Business Insurance
Insurance stands right up there with taxes as one of the least exciting aspects
of running a small business. The annual insurance review is often considered a
chore leading to a large purchase that will never be used. Most small business
owners understand what they are buying when the policies are up for renewal,
but then quickly forget the details. There is a very short “half-life” for retention
of insurance information. Still, any ongoing company needs various types of insurance
to protect itself and to meet its obligations to others. Also, small business
owners must know enough about insurance to understand when it is
acceptable and prudent to demand that vendors, customers, and other business
partners provide insurance protection to your small business. Note also that
some types of insurance allow tax-free transfer and provision of benefits to small
business owners and employees. Finally, one of the major benefits of business
insurance is that arcane and complex business-busting problems are effectively
outsourced to the insurance company.
Insurers receive their fair share of negative attention these days, but it’s
great when the problems discussed in this chapter are negotiated on your behalf
by teams of professionals (insurance adjusters, attorneys, and others), rather
than the stretched-thin staff of your small business. This chapter provides a summary
of the most common small business insurance concerns. Although this
advice will generally be useful to just about all small businesses, insurance regulation
and offerings vary significantly from state to state, so be sure to talk everything
over with a local agent.
Business Insurance Agents
Most business insurance packages are all but indecipherable to those outside
the insurance priesthood, given that clients must wade though the thick legal
mumbo-jumbo in policies, riders, amendments, exceptions, declarations, supplementary
declarations, notices, and more. But that’s not so much of a problem if
the agent representing the products really understands business insurance, and
your industry in particular.
Insurance agents must be licensed in the state where they practice, and insurance
companies are rather selective about who may represent their coverages.
The majority of agents do understand their products quite well and work
hard to uphold industry standards of honesty and integrity. Most insurance professionals
are concerned about doing a good job because they are capable people,
but also to keep their licenses in good standing and to retain the right to sell
various products. This provides great assurances to small business owners and
makes the buying process a lot easier; but as with everything, some are better
than others. It’s therefore important to find an insurance sales agent who knows
the products relevant to your industry, can comfortably explain them to you, and
ensure that your small business has adequate but not excessive or duplicate,
coverages.
To shop for an insurance agent, speak with industry colleagues for recommendations,
check the Website of a local chamber of commerce, or ask your
CPA or attorney. Another productive source is your favorite Internet search
engine. Enter keywords such as “Philadelphia business insurance” and then examine
the interesting links.
When it’s time to go shopping for insurance, tell the agent your situation and
concerns, and also provide the documents indicating that your small business
agrees to maintain certain levels of insurance coverages. For example, building
landlords usually demand that business tenants insure their premises (more on
this later). Other examples include covenants with banks, customers, and perhaps
officers and directors. With this knowledge, an informed agent is also in a
position to recommend commonly used insurance policies for firms in your industry,
and tell you when your small business should be named as an additionalinsured
under the policies of customers or vendors.
A good agent can explain what is needed, as well as the risks, costs, and
coverages, and then show it to you in writing, when all the paperwork arrives.
This can save a lot of time that you can use more productively.
Finally, it never hurts to show your current policies to a competitive agent
two or three months before renewal time to check on the current market.
Business Insurance Types
Workers’ Compensation
“Workers’ Comp” is required in most states, and this protects the workers in
your business from injuries on the job. It does not cover injuries or illnesses that
occur outside of work; General medical insurance coverage is often offered for
this purpose (discussed later). Obviously, the source of a problem can be unclear,
and when an employee with a medical issue asks for help, it’s great if the
employer can come through, regardless of the cause.
Workers’ Comp rates are based on several factors, but primarily on the
following:
The number of workers
Total compensation paid by the company (including just about anything
imaginable, including wages, bonuses, commissions, overtime,
sick pay, vacation pay, tool allowances, contributions to retirement
accounts, profit-sharing, housing, meals and more)
The type of business (most important). For example, companies that
repair high-voltage transmission-line towers pay higher rates than
companies in the stamp collecting business. Workers’ Comp can usually
be purchased in a package of other policies acquired from a general
insurance provider, but in some cases, Workers’ Comp is acquired
directly from the state.
If independent contractors or subcontractors are used, be careful.
Most state laws hold that a contractor (in this case, your small business)
is responsible for injuries to employees of subcontractors, in
the absence of other insurance. The exposure here occurs if the subcontractor
does not have insurance, has inadequate insurance, or the
injured worker’s attorney figures that it costs nothing extra to name
your small business in a lawsuit against others. Also note that independent
contractors without employees, whose duties closely resemble
those of an employee, may be considered an employee for insurance
purposes. Be prepared to ask subcontractors for proof of insurance.
If this can’t be provided, pay the Workers’ Comp premium for the
extra workers and charge the subcontractor. Don’t rely on language
in agreements that appear to pass insurance obligations off to others.
What about you? Executive officers in most states are considered employees
of their corporation and are therefore covered for injuries; however, they are
also included in calculating premiums.
Beyond this, the Occupational Safety and Health Act of 1970 and related
state plans require employers to provide employees with a safe and healthy workplace.
Enforcement of these regulations may include both civil and criminal penalties
for non-compliance.
Workers’ Comp is no substitute for medical insurance, because it only covers
problems occurring on the job, and even then, the claim must be legitimate.
Some states, such as California, have suffered for years under a system where
employers pay high Workers’ Comp rates but injured employees don’t receive
much compensation. The reason: The system pays out millions in claims for
administration of the program, for fake injuries, and for fake-injury attorneys.
It’s a bad system, but small businesses have no choice about buying Workers’
Comp insurance.
Coverage is usually expressed as a number, such as “100/500/100.” This means
the policy pays:
Bodily Injury by Accident: $100,000 maximum for each accident.
Bodily Injury by Disease: a $500,000 policy limit.
Bodily Injury by Disease: $100,000 for each employee.
Think about your situation and make sure there is enough coverage under
likely scenarios. Remember that if an on-the-job accident occurs and the Workers’
Comp policy pays out to the limit, your small business will likely still be
liable for any deficiencies. This type of financial injury may be fatal to many
small businesses.
Property
Property insurance covers business assets, and not real property. These
assets may include equipment, tools, machines, furniture, fixtures, computers
and office equipment, and related property used to produce income. Besides
tangible fixed assets, property insurance may cover inventory, accounts receivable,
cash, and even business income. Make sure that if there is a fire, major
theft, or other peril and everything is lost, the business will receive enough insurance
proceeds to restore everything. To accomplish this, get a list of all assets
(probably from your balance sheet), and then think about where your property
is—and goes—and ask the insurance sales agent to make sure there is adequate
coverage. For example, special riders may be needed for trade shows, inventory
in transit, vehicles parked off-site overnight, or equipment moved around to
customer premises. Also, be sure to know if the coverage causes problems most
likely to occur where the property is located. If a warehouse is located along a
river, for example, don’t assume there is protection against losses from floods.
Ask—and have an insurance company representative actually show you in the
policy where it says so in writing.
General Liability
If your small business rents its premises, just about all lease agreements require
that the lessee (that’s you) pay for General Liability Insurance. Here is
typical language found in a lease:
Lessee shall, at Lessee’s expense, obtain and keep in force during
the term of this lease a policy of comprehensive public liability and
property insurance insuring Lessor and Lessee against any liability
arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. The limit of said insurance
shall not, however, limit the liability of the Lessee hereunder. Insurance
provided hereunder shall be in companies rated A+, AAA or better in
“Best’s Insurance Guide.” Such insurance shall be a combined single
limit in an amount not less than $1,000,000.
In this situation, the landlord requires $1,00,000 in coverage per incident
from a quality company that is sure to pay if a problem occurs. Note that the
small business remains liable for losses not paid by the insurance company.
In most cases, the lessor (landlord) asks to be named as “additional insured,”
so that if something terrible happens, the insurance company may pay the landlord
directly. Insurance companies are then happy to provide a certificate of
insurance to the additional party to affirm this understanding.
Examples of terrible things might include a forklift that accidentally punches
a hole through a wall and into an adjacent business, or an electrical problem that
burns down your office and the entire building at night.
General Liability Insurance is often purchased in minimal amounts by small
business owners, but then results in inadequate payouts when problems occur.
For just a few dollars more, problems resulting in bankruptcy can be avoided, so
perhaps this is not the best place to skimp when purchasing insurance coverages.
General Medical
In contrast to Workers’ Comp, General Medical protects employees from
illnesses and accidents that are unrelated to work. Although employer-paid medical
insurance is not required, IRS regulations hold that this expense is deductible
only if everyone gets the same deal. If medical insurance is offered to one person
in the firm (such as yourself), everyone else must received coverage under the
same plan.
Employers often pay for the medical insurance of their employees, because it
makes employees feel secure, creates a sense of gratitude, and assures employers
that workers will not suffer financial problems and remain off the job for lack
of good medical care. This is especially important in these tumultuous times for
the medical services industry, as employees rightfully fear living without general
medical insurance.
Employers can buy insurance coverage for a relatively low cost, as compared
to the employee. (Yes, medical insurance is expensive from any perspective, but
it’s cheaper if purchased by the employer.) On top of everything, employees may
have a hard time finding coverage on their own, and the expense of this insurance
is rarely tax-deductible by workers. If the employer pays for medical insurance,
this important form of compensation basically passes to the employee free
of taxes. (See the Medical Expenses and Insurance section of Chapter 7, and the
IRS Section 125 Plans section at the end of this chapter.)
Under most plans, the employer pays a percentage of the premium, and employees
have the option of buying in or not. For example, your small business
may agree to pay 80 percent of the cost of employee insurance, and 50 percent
for their dependents. The employer then deducts the employee contribution from
paychecks. Other employees may say, “No thank you, my spouse has a better
deal.” In that case, get a written statement from the employee affirming this
decision.
Employers are not supposed to notice that the cost of medical insurance
varies greatly depending upon who is hired. But some do. For example, the cost
of insuring a healthy male in his fifties with a wife and two children (that is,
employee and three dependents) may be eight times the cost of a single male in
his twenties. To learn the cost of adding someone to the company policy, call the
insurance provider and provide the name, age, and gender of the prospective
employee, the number of new dependents, and indicate whether there are any
preexisting medical conditions that will become the responsibility of the new
insurance carrier.
Most employer-sponsored medical insurance plans require a certain buy-in
percentage, meaning that the small business must recruit a certain portion of
the total employees into the plan. For example, many medical insurance plans
require that over 70 percent of eligible employees agree to participate. Related
to this, the employer must state in advance what percentage of the plan is paid
for by the employer. In addition, the employer must require that all employees
wait for a stated period of zero to 90 days after hiring before coverage commences.
Again, consistency is important here; everyone must get the same deal.
Medical insurance policies vary enormously in their coverage. At a minimum,
the medical policy may pay a small percentage of only the most urgent
problems, or the sky may be the limit. Here are the three major cost determinants
of medical insurance plans:
1. Types of Medical Services Included. Coverage for many products
and services may be offered, including medical and health care treatment,
maternity care, orthopedic care, pharmaceuticals, dental care,
vision care, psychiatric counseling, chiropractic care, alternative medical
coverage, and add-ons such as supplementary accident insurance
or dependent life insurance.
2. Type of Plan. Another way to improve the deal and run up the cost is
to dump less-expensive Health Maintenance Organization (HMO)
plans and buy into Point of Service (POS) or Preferred Provider
Organization (PPO) plans. HMO plans are out of favor with doctors
because reimbursements are low, and employees don’t like the red
tape required to receive treatment. POS and PPO plans allow employees
greater flexibility in receiving care from different doctors, in
or out of the provider’s coverage area. There are also many hybrid
plans, and they are all expensive.
3. Financial Factors. The third major set of determinants involve how
much employees may pay to medical care providers. This primarily
involves the “co-pay” (the employees’ portion of a doctor’s office visit,
for example, $15 per visit); the deductible (“employees pay for 20 percent
of costs after paying 100 percent of the first $1,000”), coinsurance,
which is the percentage of covered expenses for which employees are
responsible, and the maximum benefit. As employees pay more to
care providers, the overall cost of the medical insurance goes down.
Other business-specific factors that determine overall cost and eligibility are:
-Number of Employees in the Firm. The smallest plans require a
minimum of two employees. Usually, husband-wife teams count as
only one employee. Note that if there is only one other full-time
employee and he or she resigns, general medical insurance coverage
will normally be terminated.
- Pregnancies. When a small business applies for medical insurance,
the number of pregnancies usually must be reported to the new
insurance company.
- Industry. Under which SIC codes is the business classified? Again,
high-voltage transmission-line workers may pay higher rates than stamp
collecting firms. See www.TheSmallBusinessOwnersManual.com for
a list of SIC codes.
All this may become a bit complex, so a good insurance sales agent may
really provide an important service here. The agent should know the pros and
cons of the different plans in the context of the needs of your small business, and
reduce the zillions of options down to just a few. It is certainly feasible to ask
representatives of the insurance providers very specific questions about different
plans under consideration, but only the agent can effectively compare plans
across different medical insurance companies.
COBRA (Medical Insurance) Must Be Offered to Departing Employees
COBRA, the Consolidated Omnibus Budget Reconciliation Act, was passed
by Congress in 1986. The law allows certain former employees, retirees, spouses,
and dependent children the right to temporary continuation of medical insurance
coverage under the plan and at the group rates paid by your small business,
plus 1 percent. The ex-employee must pay either the small business or the insurance
company to exercise this option.
At first, this may sound like a good deal to ex-employees, but many then
realize that COBRA is more expensive than anticipated because your small business
formerly paid a part of the premium but is not required to subsidize the
expense after employment ends. COBRA is ordinarily less expensive, though,
than individual health coverage.
COBRA coverage will likely be snapped up by healthy people who simply
need temporary health insurance, and by those who are pregnant, over 50, in
poor health, or attached to a specific doctor.
COBRA coverage need not be offered in firms with less than 20 employees,
or if the ex-employee was canned with cause, such as for gross misconduct. The
law sets no minimum types or levels of benefits. It does, however, require that
these plans have rules outlining how workers become entitled to the COBRA
program.
Small businesses must offer COBRA medical insurance coverage to all
ex-employees within 44 days of termination, but many forget. In that case, exemployees
may get the attention of a government investigator, or sue your
company in federal court. But this will only be a problem if serious medical
problems have occurred. Otherwise, negligent employers must pay $110 per day
to the ex-employee.
Following notice, ex-employees have 60 days to accept COBRA coverage,
and then 45 days to make the first payment. If employees stop paying after the
program is underway, they have effectively canceled COBRA medical insurance
coverage. Your small business is not obligated to pay the medical insurance premiums
and then beat on the ex-employee to get back the money. After 18 months,
continuation under the COBRA ends.
Also, note that many large medical insurance providers will directly contact
the ex-employee, go over all of this information, collect payments, administer
the plan, and otherwise relieve your company of much work. Additionally, the
Group Administrative Manual printed by the insurer tells the small business
how to further manage the COBRA program.
Small businesses should be aware of their requirements under COBRA, but
they may be indifferent as to choices made by the ex-employee because this will
result in no additional revenues or expense to the company.
Directors and Officers (D and O)
D and O protects small business owners and other insured officers and directors
against lawsuits where someone is trying to get past the business and into
personal assets. This may include customers claiming injury from your products
or services, vendors or creditors trying to collect in bad times, or a competitor
who claims damages for an unlawful action committed by your company.
D and O is generally not associated with problems arising out of alleged
sexual harassment, discrimination, or other employment-related areas. For this,
Employment Practices Liability Insurance (to be discussed) is needed.
This special protection is most valued by directors and officers who already
have great personal wealth. Outside directors may also demand it to protect
themselves from lawsuits, because the compensation received from your firm is
negligible. D and O is not frequently purchased by small businesses but should
be considered if large amounts of wealth have been transferred from the small
business into the personal accounts of officers and directors, or if the integrity
of the corporation was not well-respected and the corporate veil may be pierced
with relative ease.
Employment Practices Liability
Everyone these days has heard horror stories about entire businesses being
lost when an unhappy (current or former) employee teams up with an aggressive
plaintiff’s attorney. Any business with employees is exposed to lawsuits arising
out of harassment (sexual and otherwise), discrimination, disabilities, unlawful
hiring practices, wrongful termination, and more. This special insurance covers
not only the small business owner but also others in the company, even if they
are clearly guilty.
Perhaps the most chilling threat arises when, unknown to the small business
owner, two employees are having personal issues and decide to sue. For example,
a manager may be pressuring a subordinate quietly for sexual favors. In that
case, the bad news is that the small business can be sued and found liable—the
good news is that the company is defended in court and covered for losses and
damages with Employment Practices Liability insurance. The company is insured
whether found innocent or guilty (except of course for criminal acts).
Another example is when an employer forgets to add a new employee to the
General Medical Insurance plan and a major medical problem arises. Or perhaps
a manager is fired in violation of her employment agreement.
This is one area where some attorneys have given a bad name to their profession.
Some law firms take on dubious complaints on behalf of employees, and
basically shake down the employer, saying, “Look, it’s going to cost $100,000 to
defend against this frivolous claim, and there is a chance of losing $250,000, or
we can settle now for $150,000.” Many small businesses will be damaged seriously
by this exploitation of the legal system, so this is one situation where a
small business owner may be angry for being the victim in a legal extortion scam,
but thankful that Employment Practices Liability insurance pays for everything
and makes the headache go away.
Few firms actually purchase this special coverage, which in most cases means
they are one shake-down away from bankruptcy.
Errors and Omissions
E and O is an especially important special coverage for those who provide
services (as opposed to products), such as computer programmers and IT consultants.
This basically provides protection for cases where your small business
causes damages to others.
For example, perhaps a Web-design firm builds a site for a private religious
high school that accidentally links to a lingerie seller. The parents sue the school,
and the school wants your small business to pay. But E and O insurance offers
protection here. Another example is if an employee experiences medical problems,
and then we find out that medical insurance was never acquired for this
person.
E and O claims greatly outnumber claims under Directors and Officers insurance
and Employment Practices Liability. Many large clients demand E and
O from their small business vendors, but it might be a good idea, even if it’s not
required. Consider demanding proof of E and O insurance from certain vendors
who work for you.
Product Liability
In today’s litigation-happy environment, many lawsuits are based on claims
that manufacturers, importers, distributors, and sellers of products are liable for
the damages and injuries caused by just about any product. If your small business
is somewhere along the chain of suppliers providing a product subject to
such a lawsuit, it costs the plaintiff just a few dollars more to name your firm as
a codefendant.
Product Liability coverage is often added to General Liability policies, but
don’t assume that your firm is insured for exposures in this area. Firms desiring
increased and special protection may purchase additional Product Liability
amounts. This may be especially relevant with older small businesses that have
sold larger numbers of products, and perhaps in times when regulations were
more relaxed.
Operations in Progress and Completed Operations
Small businesses providing services must be concerned with coverage for
operations in progress as well as for completed projects.
The operations-in-progress exposure arises from claims associated with
projects currently being performed by a services contractor, where property damage
or bodily injury allegedly occurs.
An easy example involves a plumbing contractor. Wenches-with-Wrenches
Plumbing, Inc., is installing copper pipe in an older building, and a major leak
and subsequent water damage occur at night resulting from a mistake WWW
made while working earlier in the day. This is probably covered under the General
Liability policy, but make sure. Perhaps a special add-on is needed for your
industry. Ask the insurance agent how this ties in with your Workers’ Compensation
policy.
Later, WWW completes the project. This is usually defined as when the
small business contractor has completed all contracted work, or when the work
associated with the damage or injury has been put to its intended use by parties
not associated with the small business subcontractor.
If the exact same problem occurs, “operations-in-progress” will no longer pay,
and the issue falls under “completed operations” insurance. WWW may or may
not be insured, so it is important to ask to see it in writing when the policies arrive.
Note that WWW is responsible for all losses, regardless of whether the insurance
company pays up. Many contractors and firms in the service industry
are required to carry these forms of insurance, so skimping here may put your
small business in default of a contract. As the small business grows and time
passes, this loss exposure increases because so many older projects quietly age
and come to the attention of plaintiffs with a keen interest in suing your small
business and winning the legal lotto.
Business Interruption
Disability insurance covers lost personal income, but what about the income
of your small business? Businesses may be put out of action by all sorts of causes—
from fires and floods, to the business shutdown of a big customer due to terrorist
threats, to a runaway truck that crashes into a retail storefront.
This coverage may mean the difference between solvency and bankruptcy,
because the carrier would pay all the regular bills and expenses until your small
business is restored (although Business Interruption Insurance does not pay for
losses or damages). Business Interruption coverage may be included in the General
Liability policy, but speak with the agent to ensure that the amount is sufficient
for normal monthly income and expenses.
Not surprisingly, the definition of “Business Interruption” varies, so make
sure this coverage fits the situation of your small business. Note also that terrorist
threats are increasingly not covered by conventional policies, but may be
purchased as an add-on.
Short- and Long-Term Disability
Disability insurance is usually considered a way to protect income—not cover
medical expenses or losses—if the insured is unable to work. Short-Term Disability
is for a limited period of time, say two years. After these benefits are
exhausted, Long-Term Disability Insurance may be purchased, which usually
covers the worker until retirement, or age 65.
Short-Term Disability is often designed to cover the waiting period before
Long-Term Disability benefits begin. In most states, employers are required to
purchase Short-Term Disability Insurance, and this is paid for through deductions
from employee paychecks. In some states, this insurance is not required
for the small business owner; however, it should be purchased because real medical
problems may occur and the benefits from state-sponsored plans are reasonable
(but not large), considering their price as compared with private Short-Term
Disability Insurance.
Note that the benefits here are offered on an after-tax basis, meaning that
they are effectively not subject to payroll taxes. As might be expected, older
workers will pay higher rates than younger ones.
Disability Insurance policies are important to the small business owner, and
they also appeal to employees, helping to build morale and loyalty. All will sleep
better at night knowing that help in the form of cash will be coming if a workstopping
medical problem occurs.
To decide how much coverage to buy, consider the level of income needed to
maintain present lifestyles, including rent or mortgage payments, food, automobiles,
other loans, and other monthly expenses. The policies normally range from
60 percent to 70 percent of pretax income and may be critical because related
benefits from Social Security will not come close to covering these expenses.
State-sponsored plans are usually meager, so if this is not enough, consider purchasing
additional insurance from a private carrier.
Disability Insurance policies come with an elimination period, which is similar
to the deductible amount on other types of insurance policies. Typically, this
is 90 days, which means that workers (and you) must have the financial resources
to pay bills until these benefits kick in. As the elimination period increases, the
price of the insurance decreases, because many medical problems are well under
control by this time.
What, exactly, is a disability? Understand this well, since the description
varies among carriers and policies. There are two general definitions. “Own occupation”
means that a worker cannot perform activities required for a particular
occupation. This is more restrictive, but cheaper, than “any occupation.” If
the latter definition is used, an insured will receive benefits only if no incomeproducing
activities at all can be performed.
There are many other bells and whistles that may be considered with both
Short- and Long-Term Disability Insurance, but one of the most important is
whether the policy is guaranteed to be renewable. This will be especially important
to older workers. Renewals are not guaranteed unless premiums are paid
and “Non Can” (Non-Cancellation option) is purchased.
Disability Insurance may not normally be offered to workers or small business
owners who are already disabled, have an existing medical problem, are
pregnant, or earn less than $18,000 per year. In that case, life insurance may be
the best answer.
Both Short- and Long-Term Disability Insurance may be offered through
conventional medical insurance carriers and companies offering payroll services.
To find a carrier, apply, and get a quote, type “Disability Insurance” into your
favorite search engine. The best source,however, is probably your insurance sales
agent, who is uniquely positioned to make sure the Disability policies tie in with
other forms of insurance paid by your small business.
“Key Man” or Life Insurance
Various forms of term and whole-life insurance (sometimes called “Key Man
Insurance”) are sometimes purchased by the owners of small businesses, where
one partner is compensated for the loss of another. A common example is when
business co-owners buy coverage such that if one dies, the others receive a payout.
The thinking here is that in many small businesses, each person is critical,
and the business is not viable unless all are hard at work in their particular areas
of expertise. The surviving owners receive a payout to purchase the interests of
the deceased partner from the estate. Then, the company may be continued without
distractions, or it may be sold.
Once again, your business insurance sales agent is well-positioned to recommend
what is best here and to make sure that all serious risks are addressed
without purchasing duplicate or unnecessary coverages.
Insurance, Tax Advantages, and Cafeteria (IRS Section 125)
Plans
Insurance often provides a tax-free way to transfer benefits and constructive
income to the small business owner and employees. This is accomplished, for
example, when General Medical Insurance is paid for by the small business.
Employees receive this benefit free of payroll taxes.
Small business owners interested in using this allowance should investigate
IRS Code Section 125, which allows employers to pay for benefits offered to
employees, without reporting this as additional taxable compensation. Health
care, vision and dental care, group-term life insurance, disability, adoption assistance,
flexible spending accounts to employees, and dependent care assistance
programs all may qualify as allowable under Section 125.
In return for these tax-free benefits, employees often agree to salary reduction
agreements and then also contribute a portion of future salaries on a pretax
basis to pay for the qualified benefits.
One indirect benefit is that Workers’ Comp insurance rates decline, because
payroll decreases.
See Chapter 7 for more information on minimizing taxes, and learn more
about Section 125 Cafeteria Plans in IRS Publication 15-B (Employer’s Guide
To Tax Benefits) at www.irs.gov.
Honesty and accuracy are important in applying for all types of insurance. It
may be tempting to tell the insurer that a fire alarm and suppression system is
installed in your building because the rates will be less expensive; but at the end
of the day, most small business owners need to know that they are really insured.
Otherwise, when a real problem occurs, the insurer may declare the policy null
and void because the application was not correct.
It is clear that business insurance is a complicated undertaking, so many
growing businesses retain professional insurance advisors to manage and coordinate
all types of coverages. These consultants do not sell policies but make sure
that the small business has sufficient insurance to meet all contractual and regulatory
requirements, check for duplicate coverages, shop for the best rates, negotiate
payouts, and keep watch over changes and their effects inside and outside
of the business. Business insurance advisors are difficult to locate on the Internet,
but several are listed at www.TheSmallBusinessOwnersManual.com.
There are many other types of insurance that may be relevant to your small
business, so ask your business insurance sales agent as well as industry colleagues
to make sure that your total insurance coverages are similar to others in the
industry and to help you sleep well at night.
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