WELCOME to the Summer issue of clienTALK. Our client story in this issue is Kraemer & Loney, Inc., an employee benefit consulting firm and an independent insurance agency that was founded by Charles W. Kraemer in 1977. Kraemer & Loney’s philosophy is that the most important person in the health care industry is the consumer, and customer service is their highest priority.

In tax and business briefs on pages two and three, we have compiled some highlights from the Economic Growth and Tax Relief Reconciliation Act of 2001, the largest and perhaps most complex tax cut in more than 20 years. While many of the provisions of this new law do not take effect for several years, it is a good idea to plan ahead so you may receive maximum benefits. You will find articles on the following topics: Estate Tax Changes; College Tuition Deductions; Education IRAs; Tax-Qualified Plans; Child Care Tax Credit; Traditional and Roth IRA Limits Increases; Limits for Defined Plans; Salary Reduction Plan Limits; and an interesting article entitled, “A Right to Privacy in the Work Place.”

When you are finished reading our newsletter, we invite you to pass it on so others may be informed of its important information. Until next time,

  -David , Bruce & Allen

Business: Kraemer & Loney, Inc.
Place: 900 North Shore Drive, Lake Bluff, Illinois
Phone: 847.295.6611
President/CEO: Charles W. Kraemer
Executive Vice President/COO: Catherine Loney
Key to Success: ‘The most important person in the health care industry is the consumer.’

With all the dot.com start-ups that enjoyed a meteoric rise to fame only to later crash and burn, it’s refreshing to find a successful bricks and mortar company that has built a business the old fashioned way by focusing on product and customer service.

Kraemer & Loney, Inc. is an employee benefit consulting firm and an independent insurance agency. “We represent numerous insurance companies that fit the needs of our individual and business clients,” says Charles W. Kraemer, CLU. Kraemer founded the company in 1977 after working in the industry as vice president of three different major insurance companies.

Today, the company specializes in administering self-funded health and dental insurance plans, but also offers fully-insured individual and group health plans. Kraemer & Loney, Inc. works with school districts and municipalities as well as small- to medium-size businesses. Its client list, which reads like a Who’s Who of educational institutions and municipalities, includes the College of Lake County, Highland Park School District #113, New Trier High School, Winnetka Elementary School District, Cook Memorial Library as well as the villages of Lincolnshire, Northfield, Wilmette, Libertyville, Mundelein, Downers Grove, Lombard and Glen Ellyn.

“Some of our clients may offer their employees a fully insured product such as an HMO in addition to a self-funded plan, and we usually manage both plans,” explains Catherine Loney, executive vice president and chief operating officer. For self-funded insurance, Kraemer & Loney provides plan administration and benefit plan design, funding alternatives, pooling, cost containment and managed care, and medical case management.

“Increasingly, employers are turning to self-funding as an attractive alternative to financing health benefits in order to gain control over their own destiny,” says Catherine. “During the past decade the costs of providing medical benefits have soared to unprecedented levels,” she continues. “These spiraling costs have raised havoc with budgeting and have had a significant impact on the amount of basic compensation.”

What is Self Funding?
Instead of having an insurance company pay all claims and expenses in exchange for monthly premiums, the employer agrees to be responsible for the smaller claims, up to a certain limit. After that (the stop loss point), the insurance company steps in and pays the balance of the annual claims on any individual insured or the case as a whole. Thus, claims are partially self-funded and partially insured, and employers can know their maximum limits of liability.

Things Change
One thing in life is for certain, and that is ‘things change.’ In 1985, Catherine replaced Charles Kraemer’s wife as the company’s receptionist. “I have the original newspaper ad,” she laughs, as she reads the job description aloud. “Wanted—Administrative Assistant. Interesting and challenging opportunity in Lake Bluff Insurance Company.”

“Charles expected that I would be a long-term player, and I did too,” recalls Catherine. “But fate intervened, and in 1989 my husband was transferred to Rhode Island. When I left the company, I took with me a recommendation letter in which Charles described me as the most outstanding associate in 38 years.”

 In 1995, Catherine and her family came back to Chicago to watch a Cub’s game. She made a deal with her family: she would go to the game if she could stop at her old office in Lake Bluff. To her disappointment, Charles was out of town, but she left a message for him. The message was: “I would come back in a heartbeat if there was a position for me.”

Catherine doesn’t remember whether the Cubs won or lost, but she does know that her life changed on that eventful day.

“Charles called me several days later and offered me a partnership if I would come back to work. In August 1995, I made the decision and my family followed me. We purchased a home in Wisconsin and I began making the 140-mile round-trip drive to work every day.”

ust recently, Catherine says she spent her 43rd birthday working with a new client—Warren Township High School.   “Friends asked me why I worked on my birthday. I told them I couldn’t have had a better day. Knowing that I was making a difference by helping a client with their employee benefit package was a gift. I receive a lot of gratification from my work. Health care is supposed to be a benefit to the employee. I strive every day to put the concept of ‘employee benefit’ back into the insurance equation. What brought me into this business was the belief that the most important person in the health care industry is the consumer. I still believe that to be true.”

Serving the Consumer’s Needs
Elyse Clark, CPA, co-chairs the accounting/audit department at KRD. She works closely with Kraemer & Loney’s controller, Madeline Hood, who is also a certified public accountant.

“Elyse prepares our corporate tax returns and is a resource throughout the year,” says Madeline. “She is very knowledgeable about our business and is an excellent resource person regarding changes in the tax law and how those changes may impact us.”

Madeline adds: “In January 2000, Elyse was instrumental in helping us make the transition from an S corporation to a C corporation. She is always available for questions that arise in the course of business.”

Catherine agrees. “While her main responsibility is to handle our year-end corporate return (and my personal return), we refer tax questions to her all year long. She is an excellent reference person for us. She also shares our philosophy that we are here to serve the needs of the consumer.”

For information on self-funded plans, contact Ms. Loney at 847.295.6611.

Perhaps the most talked-about aspect of the 2001 Tax Relief Reconciliation Act, signed into law on June 7, is the so-called “repeal” of the estate tax. Taxpayers who hoped that the new law would simplify or even eliminate the need for estate and tax planning may be in for an unpleasant (and expensive) surprise; estate and generation-skipping transfer (GST) taxes are only reduced, not eliminated, for the next eight years. In fact, they are ONLY eliminated for one year—2010. Gift taxes are not eliminated at all. Further complicating matters is the reinstatement of the long-repealed carryover basis rule, which goes into effect immediately upon the elimination of estate taxes, possibly resulting in capital gains taxes even more onerous than estate taxes for some taxpayers. Unless extended by a future Congress, the Tax Act expires in 2010 and the current law returns in 2011, meaning estate taxes may never really go away at all!

There is no change at all until January 2002, when the estate and GST tax exemption rises from $675,000 to $1 million, and the highest estate tax rate drops from 55% to 50%. The following year, 2003, the exemption remains at $1 million, but the tax rate falls to 49%. In 2004 and 2005, the exemption increases to $1.5 million and the tax rate decreases to 48% and 47%, respectively. By the year 2009, the tax exemption jumps to $3.5 million and the top tax rate on taxable estates falls to 45% (35% gift tax). Then, in 2010, the tax will be repealed, but only for one year. In 2011, the taxable estate exclusion reverts back to $1 million and the top tax rate is reinstated at 55%. It’s anyone’s guess what the lawmakers were thinking. Between now and 2010, however, there will be two presidential and four congressional elections, so a lot may change. And, it’s almost a certainty that Congress will revisit the topic in the next few years.

Change in Carryover Basis in 2010

When the estate tax is repealed in 2010, a change in carryover basis will immediately be put into place. This may present some challenges for taxpayers who inherit larger estates. The limit in the basis step up is set at $4.3 million in assets inherited by a spouse and up to $1.3 million in assets inherited by non-spouses.

Under current law, when you die, your assets receive a “step-up in basis,” which means stocks, real estate and other inherited assets are valued at their market price on the day of your death, not the price that you originally paid for them. Planning advice: Keep good records so your children won’t have to face the time-consuming task of figuring out how much you paid for your Walgreen’s stock in 1975.:

College Tuition Deduction

Taxpayers will be able to take an above-the-line deduction for qualified higher education expenses paid during the tax year. For 2002-2003, single taxpayers with adjusted gross income (AGI) of no more than $65,000 ($130,000 for married filers) may be eligible for an above-the-line maximum tuition deduction of $3,000 each year. In 2004 and 2005, the deduction increases to $4,000 for these same taxpayers. Single taxpayers whose AGI does not exceed $80,000 and for joint filers with incomes up to $160,000 are eligible for a maximum deduction of $2,000 in 2004 and 2005. This deduction cannot be claimed in the same year as a HOPE or Lifetime Learning credit for the same student. :

Education IRAs Give Parents a Break

For tax years beginning after 2001, the annual limit on contributions to education IRAs dramatically rises from $500 to $2,000. Distributions from these “education savings accounts” are free from federal taxation if they are used to pay for qualified education expenses.

 A major change from the previous rules expands the definition of qualified education expenses to include “elementary and secondary education expenses,” thus allowing amounts distributed from education IRAs to be used for public and private schools, private religious schools and extended day care programs. The distributions may be used to pay for tuition, fees, academic tutoring, school uniforms, computer technology or equipment. Currently, college education is the only qualified use for education IRAs.

 Another important rule change for education IRAs is the phase-out range for married taxpayers filing jointly. Effective after December 31, 2001, the phase-out range increases to $190,000-$220,000 of modified adjusted gross income (MAGI), twice that of single taxpayers. The phase-out range for singles ($95,000-$110,000) does not change. Also, beginning in 2002, corporations and other entities including tax-exempt organizations can make non-deductible contributions to education IRAs with no income limitations.

 A few more important provisions are worth noting. The first is that a taxpayer can claim either a HOPE or lifetime learning tax credit for a taxable year and pay educational expenses out of an education IRA on behalf of the same student. The only stipulation is that the IRA distribution and tax credit are not used to pay for the same costs. Also, families with more than one child can roll over unused portions of an education IRA for a younger child’s use. And, the law permits contributions for special-needs beneficiaries over age 18 and allows their accounts to continue after age 30. Finally, the due date for contributions to education IRAs is extended from December 31 to April 15 of the following year.

Changes to the individual income tax rate brackets began to take effect on July 1, 2001. For the year 2001, a half point will be shaved off the existing rates of 39.6%, 36%, 31%, and 28%. Thus, the 39.6% rate will be reduced to 39.1%. In addition, starting in 2002 a new 10% tax rate applies to a portion of income that was previously taxed at 15%: the first $6,000 for singles, the first $12,000 for married couples filing jointly and $10,000 for heads of households. In lieu of the 10% bracket for 2001, taxpayers are receiving a rebate check equal to 5% of what otherwise would have been subject to the 10% rate. The maximum rebate will be $300 for singles, $600 for married couples and $500 for heads of households.

In 2002, each of the tax rate brackets will drop about 1% per year until 2006, except for the 15% bracket. Thus the 39.6% rate goes from 39.1% this year to 38.6% (2002-2003), 37.6% (2004-2005) and 35% (2006).:

Tax-Qualified Plans Allowed to Make Loans

Child Care Tax Credit

Another important provision of the Tax Relief Act is an increase in the child tax credit from $500 to $600 (2001-2004) and from $600 to $700 (2005-2008). The child care tax credit goes up to $1,000 in 2010 and thereafter.:

Starting in 2002, the Tax Relief Act increases the overall annual contribution limit for both traditional and Roth IRAs.   The maximum IRA contribution for 2002-2004 increases to $3,000. From 2005-2007, you may contribute $4,000. In the year 2008 and after, the maximum contribution increases to $8,000. The new law also provides for a “catch-up” contribution for those taxpayers who are age 50 and over. An additional $500 a year (before AGI phase-out limits) can be contributed for 2002 through 2005. The catch-up amount for taxpayers over the age of 50 increases to $1,000 per year for the years 2006 and beyond.

Catch-up contributions are also allowed for employer-sponsored retirement plans. Those 50 and over can benefit from an extra $1,000 contribution in 2002, increasing $1,000 per year to $5,000 in 2006. The contribution limits on 401(k), 403(b) and 457 plans increase to $11,000 for 2002 and rise $1,000 each year up to $15,000 in 2006.:

The maximum eligible annual salary for a qualified defined contribution plan increases from $170,000 in 2001 to $200,000 for years beginning in 2002, and the new law raises the maximum limit on annual additions (employee and employer contributions) to $40,000, up from $35,000.

The deductible percentage for profit sharing plans increases from 15% to 25% of compensation. Money purchase plans, however, continue to be combined with profit sharing plans for purposes of the limitation.

The Tax Relief Act also increases the $140,000 annual benefit limit under a defined benefit plan to $160,000 starting in 2002. The dollar limit is reduced for benefits beginning before age 62 and increased for benefits after the age of 65.:

The less your employees expect privacy, the less likely you are to have a problem protecting company property including equipment, data and money, according to Bob Rosner, Allan Halcrow and Alan Levins, authors of the best-seller, The Boss’s Survival Guide (McGraw-Hill 2001).

According to Rosner, low expectations mean employees are not surprised by their employer’s actions. Employee handbooks, job application forms, written policies and contracts should all carefully set forth your right to inspect, search, test and check for illegal substances and objects, illegal activity, and improper use of company equipment. However, there’s no reason to even think about conducting a search unless you have good evidence or a verifiable reason to believe that employees are stealing, using company equipment improperly, are engaged in an illegal activity such as selling or possessing illegal drugs, or an employee’s safety may be at risk. Then, consider doing a search only as a last resort.

“First, try old-fashioned detective work; simple questioning of employees is often enough to crack the case, if you think there’s a problem,” advise the authors.