The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
Rocco Beatrice is a CPA, MBA, MST with Estate Street Partners, a team of lawyers, accountants and business strategists that, combined with our actuarial partners, have helped more than 5,000 doctors, 1099 employees and business owners work with their own CPA’s in order to take advantage of these tax-altering pension, Super 401(k) and 401(h) plans over our 30+ years in business.
The most exciting changes that came along with the Pension Protection Act are also, shockingly, one of the least discussed sections of the Internal Revenue Code: the changes to the 401(h).
Section 401(h) of the IRC provides for specific accounts to be created for the purpose of paying for medical-related expenses during retirement.
Similar to the 401(k), the IRS classifies the 401(h) as a cafeteria plan, which means it is intended to be managed by employers for the benefit of employees. Unlike the 401(k), however, the 401(h) is not a plan that is perfect for everyone.
The amazing fact is that 98% of the most qualified individuals for these plans never take advantage of them, primarily because they, nor their CPA, have never heard of them.
The cost to implement and maintain these plans is far outweighed by the benefits these plans offer, which can potentially lead to some of the best ROI in the IRS tax code. Ask your CPA about a 401(h).
How the 401(h) Plan Works
In essence, the 401(h) is a medical expense account attached to a Cash Balance Plan account that aims to alleviate the financial burden of health conditions, accidents and hospitalizations that individuals and their dependents may come across in their retirement.
As with other plans, a 401(h) account must be separately funded and managed. As the plan is being funded, the contributions made are tax deductible.
The money is allowed to grow capital gains, tax-free. When funds are later withdrawn in retirement, the money that comes out of a 401(h) plan is also tax free.
In other words:
1. 401(h) plans can be funded with tax-deductible money.
2. Funds deposited into 401(h) plans are allowed to grow without the burden of taxation.
3. Funds withdrawn by 401(h) account beneficiaries once they retire are not taxed.
To some extent, 401(h) plans are similar to voluntary employee beneficiary associations, which are better known as 501(c) plans, in the sense that they are designed to provide retirees financial cushions for health expenses and life insurance. In fact, 501(c) plans can be combined with 401(h) plans.
Unlike the Roth Individual Retirement Arrangement or certain insurance-based instruments such as annuities, a 401(h) plan can actually provide a fully tax-free solution for retirement.
A business owner who takes Cash Balance Plan account and deposits them into a 401(h) account is essentially shielding those funds from taxation forever. This is one of the very few IRC provisions that provide a completely tax-free environment, and it is an opportunity that is certainly worth exploring by individuals who are interested in asset protection and wealth preservation strategies.
The Rationale of 401(h) Plans
Even after the insurance reform of the Affordable Care Act, healthcare inflation has not stopped. In 2014, the inflation rate of medical care in the United States increased by a little more than 3.5 percent, which is about 400 percent higher than the consumer price index.
By the end of this decade, retirees can expect that the costs of their medical expenses could climb between five and seven percent annually.
AARP cites Fidelity Investments which estimates “that a 65-year-old couple retiring [in 2013] will need $240,000 to cover future medical costs. That doesn't include the high cost of long-term care. Nor does it take into account additional costs you may incur if you decide to take — or are forced into — early retirement before your Medicare kicks in.” Doctors who celebrate their 55th birthdays today can expect their medical care costs to be nearly $465K when they retire with their spouses in the next 10 years.
Supplemental insurance policies combined with Medicare plans are not sufficient to cover all medical expenses that business-owners and other professionals are bound to face during their retirements.
Most often, retirees dip into their savings or tap into their taxable retirement income to pay for out-of-pocket medical expenses. These are the situations that 401(h) plans seek to alleviate.
When a business-owner who decides to participate in a 401(h) plan for the benefit of his staff, he or she must establish the contributions amounts, which must be reasonable, under Treasury Regulation 1.401-14(c)(3).
This is related to the aforementioned estimate of healthcare costs and their inflation; in other words, a 401(h) plan can accumulate up to $460K in contributions that can be grown through investments and later withdrawn without any taxation.
Furthermore, the IRC can be amended in the future to allow greater contribution limits to match the rising inflation of medical expenses.
Another advantage of 401(h) plans is that the list of qualified benefits is very extensive. A few treatments that are typically excluded from health insurance policies are allowed by 401(h) plans.
Some of these include:
The Practicality of 401(h) Funds401(h) plans give business-owners the ability to fund part of their retirement with deductible money so they can later enjoy tax-free distributions to cover a broad range of medically-related expenses.
This is money that can truly come out 100 percent tax-free when business-owners, 1099 employees and doctor-owners retire.
Let's say Dr. Elsa Parks, a 55-year old general practitioner, runs a family medicine practice that employs two medical assistants and a licensed practical nurse. She is married and has an average income of $700,000 per year.
Living in California, she pays federal income taxes at 39.6% and state income tax at a rate of 11%, for a total of 50.1%. This does not include FICA or self-employment taxes.
As a small business owner, Dr. Parks can use the existing corporate structure of her practice to establish a Cash Balance Plan and medical expense account under section 401(h) of the IRC.
Even if Dr. Parks worked only as a self-employed on-call physician, she could actually get some advice on how to form a business entity in her state for the purpose of setting up a Cash Balance Plan and 401(h).
Being 55 years old, married and having income of $700,000 per year gives her the ability to fund her Cash Balance and 401(h) by up to $670,000 per year. She has chosen to contribute $600,000 to her Cash Balance and 401(h) plan. Effectively, she has reduced her quarterly income tax check by $64,500.
The bottom line of 401(h) plans is that Americans are living longer and seeing their healthcare costs rise every year.
With so many retirement plans subject to taxable distributions, the 401(h) is one of the tops option for business owners, 1099 employees and doctors who would like to cover their out-of-pocket medical expenses without the burden of taxation.
We help clients from across the globe form Delaware LLCs, Delaware Limited Partnerships, and Delaware Corporations.
By now, it’s common knowledge that Delaware is the gold standard when it comes to forming an LLC, LP, or Corporation.
Delaware’s reputation is world-renowned for having the strongest corporate law structure, and this reputation is what solidifies Delaware’s position as the most popular place to incorporate.
People often inquire about running multiple different business ventures under the same Delaware LLC. They want to know if they can operate several real estate properties, retail stores or car dealerships, for example, under one LLC.
Can this be done? Sure, Delaware LLCs can conduct lawful business activity anywhere in the world. However, should this be done?
From a cost perspective, it does make sense, if that’s the only concern. You end up spending less money to set up a single Delaware LLC, as opposed to forming multiple LLCs for each part of your business.
You would also likely incur fewer annual maintenance fees, lower annual Franchise Tax and a single Registered Agent Fee.
However, as far as limiting the liability of the company, which is the whole point of forming an LLC in the first place, then the answer is no, you should not operate multiple parts of a business under one LLC.
Why not? The answer is pretty simple.
If you were to run different businesses within the same LLC, you would possibly increase the liability of the LLC as a whole.
Since the businesses would be tied to one another via the one LLC, you could be risking all the businesses if something were to happen to one of them (such as a lawsuit, fire or fraud).
If one of the pieces of the LLC were to be held liable, then so could the entire LLC.
Although you may want to keep the cost of your multiple businesses down, it is typically not worth the risk, as it could become significantly more problematic than it’s worth.
The stalwart and reliable traditional LLC is still usually a business owner’s best option. Most entrepreneurs opt to set up separate LLCs for each of their business ventures.
This way, the debts and liabilities of each LLC are completely separate from one another.
If you have any questions about forming your Delaware LLC, we can be reached at 1-800-345-2677, Ext 6133 or 302-644-6265.
THE ABOVE ARTICLE IS NOT LEGAL ADVICE AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. IT IS NOT AN ATTEMPT TO LIST ALL CONSIDERATIONS THAT MIGHT BE ADVISABLE BY AN ATTORNEY FAMILIAR WITH DELAWARE LLC LAW. IF YOU REQUIRE LEGAL ADVICE, WE RECOMMEND YOU ENGAGE THE SERVICES OF A LICENSED ATTORNEY.
No entrepreneur succeeds in every business venture. Every successful entrepreneur fails at least once, if not twice.
How entrepreneurs learn from and utilize their failures, however, is what matters, because in entrepreneurship, attitude is everything.
Here are five key attitudes every entrepreneur must conquer in order to run a prosperous business venture.
Entrepreneurs should be passionate about their ideas, goals and, of course, their companies. This passion is what drives them to do what they do.
Some entrepreneurs love the adventure and excitement of creating something new, and once it is established they lose interest and move on to something else.
Other entrepreneurs feel passionately about the product they are constructing or the sense of accomplishment they feel because they know they are helping other people, helping animals or helping the planet.
Whatever drives an individual to try to succeed is where his/her passion lies, and that passion is integral to entrepreneurial life.
Entrepreneurs, like everyone else, feel fear. They are fearful that they won’t succeed or fearful a well-conceived idea cannot be executed.
They do not, however, let these fears of failure define them. They are brave. They learn from failure. They utilize their fear of failing to push themselves to work harder and to strive to correct the mistakes that may have caused them to fail.
Many entrepreneurs need multiple attempts to create a successful company. It is bravery that drives them to pursue success.
Entrepreneurs experience setbacks. There are hurdles to overcome on any journey.
Not everyone handles change or disappointment well. However, entrepreneurs must possess flexible mindsets so they can alter a course that seems to be headed toward failure.
Flexible entrepreneurs should be aware that they may have to modify the route toward their established goal, or even perhaps tweak that established goal, in order to reach it successfully.
STRONG WORK ETHIC
It is not easy to start from the ground up and become a successful business owner. Many hours of hard work, frustration, creativity and supervision are poured into a new venture.
If you are not willing to get up and work hard every day, probably seven days a week, then how can you expect success? No successful business is created quickly, easily or without strife.
Entrepreneurs do not work a standard 9-5 day, nor do they log 40-hour work weeks. They are always working—establishing new ideas, creating new products, designing new processes, hiring smart and talented people.
Entrepreneurs motivate themselves and continually look forward.
Entrepreneurs must be able to show others they are truthful and honest. Regardless of the type of business they hope to establish, colleagues, vendors, customers and investors must trust them. There is no way around this—entrepreneurs must be trusted, and trust must be earned.
The best business idea in the world will likely fail if an untrustworthy person is at the helm.
Suppliers need to know that payments for goods they have shipped will arrive on time.
Customers need to know that whatever product or service they have ordered will be delivered as promised. Colleagues need to know that they are a valued part of the company’s success. Investors need to know that the company has to potential to grow.
Attitude is everything in entrepreneurial life.
When starting a new business, people often incorporate their company as a Delaware LLC or corporation. The state of Delaware has been a popular choice for incorporating because it is the state known for having the strongest corporate law structure in the country.
In other words, Delaware’s legal environment has repeatedly proven itself as the most advantageous to LLC and corporation owners. One of the reasons for this is the concept known as “the corporate veil.”
When your business is incorporated in Delaware, it is domestic to Delaware and foreign to every other state. You can operate your Delaware company in any other state once you have obtained the required permission from that state; this process is called Foreign Qualification.
The Foreign Qualification process is an important step; if you do not complete this step, your business may be not in compliance with that particular state.
Each state is different in regard to its procedures for registering as a foreign entity, so be sure you know exactly what a state requires before you file for Foreign Qualification for your Delaware company.
Utah, like most states, has an application process, a state fee and also requires additional documentation from Delaware. For Utah, the Foreign Qualification process is the same regardless of whether you will be registering a Delaware LLC or a Delaware corporation.
The document you receive in return from the Foreign Qualification process is called a Certificate of Authority. This is Utah’s way of giving your Delaware company the authority to operate in Utah.
In addition to Utah’s application, the state also requires a Certificate of Good Standing from Delaware. The Certificate of Good Standing does not have to be an original copy; however, it does need to be current within 90 days.
Utah also requires a Registered Agent with a physical address in Utah to be listed on the application. We offer this service in Utah for $99 per year.
Once you sign the application, we will file it with Utah’s Division of Corporations and Commercial Code, along with your company’s Certificate of Good Standing, on your behalf. Utah typically approves the documents in just a few business days.
Once your Delaware company is registered in Utah as a foreign entity, you will be responsible for Utah’s annual reporting requirements. The Utah annual report is due by the anniversary date of your Utah registration.
Utah generally mails a reminder of this reporting requirement to the Registered Agent on record. Please keep in mind that when registering your Delaware company as a foreign entity in Utah, you are still responsible for the Delaware annual fees as well. The reminders for the Delaware fees are sent to the Delaware Registered Agent.
If you have additional questions about registering your Delaware company as a foreign entity in Utah, or you are ready to get started, please call 1-800-345-2677, Ext. 6130.
Did you know you can set up a new Delaware LLC or Delaware corporation so it’s ready for business at the start of 2017?
It’s actually a very good idea to file your new company before the first business day of the new year. We can help form and file a new Delaware LLC or corporation and save you hundreds of dollars at the same time.
Here’s how: Call us immediately and ask to form your new company in December but make the “effective date” January 1, 2017. This will give your company a start date of January 1, and will save you hundreds of dollars in Delaware Franchise Taxes. Since your company's start date will be in 2017, you won't owe Franchise Tax until either March of 2018 (for a corporation) or June of 2018 (for an LLC).
It will also make you eligible for our December discount of $100 off your filing fee, which will not be available in January. Watch this 30-second video for the details:
If you have any questions about setting up your new Delaware LLC or corporation, give us a call today. We can be reached at 1-800-345-2677, via Skype at Delawareinc or you can live chat with us from our homepage at www.delawareinc.com.