Starting in 2016, push comes to shove for small businesses under the Affordable Care Act, better known as Obamacare. As of January 1, small businesses, broadly defined as firms with 50 to 100 full-time employees, must comply with the ACA’s employer mandate and provide qualified health insurance to their workers or face stiff penalties. But this requirement poses a big threat to the financial stability of small employers—and not for the reasons you might think.
Obamacare includes a myriad of regulatory incentives and exemptions that define the parameters of the employer mandate. However, these have inadvertent consequences. Most important, exemptions in the ACA encourage small firms to self-finance their health care plans—that is, pay their workers’ health care bills directly, rather than covering them through a traditional insurance policy. Most large companies in America (above 3,000 employees) engage in self-funding, but that is done now by only about 16% of small companies of between 50 and 100 employees. According to my research, that number is set to rise.
It’s understandable that small companies see self-funding as the superior option. By financing their own health care plans, they stay exempt from the community rating requirements that restrict how much insurers may vary premiums based on factors like age and smoking status; they also stay exempt from the federal and state taxes on most health care premiums that are paid to traditional insurers.
But these benefits pose significant risks for small businesses. While a big company usually has a diversified employee base and financial resources that can help absorb substantial overruns in health care expenses, a small company has neither. One big claim can wipe out a small company.
Read the rest at forbes.com…
When policy makers and commentators express concerns about how little most American workers have saved for retirement, they should focus on three related facts:
1. Roughly half of all American workers are employed by a firm that does NOT offer them any retirement plan.
2. Only 14% of small firms — with fewer than 100 employees — offer them any type of retirement plan.
3. 42 million workers –approximately one third of full-time workers in the private sector — work for small firms.
Of course, these employees of small firms have the right to go to a financial institution, file an application for an Individual Retirement Account ( IRA ), and enjoy federal tax deductions for their IRA contributions. Yet relatively few overcome the forces of inertia and take the time to open an IRA on their own. Only about 5% of employees without a retirement plan at work contribute to an IRA on a regular basis, according to best estimates.
In response to these problems, Mark Iwry and David John (both from Washington think tanks at the time) developed federal legislation that would create the Automatic IRA. This legislation would require all employers without a retirement plan, and with over a specified number of employees, to connect their payrolls to a retirement plan at a qualified financial institution. Then, approximately 3% of the salary of these employees would be contributed each month to this retirement plan, unless they decided to opt out.
Such opt-out plans have been very successful in raising the participation rate of employees in retirement plans, especially low-income and minority employees. In addition, the Automatic IRA does NOT require any contribution by the employer to the retirement plan of its employees. And the proposed legislation has garnered considerable support from both Democrats and Republicans. Nevertheless, Congress has not come close to passing the Automatic IRA.
Read the rest at realclearmarkets.com…
In the 2015 proxy season, shareholders submitted more than 60 proposals asking US public companies to appoint an independent director as a board chairman, as opposed to one person serving as both chief executive and chairman.
In 2012, 45 per cent of the S&P 500 companies split the chief executive and board chairman roles, almost doubling from 23 per cent a decade ago. However, of the 45 per cent, roughly half of the separate board chairs were held by former chief executives.
By contrast, most public companies in Europe have a truly independent director as board chairman. Some commentators have suggested that the US adopt the European model.
While US companies typically oppose this suggestion, they should ask three practical questions:
Would an independent chairman improve the financial performance of the company substantially? Could the internal governance functions of a company be satisfied by other measures? And would an independent board chairman significantly reduce the time spent by a chief executive engaging with shareholders?
After reviewing empirical studies, David Larcker, professor of accounting at Stanford University, concluded that there was no systematic evidence for or against an independent chairman. Similarly, a further study found there is “no statistical relationship between independence and firm performance”.
However, a 2012 study by GMI Ratings, the research provider, showed that, over the past five years, large US companies with a separate board chairman had higher stock increases than companies with a combined chief executive and chairman. Yet another study found that separating the role of chairman from that of chief executive improved financial performance only when the company had been doing poorly.
Read the rest at ft.com…
Co-authored with Mark Roe
The clamor against so-called corporate short-term thinking has been steadily rising, with a recent focus on eliminating the quarterly earnings report that public firms issue. Quarterly reports are said to push management to forgo attractive long-term projects to meet the expectations of investors and traders who want smooth, rising earnings from quarter to quarter.
The U.K. recently eliminated mandatory quarterly reports with the goal of lengthening the time horizon for corporate business decision-making. And now Martin Lipton, a prominent U.S. corporate lawyer, has proposed that U.S. companies’ boards be allowed to choose semiannual instead of quarterly reporting. The proposal resonates in Washington circles: Presidential candidate Hillary Clinton has criticized “quarterly capitalism” as has the recently departed Republican SEC Commissioner Daniel Gallagher.
But while quarterly reporting has drawbacks, the costs of going to semiannual reporting clearly outweigh any claimed benefits.
On the claimed-benefit side, it is doubtful that replacing quarterly with semiannual reporting will induce corporate executives to make longer-term business decisions. Do we really believe that moving from quarterly to semiannual reporting will bring forth many new five-year investment projects? Similarly, without quarterly reporting, why won’t earnings smoothing occur in six-month intervals instead?
Read the rest at wsj.com…
The corporate aspects of the tax plan recently announced by presidential candidate Jeb Bush are aimed at achieving the worthwhile goals of economic growth and job creation. However, these goals are likely be undermined by the plan’s treatment of foreign profits of U.S. multinationals and unrealistic projections of tax revenues from rate cuts.
Almost everyone would agree that the current U.S. system for taxing foreign profits of U.S. multinationals is seriously flawed. In theory, such profits are taxed by the U.S. at its standard corporate tax rate of 35 percent — one of the highest in the industrialized world. In fact, such profits are NOT subject to any U.S. corporate tax as long as they are held overseas. As a result, such profits of U.S. multinationals are effectively “trapped” overseas – they are generally not repatriated to build US plants, buy US start-ups or pay dividends to their American shareholders.
The Plan on taxing PAST foreign profits of U.S. multinational is sensible — a one-time tax of 8.75 percent paid over a period of years. That could raise close to $180 billion in revenues. Since U.S. multinationals reasonably relied on the existing U.S. tax rules for foreign profits by holding them abroad, these corporations should be taxed at a modest rate on such past profits.
In the future, however, Jeb’s plan calls for a pure territorial system — foreign profits will be taxed only in the country where they are “earned.” This plan, if adopted, would strongly encourage U.S. multinationals to transfer their intellectual property (patents, copyrights and trademarks) — which can be moved easily at minimal cost — to tax havens, like the Bahamas, where they pay little or no corporate taxes.
Read the rest at realclearmarkets.com…
The debate over Pfizer’s bid to buy U.K. drugmaker AstraZeneca is intensifying. Last week, AstraZeneca rejected Pfizer’s offer of $106 billion, even though it was about 7% higher than its previous bid.
As negotiations escalate, it’s worth taking a close look at Pfizer’s proposed merger into AstraZeneca – with its tremendous implications for U.S. tax collections and tax policies. Pfizer’s determination underscores how driven U.S. multinational corporations are to shift their domicile outside the U.S. Why? Unless they keep foreign profits abroad, the U.S. subjects them to a corporate tax of 35%.
As a result, more than $2 trillion in foreign profits held by multinationals are “locked out” of the U.S. These funds could otherwise be spent making critical investments in the U.S. economy, such as building manufacturing facilities, buying U.S. companies, or even paying dividends to shareholders. For instance, Apple recently borrowed $17 billion to pay dividends, despite holding more than $130 billion abroad.
Thus, the current tax rules reduce investments in the American economy and distort business decisions of American executives. Moreover, although the U.S. corporate tax rate is almost the highest in the world, the U.S. Treasury receives relatively little revenue from taxes on foreign profits from multinationals.
Read the rest at fortune.com…
Co-authored with Joshua Rauh
The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.
The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.
The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.
Read the rest at wsj.com…