Financial Services News

G.R. Reid Consulting Services, LLC
 

 

What Is the Difference Between a Fixed Annuity and a Variable Annuity?

An annuity is a contract with an insurance company in which you make one or more payments in exchange for a future income stream in retirement. The funds in an annuity accumulate tax deferred, regardless of which type you select. Because you do not have to pay taxes on any growth in your annuity until it is withdrawn, this financial vehicle has become an attractive way to accumulate funds for retirement.
 
Annuities can be immediate or deferred, and they can provide fixed returns or variable returns.



Fixed Annuity
A fixed annuity is an insurance-based contract that can be funded either with a lump sum or through regular payments over time. In exchange, the insurance company will pay an income that can last for a specific period of time or for life.
 
Fixed annuity contracts are issued with guaranteed minimum interest rates. Although the rate may be adjusted, it should never fall below a guaranteed minimum rate specified in the contract. This guaranteed rate acts as a “floor” to potentially protect a contract owner from periods of low interest rates. Fixed annuities provide an option for an income stream that could last a lifetime. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.
 
Immediate Fixed Annuity
Typically, an immediate annuity is funded with a lump-sum premium to the insurance company, and payments begin within 30 days or can be deferred up to 12 months. Payments can be paid monthly, quarterly, annually, or semi-annually for a guaranteed period of time or for life, whichever is specified in the contract. Only the interest portion of each payment is considered taxable income. The rest is considered a return of principal and is free of income taxes.
 
Deferred Fixed Annuity
 With a deferred annuity, you make regular premium payments to an insurance company over a period of time and allow the funds to build and earn interest during the accumulation phase. By postponing taxes while your funds accumulate, you keep more of your money working and growing for you instead of paying current taxes. This means an annuity may help you accumulate more over the long term than a taxable investment. Any earnings are not taxed until they are withdrawn, at which time they are considered ordinary income.
 
Variable Annuity
A variable annuity is a contract that provides fluctuating (variable) rather than fixed returns. The key feature of a variable annuity is that you can control how your premiums are invested by the insurance company. Thus, you decide how much risk you want to take and you also bear the investment risk.
 
Most variable annuity contracts offer a variety of professionally managed portfolios called “subaccounts” (or investment options) that invest in stocks, bonds, and money market instruments, as well as balanced investments. Some of your contributions can be placed in an account that offers a fixed rate of return. Your premiums will be allocated among the subaccounts that you select.
 
Unlike a fixed annuity, which pays a fixed rate of return, the value of a variable annuity contract is based on the performance of the investment subaccounts that you select. These subaccounts fluctuate in value with market conditions and the principal may be worth more or less than the original cost when surrendered. Variable annuities provide the dual advantages of investment flexibility and the potential for tax deferral. The taxes on all interest, dividends, and capital gains are deferred until withdrawals are made.
 
When you decide to receive income from your annuity, you can choose a lump sum, a fixed payout, or a variable payout. The earnings portion of the annuity will be subject to ordinary income taxes when you begin receiving income. Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply during the contract’s early years.
 
Annuities have contract limitations, fees, and charges, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Any guarantees are contingent on the claims-paying ability of the issuing insurance company. 
 
Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal income tax penalty. You are encouraged to seek tax or legal advice from an independent professional advisor.

The above information was supplied by Emerald Connect, Inc. All rights reserved © 2011.  This material may not be reproduced without permission.

Accounting & Tax News

: : Gary Topple, CPA
, Partner
G.R. Reid Associates, LLP

631.425.1800

Income Tax Planning 2011

At this time last year, income tax planning was particularly challenging. Several tax deductions had already expired, and significant changes, including new, higher income tax rates, were scheduled to take effect at the end of the year. Legislation passed in mid-December, however, hit the "reset" button, re-instituting already-expired deductions, and extending major tax provisions--including lower rates--for an additional one to two years.

As a result of the December legislation, 2011 tax planning takes place in an environment characterized by something that was missing last year--a relative degree of certainty. That being said, here are some things to keep in mind as you consider your current tax situation.

Tax rates/calculation
•    Federal income tax rates --The same six federal income tax rates that applied in 2010 will continue to apply in 2011 and 2012. So, depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. Remember, though, that all of your taxable income is not necessarily taxed at that rate--instead, the rate at which you pay tax generally increases as your income increases. For example, if you're a single individual with 2011 taxable income of $100,000, you fall into the 28% tax bracket. However, your first $8,500 of taxable income is taxed at 10%, your next $26,000 of taxable income is taxed at 15%, and your next $49,100 in taxable income is taxed at 25%. Only $16,400 of your taxable income is actually taxed at 28%.
•    Rates for long-term capital gains and qualifying dividends --As in 2010, long-term capital gains and qualifying dividends continue to be taxed at a maximum rate of 15% through 2012; if your income (including any long-term capital gains and qualifying dividends) puts you in the 10% or 15% income tax brackets in 2011 and 2012, a special 0% rate will generally continue to apply.
•    Alternative minimum tax (AMT) --While regular income tax rates and the maximum rates that apply to long-term capital gains and qualifying dividends were extended through 2012, the latest AMT "fix" (in the form of increased AMT exemption amounts) is effective only through 2011. So, if you think you may be subject to the AMT this year, the good news is that you know ahead of time what the relevant exemption amounts are ($74,450 for married individuals filing jointly, $48,450 for unmarried individuals, $37,225 for married individuals filing separately); the bad news is that the AMT situation for 2012 remains up in the air. You can probably expect another AMT fix later this year, but as it stands now, AMT exemption amounts will drop significantly in 2012, dramatically increasing the number of taxpayers ensnared by this parallel tax system.

Temporary payroll tax reduction
Available for 2009 and 2010, the Making Work Pay tax credit was a refundable tax credit equal to the lesser of 6.2% of earned income or $400 ($800 for married couples filing joint returns); the credit was phased out for those with higher incomes. The tax credit was not extended to 2011, but the December legislation created a new one-year 2% reduction in employee Social Security payroll taxes (the 2% reduction also applies to the self-employment tax paid by self-employed individuals).
So, if you're an employee, 4.2% of your 2011 wages (up to the 2011 taxable wage base of $106,800) is being withheld for your portion of the Social Security retirement component of FICA employment tax instead of the 6.2% that would normally be withheld. If you're self-employed, the 12.4% you would normally pay for the Social Security portion of your 2011 self-employment tax is reduced to 10.4%. So, if you earn $100,000 in wages, you'll have an extra $2,000 in take-home pay for 2011. Consider opportunities to take advantage of this extra income by, for example, increasing your retirement savings; applying the extra money toward a long-term goal could extend the benefit of this temporary tax reduction beyond 2011.

Other considerations
    •    IRA qualified charitable distributions --Unless Congress passes additional legislation, 2011 will be the last opportunity for individuals age 70½ or older to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity. These charitable distributions can be excluded from your income, and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA for 2011.
•    Depreciation and IRC Section 179 expensing --If you're a business owner or self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011. The "bonus" first-year depreciation deduction drops to 50% for property acquired and placed in service during 2012. Additionally, the maximum amount that can be expensed under Internal Revenue Code (IRC) Section 179 for 2011 is $500,000; in 2012, the limit is currently scheduled to drop to $125,000.
•    Small business stock --Generally, you can exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided that you meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired in 2011, however, you'll be able to exclude 100% of any capital gain from income if the qualified stock is held for at least five years and all other requirements are met.

Energy efficient improvements
Though not as generous as it has been the last two years, a credit is still available to individuals who make energy-efficient improvements to their homes. You may be entitled to a 10% credit for the purchase of qualified energy-efficient improvements, including a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of specified energy-efficient property: $50 for an advanced main air circulating fan; $150 for a qualified furnace or hot water boiler; and $300 for other items, including qualified electric heat pump water heaters and central air conditioning units. There's a lifetime credit cap of $500 ($200 for windows), however. So, if you've claimed the credit in the past--in one or more tax years after 2005--you're only entitled to the difference between the current cap and the total amount that you've claimed in the past. That includes any credit that you claimed in 2009 and 2010, when the aggregate limit on the credit was $1,500.

Human Resource Services News

: : Karen Randle, Director, Human Resource Services
631.923.1595 ext. 334
G.R. Reid Consulting Services, LLC

New York Wage Theft Protection Act

Effective April 9, 2011, this new law gives greater protection to all workers. Private sector employers are required to provide notice to newly hired employees, to employees once a year between January 1 and February 1 beginning in 2012, and within 7 days of any change if not indicated on employees’ pay stub.  While this law only applies to New York employees, it is something that other states should consider.

This act clarifies and expands the Department of Labor’s ability to enforce the Labor Law. It also develops an employee’s ability to bring complaints and private actions for violating the Labor Law and develops any solutions available to the employee.. Additionally, loopholes that may have previously existed regarding what actions constitute prohibited retaliation are eliminated.

In order to implement this law, pay notices have been created by the New York State Department of Labor for use, however employers are not required to use this form. Employers may use their own forms as long as it provides employees with the following information:

• Employee’s rate or rates of pay

• The basis of the employee’s rate or rates of pay (e.g. by the hour, shift, day, week, salary, piece, commission, or other)

• Whether the employer intends to claim allowances as part of the minimum

• The employee’s regular pay day designated by the employer in accordance with the frequency of pay requirements in the Labor Law

• The name of the employer and any "doing business as" names used by the employer

• The physical address of the employer's main office or principal place of business, and a mailing address if different

• The telephone number of the employer

• Any “such other information as the commissioner deems material and necessary.”

These notices must be given in the primary language of the employee and are provided in multiple languages by the Department of Labor.

Those covered by this law includes all exempt, non-exempt, hourly, salaried, union and commissioned employees. An employee many not waive the notice requirement but may refuse to sign the notice. It should be noted in the employee’s file. An electronic notice may be given to the employee however, the employee must acknowledge receipt of the notice and this acknowledgement must be included with the notice. Employers can face penalties from the Department of Labor if proper and timely notice is not given to employees.

Notices must be kept for 6 years and should be available for review if requested by the Department of labor. For more information about the New York Wage Theft Protection Act or details about retaliation, protected activities or penalties related to each, please contact us.

 

Accounting & Tax News

:: Ray Floch, CPA, Partner
631.425.1800 ext. 312
G.R. Reid Associates, LLP

Consider Carefully If You Should Work After “Retirement.”

Since an individual's excess earnings may affect his own benefits as well as those that are payable to his dependents, while the earnings of a dependent or survivor reduce only the social security check of that dependent or survivor, before considering any type of work, an individual should determine the expenses of working. The individual would have to pay social security or self-employment taxes on those earnings—even though he is receiving social security benefits. He also may be required to pay federal income taxes on that income, depending on his total income. An individual should remember that, above a certain level of income, a portion of any social security benefits is taxed. Also important are direct expenses, such as the cost of transportation, meals, clothing, etc.

An individual also should remember that if he earns more than $14,160 in 2011 (unchanged from 2010) and is between age 62 and full social security retirement age (subject to the special rule for individuals reaching full social security retirement age in 2010), he must forfeit $1 in benefits for each $2 of excess earnings—a 50 percent reduction in earnings over $14,160 (or $1,180 per month). Individuals who reach full social security retirement age in 2011 forfeit $1 in benefits for each $3 in excess benefits for each month before reaching full social security retirement age; the income level for these individuals is $37,680 or $3,140 per month (both unchanged from 2010).

Individuals need to face these facts head-on; however, the offset of earnings against early retirement benefits is merely a factor to consider in determining whether to continue to do least some paid work after electing to receive early retirement benefits. The offset should not prevent an individual from working who needs or chooses to do so. If an individual is collecting benefits and knows that his earnings will exceed the annual limit, he should notify his local Social Security Administration (SSA) office. By doing so, benefits can be withheld currently instead of the individual having to repay them later. As soon as his earnings drop, the benefit payments can start in full again. He must file a report of his calendar year earnings by April 15 of the following year. The report form is available at any SSA office and is filed with SSA, not IRS.

An additional point to remember about continuing to work: More earnings may help raise an individual's social security retirement benefit. If an individual has worked all of his life in social-security covered employment, higher current earnings may substitute for earlier lower earnings years. If close to the minimum years of coverage, additional years of work raise the amount of benefits payable even more directly. SSA runs an automatic process to check if the latest year of earnings turns out to be one of the highest 35 years and will refigure the benefit and pay any increase due. This process usually completed by October of the following year. For example, by October 2011, a beneficiary would get an increase for 2010 earnings if those earnings raised the benefit due; the increase would be retroactive to January 2011.

Health Benefit Services

: : Julie Seiden, Managing Director,
Health Benefits Services | 

631.923.1595 ext. 310

G.R. Reid Consulting Services, LLC 

CDHPs Reduce Spending...Along with Use of Preventive Care Services

Consumer-directed health plans (CDHPs) lower health care spending in their first year, but employers implementing these plans will be well-advised to beef up communications on preventive care coverage. This is because, according to one recent study, consumers in these plans are curtailing their use of preventive care along with other health care services, even though the plans studied covered preventive care on a first-dollar basis.

The study, from researchers at Rand and published in the American Journal of Managed Care, examined claims data for more than 800,000 households enrolled in the health plans of 53 large U.S. corporations, 28 of which offered CDHPs. The study notes that, at the beginning of 2010, more than 54% of U.S. employers offered at least one CDHP option and, as of 2009, 20% of Americans with employer coverage were enrolled in such plans.

The study found that families enrolling in CDHPs for the first time spent less on health care than families enrolled in traditional plans. Specifically, the monthly health care costs of households enrolled in higher-deductible plans grew by $85 less; in percentage terms, the expenditures of households in traditional plans grew by 20%, while the expenditures of households in the consumer-directed plan group grew by 4%. Consequently, in the first year after enrolling in a consumer-directed plan, spending was 14% lower than for comparable families in other plans, according to the study. Cost reductions were greatest for households with deductibles of $1,000 or more. Employer contributions to spending accounts that were part of the CDHP plan design did not undermine these households' cost sensitivity and awareness, as these plans reduced spending as much as plans with a similar deductible but no employer account contributions.

Cost reductions were due to lower growth in inpatient, outpatient and prescription drug costs. CDHP households also made less use of certain preventive care services than did households in traditional plans. Specifically, over the study period, childhood immunization rates increased for households in traditional plans, but decreased among CDHP households. Also, for certain cancer screenings (mammography, cervical cancer screening and colorectal cancer screening), use was moderately lower in CDHP households.

Studies almost universally agree that preventive care services are a good value for the money, since they catch medical problems early on, thereby potentially reducing disease severity and complications and helping those receiving such services to live longer, healthier and more productive lives. Therefore, any indications that consumer-directed health plans make it less likely that enrollees use covered preventive care services should be a concern. Did the high deductible deter households in the study from seeking out preventive care? Did plan members overlook the fact that preventive care was covered on a first-dollar basis, and instead apply a cost-conscious mentality to spending for services not perceived as important or a good value? 

Whatever the reasons, employers need to take steps to ensure plan communications clearly send these messages:

• Preventive care services are covered without cost-sharing from plan members.

• Preventive care services can enhance individual short- and long-term health.

• Most preventive care services are simple, efficient and relatively pain-free.

Work with your company's health plan provider to deliver these messages in ways targeted to your workforce, perhaps including individualized reminders as to the frequency of recommended screenings and immunizations. A healthy workforce, along with optimal plan design, is your company's best chance for effectively managing health care spending.

Human Resource Services News

:: Deidre Siegel
Director, Human Resource Services
G. R. Reid Consulting Services, LLC
Read about G.R. Reid Human Resource Management Tools 

Employee Personnel File Audit
Employee personnel files contain sensitive materials that only few may access. It is important to audit personnel files each year to make sure that those who have access to the file are able to view only what is necessary. For example, the payroll department should not have access to an individual’s I-9 or to any write-ups that the employee receives. Additionally, the benefits department should not have access to employee’s W-2 form or to the employee’s attendance calendar or time-off requests. With this in mind, personnel files should be separated into different sections to allow for ease into the file depending on who is allowed access to the file. The Society for Human Resources Management outlines what should and should not be accessible and by whom. The following is a description of the outline:

Personnel Records may include:
    •    Documents used in recruiting, screening, and hiring candidates
    •    Job descriptions
    •    Written documentation of actions taken during course of employment including promotion,
         transfer, demotion, layoff, termination, etc.
    •    Pay and compensation information
    •    Education and training documents
    •    Receipts of handbooks, employment-at-will disclaimers, policies, etc.
    •    Employee recognition programs
    •    Warnings, disciplinary actions, counseling
    •    Drug test policy acknowledgement and consent form
    •    Background check consent form
    •    Safety training acknowledgement
    •    Sexual harassment training acknowledgement
This section should be visible only to the employee, supervisor with a need to know, former employee, and/or Human resources.

Medical/Confidential should include:
    •    Medical information, enrollment forms, waivers of coverage
    •    FMLA documentation (can be kept separate)
    •    Disability documentation (can be kept separate)
    •    Doctor’s notes
    •    Workman’s compensation documentation (can be kept separate)
    •    Leave of absence documentation
This section should be visible only to Human Resources, supervisor as needed for reasonable accommodation, and/or Government/legal agencies conducting investigation relevant to medical issues.

Payroll should include:
    •    Any payroll changes including bonuses, promotions, demotions in pay, reimbursements
    •    Any deduction information that should be included in employee paycheck such as benefit
         deductions amounts
    •    W-4, garnishments, levys, child –support
This section should be visible only to payroll staff, Human Resources, and/or Auditing/investigating agencies.

The following should always remain separate:
    •    I-9
    •    Investigation notes and reports
    •    Any drug tests or background check results.
This section should be visible only to Human Resources, and/or Auditing/investigating agencies.
These sections can be modified based on the specific documents and who is allowed access to each file. Some documents may contain more information than others, such as social security numbers, which may be kept separate from other information. Files should be kept consistent, locked up in a file cabinet where files cannot be tampered, and all information accessible should be kept confidential at all times. If at any time there are any questions or discrepancies, state and federal laws should be researched to confirm compliance.

Commercial Insurance Services

: : Louis Santelli, CPCU, CIC, Managing Director, Commercial Insurance Services
631.923.1595 ext. 330
G.R. Reid Insurance Services, LLC

New Building Codes Can Leave You Under-Insured

The owner of a commercial building may believe that replacement cost insurance coverage on the building is sufficient to protect them from financial loss. After all, they took the insurance agent's advice and bought enough insurance to pay for repairing or replacing the building if it were completely destroyed. However, this may be a false sense of security, particularly if the building is an older one. While the building may not have changed greatly over the years, local building codes undoubtedly have. Even codes in effect at the time the building was constructed may affect your insurance coverage.

Many local governments have ordinances that require the demolition of a building when more than 50 percent of the building has been damaged. These ordinances require the reconstruction of the building in accordance with current building codes. Zoning and land use codes may have changed over the years prohibiting the reconstruction of that type of building at the same site. This could require the owner to rebuild somewhere else or with a much different building design. Laws and codes requiring buildings to be easily accessible to handicapped people may affect rebuilding if the building previously lacked ramps, doors that can be opened remotely, wheelchair-accessible toilets, and other accommodations.

All of these requirements may significantly increase the cost of rebuilding. Unfortunately, standard commercial property insurance policies provide very little coverage for these higher costs. Most will pay either 5 percent of the amount of insurance on the building or $10,000, whichever is less, for the increased cost of construction resulting from a local ordinance or law. Therefore, the amount of insurance available for a building insured for $150,000 is $7,500; the amount available for a building insured for $500,000 is $10,000. The costs of demolition and rebuilding up to new codes or at a new location can quickly use up this relatively small amount.

Building owners should consider buying additional insurance to cover this possibility. Many insurance companies offer ordinance or law coverage for an additional premium. This coverage will pay for the additional costs of demolition and construction unless the costs result from failure to comply with previous ordinances or from the release of pollutants. Included are three distinct coverages for the specified building:

    •    Coverage A - Loss to the undamaged portion of the building
    •    Coverage B - Cost of demolishing the undamaged portion of the building
    •    Coverage C - Increased cost of construction or repairs to comply with ordinances or laws

The amount of insurance available under Coverage A equals the amount of insurance covering the entire building. Separate amounts apply to Coverages B and C. There is no coverage if the damage results from a cause that the policy excludes. For example, most policies do not cover flood damage, so the policy will not pay if the law requires the owner to demolish the building after a flood. Also, the insurance will pay only the amount necessary to meet the minimum requirements. The insurance will not pay for the cost of exceeding requirements during rebuilding.

This insurance covers the owner only for the cost of repairing or replacing the building, not for income lost during additional reconstruction time. Separate coverage is available for this exposure.
An insurance agent can advise building owners on the types, amounts, and costs of coverage they may need to meet updated codes. Whether or not they ultimately decide they need the coverage, they should give it careful consideration. The last thing any owner wants is a surprise uninsured expense after a disaster.