January - February - New York State Association of Health Care

Business and clinical solutions for the home care industry
Volume V, No.1 January - February 2008
Inside this issue:
4
5
X Revised I-9 form
X Associates’ Corner
ESOPs: a succession strategy
for business owners
By Stanley Bulua and Paul Essner
An Employee Stock Ownership Plan (ESOP) is a powerful tool that can be used by an owner of a closely held
business to create a successful and financially rewarding succession strategy. In the home care industry, for example,
an ESOP can permit a business owner to (1) sell for cash a portion of their business to the employees in a taxadvantaged manner; (2) retain operational control of the company; and (3) provide employees with a substantial
tax-deferred benefit which will strengthen the connection to the future profitability of the business.
ESOPs are particularly useful for owners who have most of their net worth tied up in their agency. An ESOP
permits an owner to achieve personal asset diversification by providing a ready buyer for the company stock.
ESOPs can also be used to address another thorny issue. Business owners are frequently faced with the prospect
of either having to sell the businesses or face a substantial liquidity need upon death to fund estate taxes. These may
not be viable choices if there is no available buyer or the owner wishes to perpetuate their business and strengthen
the employees’ attachment to the agency beyond his lifetime.
How does an ESOP work?
An ESOP is a type of qualified employee benefit plan that is designed to invest
in company stock. The business owner takes the first step, by having their
agency adopt an ESOP. The ESOP trust then purchases a block of company
stock from the business owner based upon a fair market value purchase price
determined by an independent appraiser. In most cases the company obtains
the funds to finance the ESOP purchase through a combination of internal cash
and bank loans. Furthermore, the employees do not have any out-of-pocket
cost because the ESOP typically borrows money from the company to fund
the purchase price and the ESOP loan is paid back through annual contributions
Aware:
promoting
your agency
with a byline
article
See page 6
Continued on page 3
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Page 2
Tools for the Trade January - February 2008
Owners should consider an ESOP . . .
Continued from page 1
made by the company to the ESOP. In some cases,
the employer will curtail its contribution to other
retirement plans in order to limit the total retirement
benefit provided to employees.
An ESOP can be an effective means of
motivating and rewarding increases in
employee productivity through long-term
equity incentives.
The tax benefits provided to the business owner by
an ESOP’s purchase of stock are the fuel for the transaction.
First, the ESOP transaction permits the business owner, under certain circumstances, to defer recognizing gain
upon the sale of C corporation stock. Furthermore, in order to qualify for tax-deferral, the selling shareholder must
reinvest the sales proceeds in qualified replacement property, defined as stocks and bonds of U.S. operating
corporations. Although the selling shareholder or members of the family cannot participate in the ESOP, the benefits
of deferring tax on the sale far outweigh the loss of participation in the plan.
Second, one of the most significant income tax benefits provided by an ESOP transaction is the company’s ability
to finance the purchase price of the owner’s stock through the ESOP on a fully tax-deductible basis. An ESOP is
the only vehicle in the tax law that permits the deductibility of principal payments on corporate debt. Although
contributions to pay down principal are generally limited to 25% of employee compensation, dividends are only
subject to the consideration that they be reasonable. Through the combination of deductions for contributions and
dividends, the company is able to generate substantial tax benefits during the years in which the ESOP loan is
outstanding.
Third, as a result of tax law changes that were made in the late 1990s, an S corporation may now be owned, in
whole or in part, by an ESOP. Generally, to the extent that an S corporation is owned by an ESOP, there is no
corporate level tax or pass-through tax to the ESOP shareholder, placing the ESOP company in a highly competitive
position and providing it with significant additional funds (after repayment of the debt incurred to finance the
transaction) with which to expand or pursue acquisitions.
An ESOP can also be combined with effective estate planning. The owner has several options for their retained
ownership interest in the business:
First case – no children as successors.
If there are no family members in the business, the owner can remain in the business and, over a period of years,
groom a management team to eventually take over, with a view toward a possible subsequent second sale of stock
to the ESOP or to the management group. The owner thereby retains control over the transition of the business,
gains liquidity, and avoids selling the business to unfriendly outsiders.
Second case – children are to be successor owners.
If there are children involved in the business, the business owner may consider gifting some or all of the company
stock to one or more of the children immediately following the ESOP transaction. Because in the typical leveraged
ESOP transaction the company borrows money which is used by the ESOP to purchase the stock from the selling
shareholder, the value of the company and its stock, which is now burdened by the additional debt, is automatically
Continued on page 4
99 Troy Road, Suite 200, East, Greenbush, NY 12061
Tel: 518/463-1118 Email: [email protected]
www.nyshcp.org
Managing Editor: Richard Landers
Tools for the Trade January - February 2008
Tools for the Trade is published
bimonthly by the New York State
Association of Health Care
Providers, Inc. (HCP). Copyright ©
2008 New York State Association
of Health Care Providers, Inc. All
rights reserved.
Page 3
Owners should consider an ESOP . . .
Continued from page 3
depressed for a short period following the transaction. In addition, the value of the company stock will be further
reduced after taking into account minority and lack of marketability discounts. As a result, more stock can be
transferred by the owner to the children without the payment of gift tax than would be the case had there not been
an ESOP transaction.
Employee Motivation
Finally, but certainly no less important, an ESOP can be an effective means of motivating and rewarding increases
in employee productivity through long-term equity incentives.
Employees who have an equity stake tend to be more attuned to their individual and group productivity, sales and
profitability than employees with no vested financial stake in their employer other than a regular paycheck. Not
surprisingly, recent studies have confirmed the positive impact that ESOPs have on the bottom line.
Stanley Bulua, Esq. of the White Plains-based law firm of Danziger & Markhoff, LLP, concentrates in the
areas of estate planning, estate administration, income taxation and employee stock ownership plans. Paul
Essner, CFP, CLU, ChFC is a partner in HCP Associate Member TSG Financial, LLC of Garden City and
a member of the HCP Board of Directors.
Revised I-9 form now required
A revised version of Federal form I-9 must now be used by all employers.
This employment verification form, designed to combat immigration document
fraud, must be completed for all new hires. The new employees then have
three days to provide documents.
The revised I-9 has “(Rev. 06/05/07)N” printed on the lower right corner
of the form and is now the only version valid for use. Key changes to the
form relate to the acceptable forms of identification and work eligibility.
The form became mandatory at the end of 2007.
A revised version of the “Handbook for Employers, Instructions for
Completing the Form I-9” was also produced with images of acceptable
documents. The significant revision to the Form I-9 is the removal of several “List A”
documents which previously could be used for proof of both identity and employment eligibility. The omitted
documents include: Certificate of U.S. Citizenship (Form N-560 or N-570); Certificate of Naturalization
(Form N-550 or N-570); the Alien Registration Receipt Card (Form I-151); the Reentry Permit (Form I327); and the Refugee Travel Document (Form I-571). These documents were said to be easily faked.
Also, the most recent version of the Employment Authorization Document (Form I-766) was added to the
List A of acceptable documents.
Employers are not required to complete new I-9s for existing employees. Rather the 2007 I-9 Form only
needs to be used for new employees and existing employees who require re-verification. The new form has
an expiration date June 30, 2008, implying that an updated version may be forthcoming.
Employers have had to complete I-9 forms for all new employees since 1986. The revised form is available
in the Members Only section of the HCP website (www.nyshcp.org/members/pdf/08revisedi9.pdf). The
revised Handbook for Employers, can be found at www.uscis.gov/files/nativedocuments/m-274.
Page 4
Tools for the Trade January - February 2008
Associates’
Corner
SC Health Care Consulting, LLP
Leo D’Sa, principal of SC Health Care Consulting, LLP, has been an HCP Associate Member, sponsor,
exhibitor and advertiser for a number of years. The firm is based in Dix Hills on Long Island.
Tell us about SC Health Care Consulting.
The firm was formed in 2004 and its practice is to deal with all home care agencies—certified, licensed, long
term—and their entire reimbursement operations and financial management reporting. I have a few physicians
as clients but the real focus is home care. We deal with cost reports, billing issues, operational management,
financial reporting and analysis, projections, forecasting, budgeting. We have clients throughout New York
State but don’t try to go beyond that.
Your clients would typically have accountants in addition to your firm?
Yes, they have their own internal or external accountant and I help on the operational/financial side in areas
that are not the expertise of the accountant. I don’t get involved in taxes, for example. I have an understanding
of that but it’s not my cup of tea.
What kind of questions are clients asking these days? What’s concerning them?
Well, their biggest concern is when the State or county implements things without specifying where the funds
should come from. For example, with the living wage situation, a county specifies a living wage but they’re not
willing to provide the funds to accommodate that. We have to strategize ways to accommodate within the
financial means of each entity. Some clients take money out of their own pocket to put into the company;
some clients go out and take a line of credit. So, things that the State and local government do like that are a
big issue for the agency.
Background checks is another example. At first, there was no reimbursement; now they’re giving reimbursement
but they’re adjusting the whole thing out of the cost report. The State makes the agencies do certain things but
doesn’t want to pay for it.
How do agencies overcome this?
Legislators are going to implement things to make themselves look good and the agencies are going to do
what they have to do to survive. The legislators don’t care about the agencies crying, “We don’t have the
funds, we don’t have the funds.” Survival comes with a strong management team that can cut costs in different
areas to accommodate the new expenses. Health care is supposed to be about taking care of the patient but
now it’s turning into how can you financially survive in order to take care of the patient.
In this industry it’s the survival of who can strategize the best. Every year you have to look at what’s coming
down the pike; what’s going to have an impact next
year; the agency has to be ready. I try to focus my
clients to see how they can get there. Each client
has a different business and a different strategy
may be necessary to get to where they need
to be.
What are your plans for the future of the
firm? Will you be doing anything
differently?
I’m looking to add staff. The practice is growing
tremendously. I get at least six to eight new clients
a year and that’s been big growth.
Tools for the Trade January - February 2008
Associates’ Corner, a regular feature of Tools
For The Trade, highlights a particular HCP
Associate Member.
Page 5
How to submit a byline article
By Regina Luttrell
A byline article is a guest article on a news item or topical issue submitted by a non-journalist
for publication in a newspaper, business journal, magazine or newsletter. Articles can either be
written by topic experts in your organization, or they can be ghost written by one person and
published under another person’s name.
Benefits of a byline article
Byline articles are an excellent way to generate exposure for your company. They can position
you and/or your company as experts on topics related to home care and industry trends, and
are very credible because the commentary is published in an “official” news vehicle. The
purpose is not to directly promote your organization’s specific services, which might be seen
as self serving, but to share “news” such as trends within the home care industry and/or
educate readers on issues important or of value to them. It is perfectly acceptable, however, if
these topics have an indirect tie back to the services you offer.
Targeted publications
While daily newspapers do not accept byline articles for publication because of their focus on
time-sensitive news and reliance on experienced staff writers, the following news
organizations may accept byline articles:
•
Local business journals.
•
Local/regional business magazines.
•
Chamber newsletters.
•
Home care association newsletters.
•
Local health care organization newsletters.
How to submit
Here are some general guidelines to help get you started.
Step 1: Determine the best person in your company to list as the author of the article (this is
typically the president or in some cases the manager).
Step 2: If the article is ghost written, make sure the selected “author” has reviewed the byline
Continued on page 7
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Tools for the Trade January - February 2008
Continued from page 6
before submitting the article, so they are
familiar with the content and prepared to
answer questions that may arise when it is
published.
Step 3: Contact your primary target publication to determine if it accepts byline articles. Before
calling, it is always valuable to read a current issue of the publication, to see if it publishes byline
articles and get a sense for the topics and style of the publication. Usually the best person to ask
about submitting an article is the editorial assistant. If one isn’t available, talk with the managing
editor or editor. Explain who you represent and that, based on consumer comments/questions,
you thought it might be interesting for the publication’s readers to know more about the
particular topic. Offer a brief description of what the article would focus on, for example, how to
choose a home care agency. It is helpful to mention the headline for the article you are thinking
about so they can get a better understanding of the topic.
Step 4: If the publication does accept submitted articles ask what the guidelines are. Sometimes
there is a word count limitation and approval process. Generally, they will want to see the article
before agreeing to print it.
Step 5: If possible, include a photo or “head shot” of the author, with his/her name, title and
contact information so they can easily get back to you with any questions.
Step 6: Confirm the deadline for submission and be sure to meet it. Ask when the publication will
have a decision on publishing the article. When possible, look for opportunities to place the
article in a key upcoming issue (i.e., one that focuses on home care, trends in the home care
industry or health care in general).
Step 7: If your top target does not publish
guest articles, contact your next target
publication and follow the same process.
Do’s and don’ts
Never submit the same byline to multiple
news organizations with a similar reach/
audience.
Always meet deadlines and respond promptly
to editors’ requests.
If the publication wants to edit the article, ask
to approve the changes. (This may not be
allowed.)
How to maximize the article
A published byline article is beneficial
because it provides instant credibility and
increased visibility for the author, company
and the topic. If you are successful in getting
an article published, ask the publication for
approval to create reprints. Have copies of the
article reprinted with the publication’s
masthead at the top and use the article in your
marketing efforts including press kits,
customer information kits and handouts in
your offices.
Tools for the Trade January - February 2008
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Page 7
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Tools for the Trade January - February 2008