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Increasing Perceived Incremental “Value Added” of the CPA Firm via Unique Innovation

by

Robert W. Murphy
REBC, ChFC, CLU, RHU, MBA
President/CEO, Boca Benefits Consulting Group, Inc.
Consulting Principal, 1st Murchadhian Strategic Consultancy
727-510-7138 | P.O. Box 4309, Clearwater, FL 33758 | rw_murphy@bocabenefits.com
© December 2010, Boca Benefits Consulting Group, Inc., All Rights Reserved

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Do you attempt to make yourself an integral part of your client/prospect’s management team beyond bookkeeping, payroll, forms preparation and IRS filings? If so, do you clearly differentiate yourself from your CPA peers in the eyes of your clients/prospects CFOs and other top management persons with input into the decisions pertaining to which CPA firm is retained?  The display of uniquely innovative thinking and assistance with persistent management challenges is a key way to do so.

The below summary of marketing tips for CPAs is designed to provide firms with an outline of services of incremental value that your peer CPA firms may not be providing. They are written from the perspective of an employee benefits insurance broker. However, they have been structured to address much broader management issues that the small to mid-size client/prospect might find itself facing in 2010 and onward. Throughout these hints are described various ways in which an HRA (Health Reimbursement Account) can be used to address broader management challenges. The HRA concept is not to be confused with the rest of the benefits alphabet soup of acronyms. It is not an FSA. It is also not an HSA. It is fundamentally different in many ways. Your client/prospect managers responsible for benefits might tell you they know all about HRAs. It is very unlikely, especially given the fact that IRS regs have been evolving right up to 2009 when major changes were made effective. The discussion of uses of an HRA gives you the opportunity to walk benefits managers, CFOs and other senior management persons through solutions that might not have been recognized as such heretofore. Boca Benefits Consulting Group (“BBCG”) can assist you and/or your client/prospect with putting in place the required pieces of those solutions.

These hints have no specific priority order. Some will apply to your clients/prospects and some will not.

∆ Tip 1 of 12:  Show clients/prospects how they can begin, or continue, to offer health insurance assistance to employees without establishing a qualified group health plan.

• Healthcare reform has many smaller employers reconsidering their healthcare approach
•  Recession, premium cost increases, and additional regulatory burden are all catalysts and justifications for scaling down prior employee medical care expenses for smaller employers
• Healthcare reform will eliminate medical underwriting on individual policies once totally implemented in 2014, making all employees insurable
• Current “HIPAA policy” requirements already make every employee individually insurable… at a cost
• Qualified group healthplans have less advantage (i.e., the “guaranteed issue” element whereby all applicants are accepted) than in the past
• IRS regs implementation in 2009 allow individual policy premiums to be paid from HRA contributions made by an employer (n.b., outside or in lieu of a qualified group plan)
• IRS allowable health care expenditures on other products give employees additional options

 ∆ Tip 2 of 12: Show clients/prospects how they can offer health coverage to their employees and save money at the same time. Oriented towards client/prospects which are either not currently providing any employee medical assistance or which are not optimizing available tax advantaged options.

• HRA/Section 125 plan combination allows for both employer contribution to the HRA and “salary reduction” on the part of the employee
• HRA contribution is a tax deductible normal business expense to the employer and is passed tax free to the employee (i.e., treated similar to group insurance premium contributions paid by an employer)
• Total of employees reduced salaries are removed from payroll and all associated payroll taxes and payroll driven charges accrue to the employer as savings
• If properly structured, employee can purchase individual policies completely with pre-tax money saving them 20-30% depending on individual marginal tax bracket

 ∆ Tip 3 of 12: Show your clients/prospects how they can offer some form of health coverage to employees at zero net cost to client/prospect.

• The HRA/Section 125 approach can be used without any initial employer contribution into the HRA
• Payroll tax savings on Section 125 side can ultimately be contributed to the HRA (n.b., a net savings number after administration costs, etc.)
• Employees can choose how they want to use the HRA contribution, subject to limits written into the HRA plan by client/prospect
• Even small HRA contributions can be advantageous to employees (e.g., can be used to pay part of spouse’s healthplan premium elsewhere; inexpensive voluntary benefits allowed by the IRS can be purchased; etc.)

∆ Tip 4 of 12: Show your larger clients/prospects how to “unbook” benefits related reserves from their balance sheets. If your client/prospect is large enough to self-insure their healthplan, they are required every year to book an IBNR increment (“incurred but not reported reserve” for claims) to finance run-out liability in the pipeline if/when the plan were to be terminated or if it were to convert back to a fully insured approach. Typically the IBNR on the balance sheet will be somewhere between 6 and 12 weeks worth of the most recent year’s paid claims adjusted forward by an annual inflation factor. Unless the size of the plan expenditures is shrinking due to participation reductions and/or significant plan design modifications, the total IBNR will be an ever increasing number. This causes a high degree of frustration with many CFO’s and auditors (i.e., the latter in the case of CFO’s who try to short-fund the reserve with weak justifications).

• There is an optimum trade-off between providing an incentive to certain classes of employees to leave a qualified group healtplan and the remaining risk pool
• Care needs to be used not to gut the qualified group healthplan of young, healthy participants, skewing the costs upward for remaining participants and putting the qualified group healthplan into what is called “the death spiral” in the industry
• Proper care and structure can redirect participants out of the qualified group healthplan and into individual policies in an advantageous manner via the HRA approach
• For every participant eliminated from the qualified group healthplan there is an associated reduction in the required IBNR level on the balance sheet without losing the business expense deduction of the prior group insurance premium contribution
• Warning: projections of net participation should be made. If the net qualified group healthplan  average age and/or health is skewed negatively (i.e., higher projected per capita annual claims), a portion of the IBNR savings will be lost

 ∆ Tip 5 of 12: Show clients/prospect how to use new-hire employee tax savings as a competitive hiring and retention tool.

• IRS regs implemented in 2009 allow for payment of premiums for healthcare coverage provided to an employee or spouse from an HRA even if the coverage is not provided by the employer of a new hire per se
• Many new hire employees remain on the COBRA coverage of prior employer (n.b., there are various reasons such as the 2010 65% subsidy, continuity of care with a provider, plan design elements not in the new plan, a prolonged waiting period with new employer plan, etc.)
• Even if there is 30, 60, 90, or 180 day wait to become eligible under new healthplan of client/prospect, HRA/Section 125 plan eligibility and employer contribution can be made immediate, or at least minimized
• COBRA premiums being paid to former employer’s COBRA can be paid tax-free (20-30% cost reduction to new hire depending on individual marginal tax bracket)
• If 90 day wait, the savings to new hire can approach several thousand dollars
• Shows valuable candidate incremental value of joining your client/prospect company versus another
• Note: this same methodology can be used to assist new hire employee with paying Medicare premium tax-free if spouse is aged 65+

 ∆ Tip 6 of 12: Show clients/prospects how to save money while offering health benefits to ALL employees (including those with less than minimum hours for group plan eligibility, part timers, those in extended waiting periods, etc.).

• Increase employee satisfaction in workforce segment that may feel disenfranchised without major employer investment.
• HRA concept can be used for ALL W-2 employees.
• Non-group plan employees can purchase any IRS allowable health product pre-tax from employer HRA contribution.
• Highly applicable to Florida hospitality industry.
• Increase employee satisfaction & reduce turnover expense
• Some form of health purchase can be made available to every W-2 employee via tax-deductible HRA contribution and Section 125 salary reduction approach.
• Client saves payroll taxes on salary reduction component and take business deduction on HRA contribution.

 ∆ Tip 7 of 12: Show clients/prospect how to allow employees with Medicare aged spouses to use pre-tax money to pay Part B premiums while saving 20-30%.

• Retain valuable experienced employees via Medicare assistance
• Do any of your Florida clients/prospects have employees with Medicare age spouses… more than likely
• Spouse’s Medicare premiums, and other out-of-pocket expenses, can be paid with pre-tax dollars via an HRA approach
• No HRA contribution or too little… the Section 125 component can be used for salary reduction for the balance.
• Employer receives payroll tax savings on the reduced salary amounts

 ∆ Tip 8 of 12: Show clients/prospects how to use an HRA approach as a solution which allows class differentiation in compliance with all new PPACA Section 105(h) non-discrimination regulations.

• Your clients/prospects are likely receiving mixed signals on the Section 105(h) non-discrimination requirements of PPACA following the 9/23/2010 implementation date
• “How do we provided different medical benefits for different types of employees now?” will be the question
• Many broker/consultants are telling them it just can’t be done anymore
• By carefully classing HRA contributions, employers can effectively provide different benefit levels to different classes of employees

 ∆ Tip 9 of 12: Show clients/prospects how to allow employee to use pre-tax money while reducing client/prospect payroll via salary reduction methodology

• How many employees on your client/prospect’s payroll already carry individual health policies or are presently using after-tax money to pay out-of-pocket expenses on a spouse’s plan?
• Employee saves marginal tax bracket amount and employer saves FICA when salary reduction is employed
• Win-Win for employers and employees when using pre-tax money
• Even if your client/prospect has no interest in contributing new funds into an HRA for employees presently not participating in a health plan, show prospect/client how the Section 125 payroll deduction portion can still be used to save FICA and other payroll driven charges (e.g., workman’s compensation insurance premiums running off total payroll)

∆ Tip 10 of 12: Show clients/prospects how to reduce negative employee morale among those employees who feel disenfranchised when not using employer sponsored healthplan.

• When employees see peers utilizing the employer paid portion of medical when they can’t or don’t for some reason, there is a negative impact on performance.
• Show client/prospects how this can be mitigated
• Do client/prospects have any dental or vision only participants in benefit plan feeling disenfranchised because they don’t/can’t use employer medical plan contribution dollars
• Negative morale might not be stated but is often right under the surface effecting performance
• Show client/prospects how employees can use salary reduced dollars for premium elsewhere (e.g., spouse plan, alternative voluntary benefits, etc.) while saving payroll taxes on salary reduction amounts
• Employee allowed to use medical contribution of client/prospect to buy any other IRS allowed health product

∆ Bonus Tip: CPAs can guide clients/prospects in solving management Issues via HRAs. Provide technical guidance to your clients/prospects on just how broadly HRAs can be used to address management issues. Note: reimbursable premiums and other expenses are much more expansive than individual policy or group premiums. IRS Pubs 969 and 502, as well as IRC Section 213(d), provide more info. Also, the Section 125 Proposed Treasury Regulations published in the Federal Register on August 6, 2007 (finalized) provide information on the purchase of individual health policies via an HRA/Section 125 approach beginning in 2009. This link is very individual medical policy oriented. Note: CPAs can assist client/prospect CFOs and HR VPs with solutions to broader challenges. IRS regs expanded to support these approaches. Further research: see recent 3M Corporation announcement of future use of HRA approach to satisfy retiree healthcare obligations (i.e., contribution into HRA and retiree individual purchase of policy and carrier of choice)

∆ Tip 11 of 12:  Show clients/prospects how to reduce the pain of a required qualified group healthplan premium increase on their workforce.

• If client/prospect already has voluntary, 100% employee paid, payroll deduction benefits offered (i.e., AFLAC, Allstate, Colonial, Unum, etc.) offset the pain of a pending medical premium hike by making those benefits 20-30% less expensive for your employee via purchase with pre-tax money
• If no program in place, show how to use strategic placement of voluntary benefits to enhance overall company benefits strategy
• Show incremental value by indicating carrier differentiations
• Note: does not apply to all voluntary benefits
• Approach generally applicable to health related voluntary products allowed per IRS regs
• May facilitate a soft landing for those employees who can no longer afford to participate in qualified group healthplan

∆ Tip 12 of 12:  Show your start-up client/prospects how to save money while making employees happier.

• Many new employers are unaware of the return that can be had with minimum investment
• Does not require high cost or administrative burden to initiate a minimum contribution HRA and allow employees some form of health related benefit purchase
• Payroll tax offsets to employer can often make it a zero cost item
• Can allow start-up employers to attract and retain talent that might be difficult to do otherwise
• Particularly valuable in the hospitality industry where good middle management is attracted to large corporations with full benefit packages and rank and file employees have access to mini-med type plans
• Assists in the reduction of turnover expense with which many start-ups struggle

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To contact BBCG for any product proposals or additional information please click here.

For additional technical information and/or HRA administration proposals, please click here.

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Due to our bonus tip providing various IRS reference citations , our twelve tips are actually a baker’s dozen.

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In doing some research for a LinkedIn member relative to COBRA eligibility it seems an inconsistency has been detected between (1) long-standing COBRA regulations pertaining to early termination rules and (2) the regulations requiring early termination of the the present 65% federal subsidy. 

Although this inconsistency may be nothing more than an oversight on the part of DOL, it would appear to be more fundamental relative to its overall intent going forward. The newer intent seems to be much more business friendly (i.e., no expense associated with a non-productive former employee). It may not be so much altruistic as the real politic of what has been required to get health reform issues through a divided Congress.

In the specific case, the 65% federal subsidy will be terminated if a former employee is so much as eligible for a new employer plan. No enrollment in the new plan is required for the previous employer to require the full 102% premium to be paid (i.e., as opposed to 35%) to remain in COBRA.  It is purely a matter of eligibility. Unquestionablly, the net result will be less people on COBRA and more people enrolled in their new employer plans. Employers with a sizeable number of COBRA participants should see substantial savings if they monitor this provision closely (i.e., some form of periodic written statement from the COBRA participant that they have never been eligibile for another group plan from the inception of their COBRA participation, either personally or via spouse).

Note that this is not an allowable early termination event as previously defined by DOL where actual enrollment has been required before a former employer can terminate a former employee’s COBRA participation. In this case COBRA termination would be a voluntary former/new employee act based on the relative economics. 

The subsidy regulation above appears to be in line with the “To Age 26” provisions of PPACA 2010 as we understand them. In that case, the parent’s employer can also terminate an adult dependent’s eligibility for its healthplan based solely on eligibility for a new employer’s plan. Again, no enrollment is required for this action. The pure eligibility is the key.

Both the subsidy and the adult dependent regulations seem to reflect the true purpose of all these healthcare delivery mechanisms. The underlying intent has been to ensure that there is a mandatory safety net for those who would lose employer based coverage and have absolutely no other alternative. If there is an alternative, than there is no reason for that safety net (n.b., and the associated non-productive costs) to exist.  None of these devices have been put in place to allow for “plan shopping” on the part of an employee who might otherwise have mutliple eligibilities.

DOL needs to address the COBRA inconsistency and re-write the regulations going forward to allow for early termination of COBRA based solely on eligibility. Rarely, if ever, will there be a negative economic impact on an employee who will revert from 102% of premium to somewhere in the area of 75% of premium (i.e., assuming here a 25% employer contribution). This may require large employers to leverage local politicians if the various applicable federal statutes require amendment.


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The president signed H.R. 4851 into law late Thursday. The bill was approved earlier in the day by the Senate on a 59-38 vote and by the House on a 289-122 vote. The measure extends the 15-month, 65% federal premium subsidy to employees laid off from April 1 through May 31. The previous short-term extension expired March 31.

See the full story in Business Insurance: http://www.businessinsurance.com/article/20100416/NEWS/100419944 .

Many cost strapped employers are looking for ways to have older, more costly, employees seek early retirement without violating any age discrimination statutes. Below are some healthcare considerations to think about if you are approached.

If retiring at approximately 62 years old, there are four  healthcare options that might be available to you:

• COBRA ( http://www.dol.gov/ebsa/faqs/faq_consumer_cobra.HTML )
• Individual policy ( http://bocabenefits.com/GR 4-2009 Plans Brochure.pdf   )
• A “bridge” provided by the employer to age 65
• New employer with a group plan

COBRA with ARRA 2009 Considerations

In the case of COBRA, the expense may or may not be prohibitive depending on how your separation from service is actually defined. If “involuntary” between now and 12/31/2009 the 65% subsidy required by the American Recovery & Reinvestment Act 2009 would apply and for the nine months following the separation date your cost would be 35% of the normal 102% of true cost COBRA rates (i.e., true cost being what the total premium is for your enrollment type, not just the percentage of the cost passed along to the employee) for that period. Unless the ARRA 2009 were to be extended, the costs would go back to 102% of true costs at that point. See the piece at http://bocabenefits.com/stimulus_cobra.pdf for more info. Specifically, take a look at the income thresholds that might reduce the subsidy for you. Note: this is a zero cost subsidy for your employer.  One hundred percent of the subsidy amount is recovered via a payroll tax offset.

Individual Health Policies

Individually purchased policies are problematic for several reasons. Costs for just one person at 62 will run about $400-$500 per month (possibly less if an HSA plan). Essentially twice that for a couple. They are also not “guaranteed issue” meaning that your health status will be considered before an application is accepted and a policy issued. You can be declined, be up-rated or have policy benefit terms modified.

Early Retirement Bridge With Current Employer

A “bridge to 65” agreement with an employer is usually the best course for everyone. That is, the employer continues the employee on the health plan as if they remained an active employee until they reach Medicare eligible age. It is likely that the employee would be kept in prolonged “leave of absence” status to remain qualified for participation in the plan if no retirement health is offered otherwise. A highly paid, tenured employee can be replaced by a less experienced and less expensive new hire. Over the course of three years that could be worth in excess of $100,000 for the employer (i.e., likely substantially more). Most employers would jump at the chance to trade off three years of health care premium  for the separating employee and spouse (i.e., a guess at the cost: $36,000 pre-tax ) against the direct and indirect payroll savings. However, there is a potential downside to the employer. If the health plan is self-funded, every claim dollar incurred by the employee or spouse below some threshold per year (i.e., varies by employer size from $50,000 to $250,000;  threshold possibly higher for jumbo sized employers) will be a direct pre-tax cost to the employer. A million dollar organ transplant can eat up the entire payroll savings very quickly. It is therefore somewhat of a roll of the dice for the employer. Note: this also applies to “experience rated” insured plans to some degree where deficits from prior years are recoverable via going-forward underwriting.

It is very important that if negotiating a bridge type agreement that spouse coverage be an absolute deal breaker. You must have it if you have a spouse of roughly equivalent age who does not have a source of health care at his/her employment or who has retired earlier. You may be able to strike an agreement whereby a Medicare eligible spouse specifies that Medicare is to be “primary” and the employer’s plan will be “secondary” in claims payment order when age 65 is attained. That lessens the possible claims impact somewhat. You can also make the argument that more than likely the employer is going to own the employee and dependent claims under most of the above scenarios (i.e., stays employed, goes on COBRA, or falls under a bridge agreement).

Many large employers have canned early retirement packages on the shelf with the above kind of provisions. Human Resources professionals should be aware of them on the local/regional level. However, if that does not appear to be the case, an inquiry at the home office level might be required. HR people should also be willing to discuss these matters “off the record” to ensure no negative behavior by supervisors.

The Minimal Employment Scenario

Lastly, the new employer alternative. Many older early-retired people find work at the minimum hours and minimum skill levels required for them to qualify for health care coverage at a new employer. It occurs frequently at the ski resorts in Colorado where formerly high powered execs are now running ski lifts, acting as mountain guides or teaching lessons. If it fits your life style, it is a consideration. If it were to cramp the post-retirement life-style you envision, it obviously would not.

 Suggested Course of Action

Set up a confidential meeting with the appropriate HR person and discretely explore your options.

Many employers are struggling to determine the precise COBRA requirements under the 2009 ARRA. Employer size, state situs of the benefit plan, specific state actions, and other things, effect the answers. In addition, where certain responsibilities have been placed on carriers, their unique administrative decisions may also drive procedures.

Below is a link to a Frequently Asked Questions (i.e., FAQ) piece on this subject provided by United Healthcare. Although some of it is specific to their own client base, much of it provides generic information that benefits professionals might find valuable as they weave their way through the huge number of variables.

This subject may also be something that in-house and contracted financial professionals need to address. Who pays the 65% COBRA subsidy and how it is ultimately recovered are key items.

Non-benefit HR types may also want to spend some time with the definitions of eligibles. Although this appears at this point to be a short-term program, the costs of which are recoverable as a credit against future payroll tax liability, certain CEO’s may want to minimize participation due to the hit on quarterly cashflow or if the company is clearly in such dire straights that a payroll tax recovery may not be viable.

Link to FAQ Resource