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Taking The Family Feel Out Of Family Business

photo by Hartwig HKD

I am pretty sure he doesn’t intend this, but President Obama may be remembered as the man who did away with paternalism in the small business workplace.

“Paternalism” is an old-fashioned word, inappropriate and inaccurate nowadays when a small business is about as likely to be run by a woman as by a man. But it still captures the relationship that often exists between the owner-manager of an enterprise and the employees who work there. Even in the total absence of blood ties, many who work in such firms - owners and non-owners alike - think of themselves as a family. Of course money, not love, is at the core of the relationship, but it still often contains a degree of mutual commitment that is highly unusual in public companies, where ownership is represented by a non-management, part-time board of directors.

A lawyer speaking at a big estate planning conference earlier this year remarked on this. When a public company is sold, you never hear a CEO instruct the lawyers to provide a special bonus for Henry, the longtime employee in accounts receivable who might not otherwise have enough money to retire. But you see this “all the time” when a private firm changes hands, the lawyer commented. (It doesn’t actually happen all the time, but nobody who has advised or run a family firm would be surprised to encounter this sort of generosity. I have seen it myself.)

Paternalism also manifests itself in the benefits packages that owners provide to their workers. For 15 years, I paid the full cost of health insurance for all of my full-time employees. There was never any discussion of what sort of plan I would buy for them; they got the same plan I used for my own family. If it was good enough for them, it was good enough for me.

But then the Affordable Care Act came along, mandating that most businesses provide health benefits, specifying the minimum requirements for those benefits, changing the insurance marketplace in ways that are virtually guaranteed to drive premiums higher, and allowing individuals not covered through their jobs to buy insurance on their own, many with government subsidies, and without regard to any pre-existing health problems.

The law also raised my personal taxes to help pay for the insurance subsidies for all those strangers.

Suddenly, it made no sense for me to be in the business of choosing insurance for my workers. They would be able to go out and buy it themselves, guaranteed, in some cases with subsidies I was helping to pay for due to that tax increase. Some could go on their spouses’ plans; some could go on their parents’. Though our business was small enough to avoid the coverage mandate, that could change - and the government might impose penalties later on businesses like mine that opted to drop increasingly expensive coverage. So, late in 2010, I stopped paying for my employees’ insurance, gave them a raise, and told them to spend it however they chose.

For nearly two decades, my business has also maintained a profit-sharing plan. Employees don’t contribute to it, because it is not a salary-reduction plan such as a 401(k). I bear all the costs. Every year, I decide what percentage of an employee’s eligible compensation (in 2013, defined as compensation up to $255,000) will go into the plan. The employee gets the same percentage that applies to me and to my wife, who also works in the business. I get an immediate tax deduction; the employee does not pay tax on this money until he or she withdraws it from the plan.

But the president’s budget proposal, released earlier this month, would change the rules of this game in a way that may make me decide not to play any more.

The president wants to eliminate contributions to retirement plans, including my profit sharing plan, on behalf of anyone who has a current total balance of $3.4 million or more. This is the amount the president calculates would provide an “adequate” retirement income. The amount could fluctuate sharply: As interest rates go up, the “adequate” amount goes down. (A sensible modification, not reflected in the president’s proposal, would adjust these limits by age, so younger workers would have lower limits than older workers.) Equally discouraging, a revenue-hungry federal government could, in future, lower the limits further and immediately tax any “excess” amount by forcing its withdrawal from the plan.

I don’t think the president's scheme has much chance of passing, so I do not anticipate making any near-term changes to my company’s plan. But if anything like this did come into force, I would stop making profit-sharing contributions, give my employees the money each year, let them pay their taxes and then decide for themselves whether to save for retirement. Right now I have to cover them in order to cover myself. An employee who wants early access to the money can, within limits, borrow it from the plan. But when I am no longer covered, why should I continue to put their money in a vehicle that they may or may not want to use?

I care very much about my staff’s welfare. I want to see them have health insurance. I want to see them accumulate and invest money toward their financial security in old age. I value their loyalty to my business, and I want my business to provide them with the elements of a stable, secure financial life.

In the end, however, the purpose of my business is to do business, not to provide benefits, and my employees’ lives are their own. I have no desire to inject myself into their affairs unless there is a compelling reason to do so. One by one, President Obama is removing the reasons.

There are some on the political right who see a deeper purpose in Obama’s policies. Making employees less reliant on their workplace can make them more reliant on the government. Obama makes no bones about the fact that he thinks people can, and should, be able to look to government for many aspects of their financial lives. To some conservatives, pushing small businesses like mine out of the way is part of the plan.

I doubt that there is such a plan - or, for that matter, any plan, other than to get revenue in whatever politically palatable way Obama thinks he can manage. But all choices can have unintended consequences. The president’s choices may carry the unintended consequence of making my workplace feel like less of a family affair.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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