When it comes to a discussion about labor unions, emotions run very high. Some prognosticators will attribute the decline of American manufacturing jobs to labor unions. I say Fortune 500 companies (on the advice of their consultants) would have cut 10,000 jobs any how to increase quarterly earnings by a penny per share.
Business owners typically shake in their boots and conjure up images of picket lines outside of their business. Employees these days may have the image that Ross Perot described about NAFTA during his presidential campaign of jobs being "sucked" South of the Border" or across the Pond to Southeast Asia, India or China. Some employees might say that any job with no pension plan or benefits is better than not having a job at all.
For many business owners, their bias against unions, can often defy reason. They imagine a union employee who - (1) Never comes to work (2) Comes to work drunk or stoned or (3) Sleeps 7 hours of the 8 hour shift, and (4) A loss of power of to fire the employee because of the collective bargaining agreement with the union. Like fishing stories, union stories become more outrageous each time they are told.
Over the last twenty five years, pension reform within the tax law has had the effect of limiting pension benefits for everyone. As a result of tax rules such as the controlled group and affiliated service group rules, it became more difficult for business owners to structure pension plans that reduced participation by rank and file employee. At the same time, salary and benefit caps were added. Adding insult to injury, the stock market has also had several catastrophic declines.
The net result is that no one was better for the legislation and everyone has a bad pension plan or no pension plan. However, as the law of the jungle dictates, if there isn't enough "meat on the bone" for the business owner, no one eats!
Over the last quarter century, defined benefit plans in small businesses large disappeared. In many small businesses, the only pension program is a 401(k) Plan. These plans were never intended to be pension programs but rather savings programs. An employee these days is very fortunate to have an employer that provides a "match" to the employee's contribution.
Unfortunately, the prospects for healthcare seem to be unfolding in the same manner as the pension story. Millions of workers lacked health insurance so the federal government mandated health insurance. As Obamacare unfolds, the early predictions for business owners and their employees seem disastrous. The predictions regarding cost, forecast increases to the cost of current coverage of 50-60 percent. Many business owners predictably are looking to pay the penalty tax for non-participation instead. Many states have refused to establish health insurance exchanges as required by the new healthcare law.
Businesses with over 50 employees need to provide healthcare coverage for its employees. A failure to provide coverage will result in a penalty is $2000 per employee and $3000 if the business owner uses tax credits to purchase insurance on the exchange. Employers with fewer than 25 full time employees and average income below $50, 000 can apply for tax credits of up to 30% for insuring their employees.
Small businesses provide the majority of jobs. When it is all said and done, employees in small businesses will have no pensions or healthcare. As the cliché says, "The road to Hell is paved with good intentions." In this case, under the Doctrine of If You Can't Beat Them, Join Them, union membership may provide the best solution for a small business owner and his employees.
This article will outline the path towards retirement and healthcare security while minimizing the recent increase in taxation. The article will discuss how a business owner or owner of a professional practice can elect to cover his employees under a collectively bargained agreement with a union for retirement and benefits purposes.
As a consequence, the business owners will be able to establish the type of benefit plan that optimizes benefits for the business’ principals – a defined benefit plan as well as other benefit plans that are subject to ERISA. The business owner can use some of his tax savings to provide pension and/or healthcare benefits under the collective bargaining agreement that were better than his business owner previously offered the employees.
The Current Business Landscape
Most closely held businesses (65-75%) are structured as pass-through entities - S corporations or LLCs. As a result, the business owner is taxed on the income at the
The top marginal bracket for taxpayers with more than $400,000 (single and $450,000 married) increased to 39.6 percent. Taxpayers with adjusted gross income in excess of $250,000 will pick up an additional 3.8 percent on unearned income raising the top marginal bracket to 43.4 percent.
These same taxpayers will also be exposed to the phase out of personal exemptions and miscellaneous deductions. These phaseouts effectively raise the marginal bracket by 1-2 percent. Taxpayers in the top marginal bracket will end up with a top federal bracket of 45.4 percent. High income states such as New York and California add an additional 8-10percent bringing taxpayers to a combined marginal tax bracket of 53-57 percent.
The benefits of qualified retirement plans often lose a lot their luster due to the requirements to provide non-discriminatory participation and benefits for employees. It suddenly makes the plan expensive when the business owner has to contribute for someone else other than himself.
Collectively Bargained Arrangements under IRC Sec 410(b)(3)(A)
IRC Sec 410(b)(3)(A) provides an important exception to the minimum participation rules of qualified retirement plans. This Code section exempts employees that are covered for retirement as well as health benefits under a collectively bargained agreement.
IRC Sec 410(b)(3)(A) states the following in its exemption:
“employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers,”
As a result, company employees pursuant to a collective bargaining agreement become union members and the business makes contributions to the union retirement and health plans instead of the company plans. These contributions to the union plan are tax deductible.
As a result, these employees are no longer part of the company pension plan or benefits program. The business owner is free to establish a define benefit plan as well as a medical reimbursement plan. The only remaining employees eligible for participation in the business owner’s plan are the business owner and family members or key employees.
Benefit plan contributions can be optimized for the business owner. The business owner gets what he wants and the employees receive better benefits than they previously had.
Dr. Ben Casey, age 55, is a dermatologist with his own medical practice. His wife, age 55, works as his office manager. Ben takes an annual salary of $700,000 and his wife takes a salary of $255,000 on revenues of $3 million.
The practice has two employees - two nurse practioners as well as a bookkeeper and a receptionist. The senior nurse is 55 years old and has a salary of $65,000 per year. The junior nurse is 50 years old with an annual salary of $40,000. The bookkeeper, age 60, has an annual salary of $30,000. The receptionist, age 50, has an annual salary of $25,000. The total payroll for non-owner employees is $160,000.
The medical practice has provided a 401(k) plan without a match. Additionally, the practice offers a medical plan that pays half of the cost of the employee coverage. Each employee pays for the cost of coverage for family members. The cost for family for the employee and family coverage is $1,250 per month.
The Casey Medical Group enters in to a collective bargaining agreement with the Local 999 of the A.F.L-C.IO. Each employee will pay union dues of $35 per month. The practice will increase salaries to compensate for the cost of union dues. Each employee with be a "card-carrying" member of Local 999.
The collective bargaining agreement (CBA) has several important provisions. First, the CBA has a provision that prevents employees from striking. The CBA provides the practice may fire any employee for just cause without restriction. Additionally, the CBA allows the business owner in the event of contracting "cold feet" to terminate the CBA with ninety days notice to the Local 999. The CBA provides for a single coordinated visit by a representative from Local 999.
The CBA outlines paid vacation days and holidays as well as vacation policy and overtime pay. A point here - this type of information should be in writing anyhow!
The CBA memorializes the medical practice contributions to the Local 999 401(k) plan as well as the Local 999 healthcare plan. The practice will make a 3 percent match to contributions. Additionally, it will pay the full cost of employee healthcare in the union plan which is a "Cadillac" plan.
The medical group establishes a new defined benefit plan covering Dr. Casey and his wife. A fully insured defined benefit plan option funded with life insurance and annuities. The contribution for Dr. Casey and his wife is $293,000 each. The total contribution is $586,000 for the fully insured defined benefit plan. Each plan participant has a pre-retirement death benefit of approximately $2.4 million.
Additionally, Dr. Casey and his wife will make full 401(k) contributions along with a "catch up" contribution for a total contribution of $23,000 each. Dr. Casey and his wife will each be able to make profit sharing contributions of 6 percent of their earned income up to $255,000 of compensation. The contribution for each participant is $15, 300 each. The total defined benefit contribution for the 401(k) and profit sharing plan is $76,600.
Dr. Casey and his wife will be able to make pre-tax contributions of $662,600 into a combination of qualified retirement plans. He will also adopt a medical reimbursement plan.
IRC Sec 105 provides a small business owner with the ability to reimburse an employee and his family members for medical expenses not covered by health insurance. The business is able to deduct the reimbursement expense as a business expense while excluding the payment for the benefit of the employee without treating the payment as wages subject to income and the employer portion of FICA (7.655) and FUTA (0.8%) payments. The employee is not taxed on these reimbursement payments from the employer and not subject to the employee portion of FICA or the additional Medicare tax. .
The Medical Expense Reimbursement Plan is a contractual arrangement or plan that is subject to discrimination testing absent the collective bargaining agreement between the business and a union. The Medical Expense Reimbursement Plan requires a corporate resolution adopting the Plan as well as a Summary Plan Description.
The additional expenses for the business related to the union arrangement are very modest and are dramatically offset by the additional retirement benefits and pre-tax contributions to multiple pension plans. The CBA arrangement excludes the employees for all benefit plan purposes.
Sooner or later in this life, we arrive at the conclusion that we need each other. The result of government regulation in employee benefits and now healthcare has had the effect of limiting benefits for business owners. The unintended consequence of this level of regulation has resulted in a loss or reduction of benefits for employees. Everyone was worse off than before government regulation.
Most of the jobs in the U.S. economy are in small business. Business owners are historically have an unrealistic and biased view of labor unions. Union members are regular folks that are moderate or conservative both politically and socially. Most served in the Armed Forces. They are not left-wing limousine liberals. Politically unions have cast their bets where they have had the best chance to protect their members.
Both unions and business owners find themselves in the same spot - backs against the wall. There is an unprecedented opportunity to take advantage of the opportunity to improve the benefit and tax results for business owners and their employees. Seize the moment!
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