Healthy Perspectives August 2017


July 25th, 2017

Age Weighted Plan Considerations

Kris Houghton, CPA, MST

Are you among the majority of medical practices who established a retirement plan many years ago and haven’t reviewed it to determine if it is still the best fit? If so, now may be the perfect time to consider a change.

Age-weighted profit sharing plans have been around for a little over ten years and are an intriguing tool for the design of retirement plans, permitting employers to make contribution allocations on the basis of age as well as salary. The age-weighted profit sharing plan can be useful for employers that wish to reward older employees with larger allocations, want contribution discretion, and are willing to give up larger contributions (and pension benefits) available under defined benefit plans. The plan may also suit a practice with older and younger partners where the young partners can only afford a limited amount, while the older partners desire contributions near the maximum level. The following is a simple review of how these plans work and a comparison to the plan you may already have.

Service-weighting. Instead of strictly age-weighting a plan, an employer may find it more desirable to reward the longer-service employees by weighting contributions by service, or a combination of age and service, rather than just age. This is a modification of age-weighting, since employees with greater service are more likely to be older in age.

The age-weighted profit sharing plan does not differ in any other respect from the traditional profit sharing plan. Contributions by the employer can be fully discretionary; Social Security integration is possible; the top-heavy and nondiscrimination rules apply; benefits are equal to the account balances; and participant directed investments are permitted. The contribution limitations are also the same: individual allocations are limited by to the smaller of $54,000 (2017) or 25% of salary.

Age-weighted Plans for Self-employed Individuals. Age-weighted plans may also be used for self-employed individuals. However, a trial-and-error basis must be used in determining the self-employed individual’s compensation for allocation purposes since it is a circular calculation. When calculating a self-employed individual’s own contribution deduction to an age-weighed plan, compensation is defined as net self-employment earnings less the deduction for the employer-equivalent portion of the self-employment (SE) tax after a reduction for the individual’s own contribution.  If the individual’s compensation after the previous deductions is not reduced below $270,000, the 2017 maximum salary limit for calculating benefits, $270,000 is used for compensation for allocation purposes. However, if the individual’s compensation falls below $270,000 after the necessary reductions, a trial-and-error basis must be used to determine compensation.

Comparison of Age-weighted and Other Plans Defined Contribution Plans. The money purchase plan is a defined contribution individual account plan similar to a traditional profit sharing plan, except that up to 25% of the total salary of participants may be contributed and the company’s contributions are neither discretionary nor flexible. The target benefit plan is a money purchase plan where the contributions are age-weighted. The target plan has been around a long time, but never really caught on because of the requirement of an annual contribution and the $54,000 maximum.

Defined Benefit Plans. The age-weighted profit sharing plan resembles the defined benefit plan in that the contributions are actuarially structured. However, there is a world of difference. The defined benefit plan contribution, for instance, is not limited to specified percentages of salary–the limitation is in the annual pension benefit instead. A contribution for a highly compensated older participant can be well in excess of the greater of $54,000 or 25% of salary, and the company contribution in total is not restricted to 15% of total participants’ salary.

The age-weighted profit sharing plan will produce larger contributions for the older employee and do a better job of providing an adequate pension benefit than the standard profit sharing plan. However, the defined benefit plan remains better suited for this purpose, since it can easily relate the pension at retirement to final average pay and total service, and there are no contribution limitations to prevent it from doing so, assuming the necessary funds are available. Where there are older employees, including the owner, who wish to retire, the defined benefit plan can provide an adequate benefit level.

Also, contrary to popular belief, the defined benefit plan can offer contribution flexibility, permitting a certain amount of budgeting by an employer. This usually occurs where there is a past service liability and maximum contributions are made whenever possible, thereby reducing the minimum contribution requirement in succeeding years and expanding the contribution range. This degree of flexibility does not, of course, approach the complete contribution discretion possible under a profit sharing plan, but frequently is satisfactory to the employer.

The defined benefit plan has been saddled with a host of complex requirements generated by the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation, and the FASB. As a result, defined benefit plans are, on average, harder to administer and require greater use of professionals–actuaries and accountants and, from time to time, attorneys. The administrative cost will usually be higher than for a profit sharing plan, unless the profit sharing plan is encumbered by additional administrative details such as permitting the participant to select investments from several funds, making loans, and frequent distribution of statements to participants. The employer may also need to pay premiums to the PBGC, which are not required of profit sharing plans.

The defined benefit plan therefore requires a higher degree of commitment than does an age-weighted profit sharing plan but, if properly communicated, will usually generate greater goodwill among the older and longer-service employees because of a promised benefit level geared directly to salary and service.

Favoring Those Closest to Retirement The salient feature of the age-weighted profit sharing plan is the ability to skew the contribution allocation toward the older participants while retaining all the other desirable features of profit sharing plans. This will enable greater retirement benefits for those closest to retirement. However, the new tool IRS made available will not work as effectively as the traditionally defined benefit plan if a larger pension for the older employees is vital. Employers will find the age-weighted profit sharing plan worth exploring. It also provides an opportunity to take a fresh look at the existing retirement program to determine if it is still suitable in meeting the company’s original objectives.

Since this article is intended to be an introduction to age-weighted plans, you should discuss its applicability and possible limitations with your benefits plan adviser.

 

Kristina Drzal Houghton, CPA, MST is a partner with MBK, and director of the firm’s Taxation Division; khoughton@mbkcpa.com.

Private Practice – Succession Planning From Within


July 25th, 2017

Private Practice – Succession Planning From Within

By Kevin E. Hines, CPA, MST, CVA, CSEP

Partner

In today’s economic landscape, there are a plethora of challenges facing private medical practices. The financial environment of the private practice is more complicated than ever and practice management is made even more complicated by administrative and medical staff management issues, non-stop changes in billing and reporting, and here in Western Massachusetts, the trend of many medium and large practices being purchased by area hospitals. However, one of the most important issues facing privately owned practices may be often overlooked: Succession Planning.

According to a census study performed by the Federation of State Medical Boards in 2014, over 50% of all physicians are over age 50 and about 20% of all physicians are over the age of 60. This is a staggering statistic and will have a significant impact on private practices as they begin to transition from within, due to the often limited pool of possible new future partners

Some of the Challenges

Physician owners can only pass their business on to another qualified physician, inherently limiting the pool of possible candidates/buyers. This number grows smaller as many young doctors look to work with larger health care providers. The reasons for this vary, however, often include work/life balance considerations, personal finances and the security of a larger employer. At the same time, retiring physicians are probably thinking about their personal finances as well.

“How soon should I retire? Will I have the financial wealth to allow for retirement living?  Can I increase my retirement assets with a proper transition of the business/practice?”

For many physicians, recognizing these concerns may be the first step towards discussing and implementing a succession plan.

Establish Succession Plan Goals

Establishing a succession plan is one of the most important decisions a business/practitioner can make.  However, establishing a successful plan requires that the plan a) provides a road map to the future, b) ) may provide some level of job security to employees, c) possibly provides comfort to key employees because they can see a path to the future and d) helps determine next steps within the plan.  So, what will the goals of the succession plan be?

Owners, key stakeholders and trusted advisors should get together to identify goals and objectives: What’s the end game?  What are the financial goals of the selling physician? What are the business considerations that should be weighed and executed within the plan?  Will the transfer be to current or future employed/practice physicians? What is the timing of the transfer?  How will we go about setting the plan in motion?  Who should we share the plan with? Advisors? Employees?

Four Phases

Once goals have been established, a plan can be created. A typical Succession Plan can be broken into four phases:

  1. Identifying or Recruiting Necessary Talent. Is this talent currently on board? Will there be a search for new talent?
  2. Developing the Next Generation. Ensure that the individuals moving in to ownership are prepared for their new responsibilities. If a new skill set is needed, be sure to identify these skills required in advance and create a process for training.
  3. Review of the financial arrangement. How will the finances be vetted?  Consider both salaries for the key individuals working into ownership and the buyout of current ownership.  Will there be sufficient funds to finance the succession plan?
  4. Develop & execute the plan. Write the playbook and execute effectively. Define what success looks like, including milestones throughout the execution of the plan. Monitoring progress effectively can help keep the succession process from falling victim to unexpected potentialities.

Identifying or Recruiting Necessary Talent

One of the more important steps will be to assess your current talent.  Depending on the size of the practice, you will need to determine what skills a future owner will need.  In a small practice, the practitioner may need a more seasoned business skill set, while a larger practice with a strong firm or financial administrator support team, the talent needed may lean towards other areas of the practice such as recruitment or oversight of various medical specialties of the practice. Each situation will be different.  Once you have reviewed the talent pool, you will then need to determine if you have talent on hand or will need to search outside the group for the next group of partners.

Developing the Next Generation: Communication and Training

Now, how and when do you communicate this plan?  To whom do you communicate the plan to?  This will be one of the keys to success, where you try to get everyone on board with the plan.  My experience has been that if the plan is a) well thought out, b) written with logical and orderly steps and c) takes into consideration the goals you identified at the beginning of this exercise, you have a much better chance of success.  Timing and disclosure of the succession plan should take into consideration the work you did in determining who would be your successor, the skills that are needed to take over, whether training or mentoring will be required and your intended retirement schedule. Will you step away or slowly transition the reins of the business to your successor?  This can be a difficult decision since you may not have a previous, similar experience to reflect on.

Plan B

Despite all of your planning and careful execution, there is one lesson that has stood the test of time: always have a “Plan B”.  Succession plans play out over time and will need to be updated on a regular basis.  As you can imagine, situations will change and evolve and your goals may change as well.  Key employees may leave or there may be a situation that requires the succession plan to be accelerated, such as a health issue of a key owner. Having a Plan B ready to go will help account for the unexpected.

Consider Professional Help

Finally, seek outside professional help. Consider the value that a professional experienced in the planning and execution of many Succession Plans can bring to this important event.  By working with someone who has the depth of knowledge and foresight to plan for (and possibly mitigate) the challenges and obstacles that you will undoubtedly face, you have a much better chance of executing a successful and efficient transition. Unlike the vast majority of those who ignore succession planning, you will also be working to reap the rewards of succession in a smarter, more advantageous way.   This professional should be a trusted advisor, have experience with transitions of businesses and be able to bring together various individuals and professionals to achieve the goals you have established for the transition of your business.

This article was written by Kevin E. Hines, CPA, MST, CVA, CSEP, partner at MBK, with specialties in Business Valuations, Estate Planning and Taxes.  You can reach Kevin at (413) 536-8510.

Meyers Brothers Kalicka Adds Two New Partners


December 28th, 2016

A Matter of Addition

Kristi Reale and Jim Krupienski

Kristi Reale and Jim Krupienski are the newest partners at Meyers Brothers Kalicka.

As part of a strategic plan to generate new opportunities and more profound growth for the company, and also to ensure a steady flow of new leadership, the Holyoke-based accounting firm Meyers Brothers Kalicka has named two new partners — senior managers Jim Krupienski and Kristi Reale. They’ve been acting essentially as partners without that title for more than year now, and say the firm has provided them all the tools they need to succeed.

Jim Barrett says it was maybe the worst-kept secret he’d seen in quite some time.

He was referring to the granting of partner status to two senior managers at the Holyoke-based accounting firm Meyers Brothers Kalicka — Jim Krupienski and Kristi Reale. The two, who have been with the firm for 12 and 15 years respectively, and had risen through the ranks to senior manager, were told more than a year ago, in something approaching confidentiality, that they were on the track to becoming partners and would likely achieve such status so by the end of this year.

Their promotion wasn’t exactly classified information, but it certainly wasn’t broadcast loudly, said Barrett, the firm’s managing partner since 2009, adding that he made it all official in an announcement to the staff on Dec. 19.

To say that it was somewhat anti-climactic was an understatement, as evidenced by this anecdote from Reale, several days before the news was scheduled to break internally.

“Someone walked up to me and said ‘has your promotion been made official yet?’ she recalled. “It wasn’t exactly a secret, but I didn’t think everyone knew. I guess they did.”

But while the promotions may not have been as discreet as intended, they are certainly significant, said Barrett, and represent an important and in many ways unique step in the company’s efforts to grow and put in place an effective succession plan that will ensure solid leadership for decades to come.

“This was a well-thought-out component of our strategic plan,” he explained. “We have a partner who is retiring, so we have a practice need; Jim and Kristi have demonstrated all prerequisite skills to get there, and we’ve been talking to them for almost two years about how they’re on the track.

“It’s been a process that’s taken a number of years to unfold,” he went on. “We want to onboard them so they know what to expect and the know what’s expected of them; we want this to be a success for everyone.”

While Reale and Krupienski took essentially the same path to a partnership, and their resumes have many common denominators, including extensive work in the community, BusinessWest 40 Under Forty plaques (Reale in 2009 and Krupinski a year later), and a number of bylined submissions to this magazine, they arrived at MBK with different career aspirations, as we’ll see in a few moments.

But they arrived at this career moment together, and for now, they’re excited about moving into different, slightly bigger offices and having their names and bios found by clicking the ‘partners’ button on the MBK homepage. But they’re far more focused on meeting the responsibilities that some with that title and helping the firm grow at a time when doing so is certainly challenging for any financial services firm in a region that has seen little, if any, overall expansion.

For this issue and its focus on Banking & Financial Services, BusinessWest talked with the two new partners, as well as the managing partner, about the promotions and the firm’s strategic plans moving forward.

Watching Their Figures

When she first came to Meyers Brothers, P.C. in February of 2001, Reale was thinking more about staying maybe 16 weeks than the nearly 16 years it took her to reach partner.

Indeed, a veteran with seven years of public accounting work under her belt, she was hired to help during tax season on a per-diem basis, and walked in the door already thinking about what she might do next. But a funny thing happened on the way to carrying out those plans.

“I never left,” she said, stating the obvious before moving on to the more important topic — why.

“I was thinking about going into private industry, but after a couple of months at Meyers Brothers, I just loved it and decided to stay,” she explained, adding that she was hired after just five weeks of per-diem work. “It was very professional, everyone was treated well … it was just a great place to work. I looked forward to going there every day.”

Kristi Reale

When she arrived at Meyers Brothers, Kristi Reale was focused on staying 16 weeks, not 16 years, but the environment she found changed those plans quickly.

 

Meanwhile, Krupienski got off the elevator on the eighth floor of the PeoplesBank Building just off I-91 (the merged companies came together there in 2005) with a much different mindset.

After serving as a senior accountant at a Big-4 firm (PricewaterhouseCoopers) and then shifting gears and working as a senior auditor at the Hartford, he had made up his mind to return to public accounting. The question was where, he said, adding that through a friend he heard about an opening at MBK.

“I interviewed, liked what I heard, liked the firm, the culture, the people I met with … and felt I should throw my hat into the ring,” said Krupienski, adding that while it would be a leap to start thinking about making partner back in 2003, he allowed himself to harbor such thoughts, and before long, that became a hard goal.

“It was kind of a thought in the back of my mind — I had made the jump back into public accounting, and you generally don’t do that if you don’t have some aspirations for being partner someday,” he told BusinessWest, adding quickly that reaching this rung at a firm of that size is never a given and it would likely take much more than a decade.

“I came from a big-firm mentality,” he explained. “It’s very structured there in terms of the progression, and while this firm isn’t PricewaterhouseCoopers … things are similar in many ways.”

Those sentiments help explain how accounting firms are in many ways different from small and medium-sized law firms, said Barrett, adding that with the latter, an associate is in many cases on a partner track soon after arrival, and if they’re good at what they do, can probably expect to make partner within a certain number of years, although the number and circumstances vary widely with the firm.

In accounting, it’s different, he said, adding that law is more of a transactional business, where individual lawyers have what amounts to their own book of business and client list, while in accounting, one to 10 people could be working with the same client.

Jim Krupienski

Jim Krupienski says MBK has provided him and fellow new partner Kristi Reale with all the tools they need to succeed.

When asked why both Reale and Krupienski were named partners at this time, Barrett said it this amounted to a sound business decision. Both are qualified, experienced managers, and both have the capacity to help the firm grow market share.

Elaborating, he said there are certain required skill sets for reaching the partner rung, and both certainly possess them.

“Can you serve clients?” he began. “Are you able to grow the practice — attract new clients and develop relationships with existing clients? Can you train and develop staff? These are the prerequisites, and they have them.”

By the Numbers

Beyond those required skills, Reale and Krupienski also complement each other in many ways, said Barrett, adding that while they’re both involved in auditing and accounting, or A&A as they say in this business, they have different focus areas and specialize in different sectors of the economy.

Krupienski, for example, specializes — and has written about — medical practice operation, tax planning, and retirement plan strategy, while Reale specializes in closely held businesses, business valuations, management advisory services, and business and tax planning, and has extensive experience in retail, manufacturing, construction, distribution, real estate, insurance, and other service organizations.

“We have people with somewhat similar skill sets,” said Barrett. “But they’re different enough so they can go out and not compete with each other, and complement each other in some cases.”

Meanwhile, bringing them both on as partners now is a proactive step within the company’s broad efforts within the realm of succession planning, he went on, adding that many firms, especially smaller operations, are not putting enough emphasis on creating a solid pipeline of leadership of the years to come.

Elaborating, he said that when the two firms merged, there were 13 partners, a large number that the shareholders knew would eventually be whittled down, out of necessity, through retirement. That point has been reached, he went on, and the firm needs to replace that leadership.

“Our number one strategy starting when I became managing partner was to have a succession plan,” he told BusinessWest. “And everything we’ve done subsequent to that has been to develop that plan, including an investment in technology, investment in people through training, investment in human resources; this is just the culmination of that.

“We chopped this down to a five-year program,” he went on. “And the culmination of that is to have our replacements in place. This is the first example of all those efforts coming to fruition.”

When asked if, when, and under what circumstances additional partners would be named, Barrett gave a very quick answer: “Growth of the firm.”

And there are several ways to achieve growth, he went on, listing acquisition, geographic expansion, attaining a larger piece of the existing pie, or moving aggressively and effectively if the pie should happen to become larger.

And the two partners could, and likely will, play a large role in those growth efforts.

“We’re hoping that with their respective areas of expertise — Jim in medical and pension work and Kristi with business valuation — that they’re going to bring another level of services to clients or perspective clients that will allow us to grow,” he explained.

Both partners sounded like they were up for that mix of opportunity and challenge.

“It’s taken us time to get here, we’ve gone through the needed steps,” said Krupienski. “And in terms of where we are — they’ve afforded us with every tool we need to meet those challenges — training, development, helping us get out there, supporting us with joining boards and getting involved in the community … all of that will help in terms of meeting new people, meeting new prospective clients, and meeting other associates and professionals that will develop our base moving forward.”

Said Reale, “we’ve both had a lot of training, whether it’s in our own special niche, sales training, soft-skills training, leadership training … and it’s all going to help us develop professionally. And we’ve already been essentially working as partners, just without the title, for more than a year now.”

Focus on the Bottom Line

That last point certainly helps explain why the promotion of Reale and Krupienski to partner has been the proverbial worst-kept secret.

But while the announcement on the 19th might have been anti-climactic in some ways, it was a milestone moment nonetheless.

That’s because, as Barrett noted, it represented one significant step in ongoing efforts to achieve growth and a solid leadership for the future.

George O’Brien can be reached at obrien@businesswest.com

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