, as it often is, it’s time for just-in-time training — for techies and for managers alike.

— Bart Jackson

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Health Plan Options

Good health insurance coverage is perhaps the benefit most sought after by potential employees, and smaller employers who cannot offer an adequate plan may not attract quality candidates. In 1992, to guarantee access to health coverage for small employers, regardless of health status, claims history, or any other risk factor, the New Jersey Legislature created the Small Employer Health Benefits Program, which went into effect in 1994. Under this plan employers with 2 to 50 employees may select among standardized plans with rates are based only on the ages of the employees, their gender, and where they live.

“The reform laws make it easier for small businesses to get quality insurance and not be denied,” says Kevin Duddy, who will give a talk entitled “Health Benefits for Small Businesses” as part of a half-day workshop on Thursday June 17, at 9:30 a.m. The event is sponsored by the Small Business Development Center at the College of New Jersey and takes place on the college’s Ewing campus. Cost: $10. Call 609-989-5232 for more information.

The Health Benefits Programs works like this: Eight primary carriers in New Jersey — Aetna, Horizon, Cigna, United HealthCare, Guardian, AmeriHealth, Well Choice, and Oxford — offer a number of “cookie-cutter programs” — set plans among which a small business can choose based on its needs. The plans vary on a number of characteristics. They range from fee-for-service “indemnity” plans, which reimburse for all medical expenses regardless of who provides the service, to managed care plans of three types, which involve arrangements between the insurer and a selected network of health care providers.

The first managed care plan is the typical HMO (health maintenance organization), which provides medical treatment on a prepaid basis, with members paying a fixed monthly fee. The second is a PPO (preferred provider organization), which consists of doctors and/or hospitals that provide medical service only to a specific group or association, and members pay for services as they are rendered. The PPO sponsor reimburses the member for the cost of the treatment, less any co-payment. The third is a POS (point-of-service plan), where the patient pays a minimal co-payment for each service when using a healthcare provider within the network. The patient selects a primary care physician who is responsible for referrals within the network. If patients go out of network, there is usually a deductible and a substantial charge to the patient.

Job ads often boast that positions come “with benefits.” Job hunters generally translate the words to mean “health benefits,” and the may choose one job over another because it offers them. But there are tremendous differences among health benefit plans. Dental and vision may or may not be included. The co-payment employees have to fork over to the doctor or hospital can be negligible — or it can be huge. Prescription drugs can be free, or pricey. There may be freedom to see doctors out of network for a reasonable fee, or the surcharge may be prohibitive.

Due to this variance, explains Duddy, “there could be thousands of types of plans available among the eight carriers.” He adds that this approach has generated “a lot of competition among the carriers to get the small businesses.”

Duddy suggests that a company needs to consider a number of things in selecting the plan or plans that work best for them:

What plan options are available?

Should the employer go directly to an insurance carrier or go through a broker?

What are the medical needs of current employees? A group that requires lots of prescriptions, for example, might opt for a plan where each prescription costs $15, whereas a group that needs few prescriptions could go with a 50 percent drug card. Another possibility is a two-tiered or three-tiered prescription card, with the lowest cost for a generic drug, a middle cost for a “preferred” drug, and a higher cost for brand new drugs.

Which doctors do employees currently use and what networks are those doctors part of?

Who are the doctors within the networks associated with particular plan options?

Are employees likely to stick with the doctors within a network or go outside?

Does it make sense to go with just one plan or to select different plans for different subgroups within a company?

Duddy, originally from Allentown, Pennsylvania, graduated from Indiana University of Pennsylvania with a human resources management degree in 1985 and has lived in New Jersey for 17 years. He has worked in human resources and managed various businesses, from hotels to pharmacies. With regard to finding the best plan for a particular company, Duddy advises that if the companies do this legwork, either by themselves or with the help of a broker, “they can make an informed decision about how much they want to spend and how they can best minimize healthcare expenses.”

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Business Type & Taxes

A local boy who grew up in Mercerville, and is now a CPA in Hamilton and Trenton, Bob Small was not following a childhood dream when he ended up in the business world. His motivation came from a two-year stint in the Navy following high school: “I was the ship store keeper, responsible for buying, storing, and control of all inventory on a destroyer,” he says. Small jokes that his course in the Navy mirrored the advertisement, “Join the Navy; see the world,” because his ship was constantly on the move — in the Mediterranean and the Caribbean, and then on an around-the-world cruise. “When I got out of the service, I asked myself, ‘What can I do?’” says Small. “And that’s what got me started in business and accounting.”

Small received a bachelor’s degree in accounting from Ryder in 1976 and then an MBA in finance from Drexel. Today, as a partner in Ressler & Small LLP, he provides accounting and tax services to business and non-profits. He speaks about “Selecting a Business Type and Understanding the Tax Implications” at a half-day workshop on June 17, 9:30 a.m., sponsored by the TCNJ Small Business Development Center at 36 Broad Street in Trenton. Cost: $10. Call 609-989-5232 for more information.

Deciding on the legal identity of a new business has everything to do with taxes, says Small. “The whole idea with this type of tax planning is to sort out which business type minimizes tax payments.” Some of the main considerations include the nature of the business and how much structure it will require, its potential size, how much of a personal investment it requires, and an educated guess on whether the business will make a profit in its early years.

An entrepreneur may choose among five potential business types:

Sole proprietorship. This is the most common business type, requiring very little paperwork — just a business license from the city or county. Typically a sole proprietorship operates under the owner’s social security number. “Although it is simple and quick,” says Small, “it provides no coverage or insulation of personal liability, because the person is the business.”

LLC The limited liability corporation, and its cousin, the LLP, limited liability partnership, allow all earnings to be taxable on an individual basis on a personal tax return, based on the percentage of ownership. These entities use the 1065 partnership tax return, which allows profits and losses of the legal entity to flow down to its shareholders.

Both entities also provide a legal liability shield for personal assets, although the shield is generally weaker for the LLP. Although an LLC may have just one owner, an LLP must have at least two. The choice between these two entity types depends primarily on whether an LLC or LLP is more appropriate, the nature of the business, and the degree of structure it requires.

With an LLC, the owner can define specific responsibilities for individual managers and flexibly create necessary management structures, whereas in an LLP, responsibility and authority are completely shared among the partners. For example, in a small LLP accounting firm, any partner can sign any contract.

Another aspect of an LLP that it can have both general partners, who manage the LLP and hence have more exposure, and limited partners, who may invest financially, but are not involved day to day.

C corporation. When you create a corporate entity, you are automatically deemed to be a C corporation, which has no maximum on the potential number of shareholders. The C corporation is a stand-alone tax entity that is required to pay corporate taxes. With a C corporation, you can also have different classes of stock with different rights.

“The advantage in multiple classes of stock,” explains Small, “is that it allows different classes of shareholders to have different rights.” For example, preferred stock may be more of a draw for potential investors, because it offers guaranteed annual dividends and because, on liquidation, preferred shareholders get their investment back before common shareholders.

S corp. An S corp has a maximum of 75 shareholders. In an S corp, the income is distributed to the shareholders, and they report income on their personal income tax returns. With no corporate tax, they avoid the double taxation burden of a C corporation. With an S corp, however, only one class of stock can be issued. This decreases flexibility in attracting investors.

While the S corp is not for every business, small, privately-held companies will get a favorable tax result by structuring themselves as an S corp. Another advantage of an S corp for a startup company that projects losing money for years is that personal income taxes can be reduced commensurate with the amount of the corporate losses. Both the S and C corporations require more formal management structures and requirements than LLCs or LLPs, but the trade-off might be worth it.

— Michele Alperin

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