December 2017 eNewsletter

Your Family Business Balance Sheet

Larry Grypp, Goering Center
December 2017

Many years ago, as my father was nearing the end of his life, he asked my brother and me to help put his affairs in order.

While I am the fifth of seven siblings, perhaps because of my career at the time in financial services, he assigned his estate arrangements to me and said, “Whatever, you do, Larry, keep the family together.”

We did, but it wasn’t the estate planning that forged the bonds; it was simply a lifetime together appreciating what it meant to be family, the experiences we shared, the trust we had built with each other, perhaps without even knowing we were doing so.

If you will allow me this personal reflection, this memory comes back to me with even deeper meaning as I prepare to step away from one of the most enriching and fulfilling experiences in my career.

When I first took on the role of Goering Center President, I expected to work for perhaps three or four years, and try to guide the Center to a new level and to bring value to the incredible community of family and private businesses we have in the Cincinnati region. I had retired from my corporate career and, while I have always had an appetite for learning, I figured this community role would mostly call on what I had learned to that point, and to serve others in doing so.

That was nine years ago. My how times flies when you feel like you’re around family. And learning.

One thing I’ve learned over this nine years – perhaps just refreshed from the words of my father – is how important family is to our lives. I think we can all attest to the reality that at times it can be hard – enormously hard – to integrate our relationship as family members with how we work together in a family business. Over these years it’s come back to me how important trust is to that precious balance. It is a trust that perhaps comes naturally in a family unit, but one that can be put under tremendous stress in the daily pressure of business. It is a trust that is shaped and fortified in the courage to have those awkward conversations, make the difficult decisions, communicate openly and honestly, guide new generations in their growth, stand with each other in the struggles, and know when to step away – to trust – so others take the lead.

That kind of trust – the kind that can last a lifetime – is something that most other businesses never experience nor fully appreciate. While we at the Goering Center have always said family business needs to be open to take whatever path is best for the business and the family, we do lean in to the specialness that comes when a healthy family can foster a healthy business and a healthy business can foster a healthy family.

There is no balance sheet in business quite like the one at the kitchen table where you realize what you have built through hard work, sacrifice, love and commitment.

I’ve learned that over these last nine years. No, so many of you have taught me that.

I’ve learned from one more, as well. I’ve worked for and with some accomplished people in my life, but John Goering holds a special place for me. The visible part is how we all know he joined with others in a vision to support family and private businesses, and put up his own money to serve as its foundation. But even more, I have watched him for a decade exercise a grace, drive, dedication, and care for our members and our mission that is a wonder to see.

I always relished my personal time with John and always felt like I was in the company of a man who quietly and generously has touched lives, families and businesses in our community in ways that will be counted for years to come.

And now it is time for Carol Butler to lead the Goering Center forward.  Following her retirement from International Paper, Carol has been a dedicated volunteer leader here at the Center.  In January she will serve full-time as our President.

It’s been an amazing journey. I am so grateful for what I’ve learned and what we’ve done together. The people – staff, volunteers and members – who make up the Goering Center will always feel like family to me.

My dad was right. That’s what matters the most.

Giving Nicely

Anna Pfaehler, Director of Financial Planning, HORAN
December 2017

A favorite read for my children is The Nice Book by David Ezra Stein. The book gives simple examples of what it means to be nice. One of my favorites is “if you have more than you need, share.” As an adult, sharing moves beyond treats and toys with schoolmates. It develops into causes, charitable organizations with varying structures and maximizing impact.

The holidays create an atmosphere of giving. The potential transfers to the kinetic as having more than we need becomes sharing with those in need. While altruism may be the catalyst, the tax code often provides the medium. Below are two considerations for those looking to give this holiday season while maximizing the available tax benefits.

Appreciated Securities

The markets have had a great run the past year and you may have stocks, or other securities, with unrealized capital gains. If you were to sell the stock and then give the proceeds, you would recognize the gain which is taxable income. If you itemize deductions, you could then take a deduction for the amount contributed to charity. This would seem like a wash except the income from the gain can affect other thresholds that utilize your adjusted gross income such as Medicare Part B premiums.

Instead, consider giving the appreciated security directly to charity. You still can take a deduction for the donation but you will avoid recognizing the capital gain on your income tax return. This works best for securities held long term (at least one year and one day) because you can deduct the full fair market value of the stock. If held less than one year, the deduction is limited to the cost basis of the stock.

Qualified Charitable Distributions

If you are over 70 and a half, you can distribute up to $100,000 from an IRA directly to a charity. These qualified charitable distributions count toward Required Minimum Distributions (RMDs) and are not included in your taxable income for the year. Unlike with donating appreciated securities, you do not get to take the charitable deduction for the contribution. However, as mentioned above, you may be able to avoid certain other thresholds by keeping the RMD out of your income.

These types of contributions typically take longer for custodians and charities to process. If you are looking for a 2017 tax deduction, you should start the contribution process as soon as possible so that it will be completed by the end of the year.

Happy Giving!

Keep Your Employees Safe as You Celebrate This Holiday Season

Faith Whittaker, Partner, Dinsmore
December 2017

Holiday parties are a great time for colleagues to close out the year while getting to know each other better outside of the office. However, a good party comes with certain risks, and it is important for employers to plan ahead to limit legal exposure and ensure their employees are safe. As you plan your year-end celebration, consider the following:

Managing alcohol consumption: One person overindulging can create problems for everyone. To manage consumption, consider using drink tickets or a cash bar. Look for a venue outside of the office to host the event or consider hiring a bartender. Avoid having employees pour and serve each other drinks, and do not offer an open bar for an unlimited time. Additionally, be sure there is food available to prevent guests from drinking on an empty stomach.

Guest safety: If you are hosting the party outside of the office, be sure to inspect the venue beforehand. Ensure the venue is accessible for all of your guests and that there are plenty of exits in case of emergency. Also, think about alternative transportation for your guests and consider offering transportation vouchers or a shuttle.

Compensation concerns: Be sure employees know that attendance is voluntary and the company is not going to compensate employees to attend. Avoid asking or mandating employees to help with the event, such as checking in guests, without compensation.

Preventing harassment: It is important to understand that harassment can extend outside of the office and work hours. It is a best practice for employers to review anti-harassment policies prior to the event and have management lead by example. Most importantly, ensure employees know how they can voice complaints if they experience or witness a situation they believe is harassment.

Naming the event: Not everyone celebrates Christmas, and the goal is to make sure all guests feel included. Consider using the event to mark the holiday season or end of the year.

For employees: Remind workers this is a chance to have fun and network with their colleagues. Also remind them that they need to be respectful of their co-workers and to behave appropriately. A good rule of thumb is if they would not say or do something in front of their spouse/significant other, then it is not appropriate for the party either.

Is Your Deferred Compensation Plan 409A Compliant?

Jeffrey G. Stagnaro, Shareholder; Jeffrey B. Stagnaro, Law Clark
Stagnaro Saba & Patterson Co. LPA

December 2017

Nonqualified Deferred Compensation Plans

Nonqualified deferred compensation (“NQDC”) plans are common tools for business owners with respect to the compensation and retention of key employees.  Under an NQDC plan, an employee may defer receipt of compensation due in one taxable year to a later taxable year—with payment typically triggered upon the occurrence of a specific event, such as retirement.  Under a well drafted NQDC plan, an employee will not be taxed on the deferred amount until the income is actually received, thereby offering potential favorable tax treatment to the employee.  For example, NQDC plan payments received upon retirement are often paid in a tax year in which the retiree is in a lower tax bracket.

Employers often utilize NQDC plans to compensate and, most importantly, retain key employees by incentivizing them to stay with the company through the duration of the plan.  Furthermore, unlike qualified plans, NQDC plans are not subject to any nondiscrimination rules, allowing the employer to make the plan available to only those key employees the employer chooses.   NQDC plans are also used frequently by startup companies who need the flexibility to defer compensation when the company’s cash flow is tight.

While NQDC plans may provide employees and employers with mutual benefits, a poorly drafted plan may result in harsh penalties under Section 409A of the Internal Revenue Code.  Under 409A, a non-compliant plan is subject to immediate taxation of the deferred amount, as well as an additional 20% excise tax.[1]  Continue reading to learn about some of the common 409A pitfalls.  The following is merely an overview of common mistakes and should not be taken as an exhaustive compliance guide.

Plans Covered Under 409A

409A regulations define an NQDC plan as any plan that provides for the deferral of compensation, excluding qualified plans such as traditional retirement and pension plans.[2]  A plan provides for the deferral of compensation if the employee has a legally binding right during a taxable year to compensation that, pursuant to the terms of the plan, is or may be payable to (or on behalf of) the employee in a later taxable year.[3]  Common NQDC plans include, executive compensation packages, phantom stock plans, supplemental retirement plans, stock options, and share redemption plans.

Mistakes to Avoid

1. Improper Distributions.

Too often, NQDC plans allow for impermissible distributions, such as at-will withdrawals by the employee.  Under 409A, compensation deferred, pursuant to a compliant plan, may not be distributed earlier than:

• separation from service (termination of employment);
• the date the participant becomes disabled;
• death;
• a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation;
• a change in ownership or effective control of the company (or its assets); or
• the occurrence of an unforeseeable emergency.[4]

In practice, an NQDC plan will often provide for distributions to be made pursuant to a fixed schedule upon the earlieroccurrence of any of the above events.  Because triggering events may have an unknown future date, distributions made pursuant to a fixed schedule may be preferable for planning purposes (as opposed to the entire amount being due upon the occurrence of an uncertain triggering event).

2. Improper Funding.

409A strictly regulates the manner in which NQDC plans are funded.  In general, any deferred income held in a protected or “offshore” trust for the purpose of later distributing to the employee pursuant to the NQDC plan will be deemed a transfer of property and is thereby countable as taxable income.  As a general rule, assets held for the purpose of funding an NQDC plan will not be deemed a transfer of property to the extent the assets remain subject to claims of the employer’s general creditors upon insolvency.[5]

3. Improper Acceleration of Payments.

Prior to the enactment of 409A, “haircut” provisions were standard in NQDC plans.  Under such provisions, an employee could elect to receive all or part of the deferred compensation at any time at a penalized rate.  Furthermore, many poorly drafted plans allow for early distributions at the election of either the employee or the plan administrator.  Today, however, including such provisions in an NQDC plan will subject the plan to harsh penalties.  Generally, a plan may not allow any acceleration of payment of the deferred amount after the deferral election has been made.[6]  Be sure that your existing plan does not include the once commonplace acceleration provisions.

4. Substantial Risk of Forfeiture.

Often, business owners attempt to avoid 409A by claiming the plan is subject to a substantial risk of forfeiture.  A plan is not subject to the regulations of 409A to the extent it is subject to a “substantial risk of forfeiture.”[7]  Compensation is considered to be subject to a substantial risk of forfeiture if receipt of compensation is conditioned upon (i) the performance of future services or (ii) the occurrence of a condition related to a purpose of the compensation.[8]  Even when compensation under a plan is conditional, as set forth above, the law is clear that the possibility of forfeiture must be substantial.  As such, simply including an illusory condition is not sufficient to create a substantial risk of forfeiture.  The likelihood of forfeiture, along with all the facts and circumstances, will be considered to determine the substantiality of the risk.  In practice, many NQDC plans ignore the rigor of the substantial risk analysis and assume—incorrectly—that a condition such as a non-compete clause will sufficiently impose a substantial risk of forfeiture.[9]

[1] 26 U.S.C. §409A(a)(1)(B)

[2] 26 C.F.R §1.409A-1(a)

[3] 26 C.F.R. §1.409A-1(b)

[4] 26 U.S.C. §409A(a)(2)(A)

[5] 29 U.S.C. §1081(a)

[6] 26 C.F.R. §1.409A-3(j)(1)

[7] 26 U.S.C. §409A(a)(1)(A)(ii)

[8] 26 C.F.R. §1.409A-1(d)(1)

[9] Id.