Accounting

Morningstar report names only one HSA provider high quality

Published

4 weeks ago

October 28, 2024

Morningstar’s annual report card for the providers on the menu of so-called “triple-tax-free” health savings accounts is in, and most did not earn very high grades.

Only one HSA firm — Fidelity Investments — out of 11 reviewed by the independent investment research firm as part of its yearly “Health Savings Account Landscape” report last month got an assessment of being “high” quality for the purposes of paying for medical costs and acting as a long-term investment account. Just three others — HealthEquity, HSA Bank and Saturna — received “above average” ratings on both measures.

First American Bank, Lively, UMB, Associated Bank, NueSynergy, Optum and Bank of America came out “average” or “below average” in covering health costs or being a long-term investment account. Importantly, Morningstar used public data and a survey, so the report noted that it was not evaluating specific employer-offered HSAs that vary based on their size and relationships with providers.

Low interest rates for client cash holdings and higher relative fees for custody and the underlying investments drove the poor grades for most of the providers, according to Greg Carlson, a senior manager research analyst for equity strategy with Morningstar and one of the authors of the report. An average expense ratio of 24 basis points on the available investment funds in the plans offered one bright spot from the report, since the decline from 29 bps last year added up to “a significant one-year decline” and “the biggest change we’ve seen,” he said.

“Part of it is Fidelity just beating everyone in terms of fees pretty much, and that’s a big advantage,” Carlson said. “They have come down across the board. Just like in other areas of asset management, competition has intensified on the fee side.”

The often-discussed advantages of HSAs from getting pretax contributions, untaxed investment returns and tax- and penalty-free withdrawals for medical purposes come with some challenges. Only high-deductible health insurance plans are eligible, every provider besides Fidelity and Lively require participants to put a minimum level of assets into the HSA before they can do any investing, and Fidelity is the only one out of the group of 11 to pay interest rates on cash assets above 1%.

HSAs are often “sub-par regarding interest on cash balances,” said planner Autumn Knutson of Tulsa, Oklahoma-based Styled Wealth.

“HSAs are a powerful vehicle for tax-advantaged healthcare savings, but most consumers are stuck with whatever provider their employer chooses if they want to benefit from payroll deductions toward their HSA,” Knutson said in an email. “As if the nuances of understanding how to qualify for, contribute to and invest within an HSA were not tricky enough, an additional layer of complexity for HSA providers is within the interface, navigating minimum cash balance requirements and fees for other services or selections.”

HSA assets have soared by a factor of 22 between 2006 and 2023 to $123 billion as the share of workers using employer-sponsored plans that have high-deductible health insurance plans jumped from 7% to 31%. HSAs started in 2003 as an effort “to make high-deductible plans more attractive,” according to the report.

In another finding that’s consistent with other studies but crucial to financial advisors and tax professionals working with clients who have HSAs, an average of 74% of the plan participants among surveyed providers used the accounts to cover medical expenses but didn’t take advantage of the ability to invest through them.

The participants “may not be able to meet and maintain the minimum investment account balances most providers require” or have enough left over for stocks and bonds after paying medical bills, the report said. The average American had about $13,500 in healthcare expenses in 2022, according to Centers for Medicare and Medicaid Services figures cited by Morningstar.

“Plans have gotten better in important ways,” the report said. “Both investment and spending account fees have continued to decline, for example, and investment option quality keeps improving. HSA transparency and ease of use could still improve, though, and costs — particularly investing and custodial fees — could drop further. The process of investigating, signing up for and funding accounts remains complicated. Fewer top providers charge maintenance fees, but some still do — and they often require minimum account balances before participants can invest. Most providers also pay paltry interest rates on spending account balances below relatively lofty levels, even two years after rates began rising.”

While high-deductible plan participants can use a different HSA provider than the one chosen by their employer, that one is “likely most convenient and financially advantageous” because “your contributions are deducted before Social Security and Medicare taxes,” Knutson noted. More often, the participants will move to an alternate provider once they change employers.

As for the investing side of HSAs — or the lack thereof — “some of the biggest problems I see” in the accounts are savers who are “accruing large balances and not investing the cash amounts at all,” Knutson said.

“This is a function less on the HSA provider and more on investors understanding that funds in an HSA are not invested by default, but rather need to be invested after they are contributed,” she said. “Just as 401(k)’s now have a default investment option to protect investors from having decades of funds accidentally uninvested, an idea for improving HSAs could be to have any excess beyond a planned out-of-pocket max be invested, as this would cover any expenses incurred through health insurance and allow any excess amounts saved into an HSA to be invested for longer term goals.”

Companies and lawmakers “can do more to motivate HSA participants to take advantage of their plans’ investment features,” according to the Morningstar report.

“While employers can automatically enroll employees in employer-sponsored retirement plans, the government has not yet allowed them to do the same for employees who are eligible for HSAs. Automatic enrollment has boosted retirement plan participation,” the report said. “Another barrier to increased HSA investing is that participants sometimes aren’t aware of investment-account options. Providers could simplify the account-opening process and better teach participants both how to transfer between the two account types and about the benefits of long-term investing. Providers that offer better guidance and tools tend to have higher average investment account balances.”

In addition, Morningstar gave advisors, tax pros and their clients some best practices to seek out from their providers when using HSAs. For medical expenses, they should look for “no ongoing maintenance fees,” “competitive interest rates on account balances,” “few or no additional fees” and “FDIC insurance on the spending account.”

When thinking about the long-term investment side of HSAs, they should find providers who have “investment menus that cover core areas and limit overlap and volatile or niche strategies,” “investment options that earn Morningstar Medalist Ratings of bronze or higher,” “low fees” and “no minimum balance in a spending account required before investing.”

Advisors can guide clients through their HSA decisions with an eye toward the lowest-cost investments and an understanding that even a core bond fund could bring higher return than cash, according to Carlson. One method to lock in some intermediate and longer-term gains would be to set aside the “money you’ll need in the short term,” he said.

“Obviously, health care costs are high and rising, so you do want to make sure that, first and foremost, you’re not taking a lot of risk with money you may need to use immediately or in the short term,” Carlson said. “You want to probably try to separate pools of money.”

Accounting

How to Mastering Accounts Receivable Management to Maximize Cash Flow

Published

2 hours ago

November 23, 2024

Business Finance News

Accounts Receivable Management for Maximum Cash Flow

Effective accounts receivable (AR) management is vital for maintaining a company’s cash flow, profitability, overall financial stability and is considered to be best practice for accounting management . By implementing strategic AR practices, businesses can reduce payment delays, minimize financial risks, and improve relationships with customers. Below are in-depth strategies for enhancing AR performance, ensuring financial health, and maintaining strong client relationships.

Establishing Formal Policies and Procedures

A well-defined set of policies and procedures is the foundation of effective accounts receivable management. Clear guidelines ensure consistency across the entire order-to-cash cycle, from invoicing to collection. These guidelines should outline the specific steps involved in generating invoices, tracking payments, and handling overdue accounts. Clearly defined roles and responsibilities for team members contribute to accountability, while setting payment terms and due dates helps streamline the process.

Creating a documented standard operating procedure (SOP) that employees can refer to ensures that everyone follows the same approach, minimizing errors and reducing confusion. Policies should also specify the consequences for late payments, including any penalties or fees. Establishing escalation protocols—such as follow-up reminders, late payment notices, and legal actions if necessary—keeps the collection process organized and efficient.

Leveraging Advanced Technology for Efficiency

Incorporating technology into accounts receivable management can significantly enhance efficiency. Advanced AR software platforms offer a range of features designed to automate and optimize the process, reducing the manual workload and minimizing errors. These platforms often include automated invoicing, payment tracking, customer communication, and collections management.

Automated systems can send reminders for upcoming payments and follow up on overdue accounts without human intervention. This automation saves time and ensures consistency in communication with clients. Many platforms also offer integrated billing systems that sync with existing account receivable software, providing a seamless flow of information across financial operations. Customer portals allow clients to access statements, make payments online, and review their payment history, fostering a more convenient and user-friendly experience. Some of the best account receivable software are: QuickBooks Online, Xero, Sage Intacct and NetSuite ERP.

Implementing Regular Accounts Receivable Reviews and Aging Analyses

Regular reviews of accounts receivable are essential to maintain a healthy cash flow. Implementing a schedule for periodic AR reviews allows businesses to monitor the status of outstanding balances and identify potential problems early. Aging analyses categorize receivables based on how long they have been outstanding—30, 60, or 90+ days—highlighting overdue accounts that require immediate action. These reports are valuable tools for assessing the health of cash flow and making informed decisions about which accounts to prioritize for follow-up.

Analyzing AR data helps identify patterns and trends that may indicate broader issues, such as recurring late payments from specific clients or seasonal fluctuations in cash flow. Businesses can use this data to refine their credit policies and improve collection strategies. A disciplined review process also enables organizations to proactively address cash flow challenges before they escalate, ensuring financial stability.

Strengthening Customer Relationships for Improved Collections

Maintaining positive relationships with customers is a crucial aspect of effective AR management. Accurate and up-to-date customer information, including contact details and payment histories, enables personalized service and facilitates smoother transactions. Keeping comprehensive customer profiles with relevant data helps businesses address issues quickly and negotiate payment plans when necessary.

Clear and transparent communication builds trust with clients, making them more likely to prioritize timely payments. Sending invoices promptly, following up with friendly reminders, and providing clear payment instructions are all practices that enhance client relationships. By understanding customers’ payment behaviors and preferences, businesses can tailor their approach to improve cash flow without jeopardizing long-term partnerships.

Implementing Credit Risk Management Strategies

For companies that extend credit to customers, managing credit risk is a critical part of AR management. Implementing structured credit assessment processes allows businesses to evaluate the risk associated with each customer before offering credit terms. Conducting thorough credit checks and setting credit limits based on each client’s financial history and creditworthiness can significantly reduce the likelihood of non-payment.

Businesses should regularly review credit terms and limits to ensure they remain aligned with evolving market conditions and customer circumstances. Implementing dynamic credit policies that adapt to changes in a customer’s payment behavior or overall economic environment helps minimize risks and protect cash flow. A well-executed credit management strategy reduces the impact of late payments and uncollected debts on the company’s finances.

Utilizing Aging Reports for Strategic Analysis

Aging reports are essential tools for understanding the status of outstanding invoices. These reports categorize receivables based on the duration since the invoice was issued, making it easier to identify overdue accounts. Regularly analyzing aging reports helps businesses prioritize follow-up efforts, allocate resources effectively, and take targeted actions to minimize delinquencies.

A data-driven approach to AR management not only enhances the efficiency of collections but also provides valuable insights into the company’s financial health. Recognizing patterns in payment behavior can inform adjustments to invoicing procedures, credit policies, and follow-up strategies. Accurate and timely aging reports are crucial for maintaining cash flow and ensuring that overdue accounts are addressed promptly.

Balancing Automation with Human Oversight

While automation offers numerous benefits for accounts receivable management, human oversight remains indispensable. Automated systems excel at handling routine tasks like invoicing, sending reminders, and updating payment statuses, but they cannot replace the expertise and judgment of experienced professionals. Human involvement is necessary for analyzing data, handling complex payment disputes, and maintaining customer relationships.

Businesses should strike a balance between automation and manual oversight. Leveraging automation for repetitive tasks allows AR teams to focus on higher-value activities, such as negotiating payment plans and resolving disputes. A well-rounded approach that combines technology with human expertise ensures that AR management remains adaptable and responsive to changing circumstances.

Proactive Collections and Follow-Up Procedures

A proactive approach to collections is crucial for maintaining healthy cash flow. Sending invoices as soon as work is completed and issuing payment reminders well before the due date can significantly reduce payment delays. Establishing a structured follow-up schedule for overdue accounts—such as sending gentle reminders at 15 days and more assertive notices at 30 days—helps businesses maintain consistent cash flow.

Maintaining detailed records of all payment communications provides a clear audit trail and ensures that the collection process remains professional and well-documented. Professional yet firm follow-up procedures demonstrate the company’s commitment to timely payments while preserving the relationship with clients.

Monitoring Key Performance Indicators (KPIs) for Continuous Improvement

Tracking key performance indicators (KPIs) is essential for assessing the effectiveness of AR management strategies. Metrics such as Days Sales Outstanding (DSO), average collection period, and the percentage of overdue accounts provide valuable insights into cash flow health. Setting specific goals for these KPIs encourages continuous improvement and helps identify areas where adjustments are needed.

By regularly monitoring and analyzing these metrics, businesses can refine their AR processes, implement targeted strategies, and optimize collections. Effective AR management not only improves cash flow but also strengthens the organization’s financial foundation, supporting sustainable growth and long-term success.

Accounts receivable management services

Several reputable accounts receivable management services are available to help businesses enhance cash flow and streamline collections. TSI (Transworld Systems Inc.) specializes in customized debt collection and payment reminders, reducing delinquency rates through targeted analytics. Atradius Collections offers global AR management, focusing on credit insurance and tailored solutions for international clients. Dun & Bradstreet Receivable Management Services provides comprehensive AR solutions, including credit risk assessments and data-driven strategies. Gulf Coast Collection Bureau supports industries like healthcare and utilities with services ranging from AR outsourcing to debt recovery. ABC-Amega delivers global commercial debt collection and AR outsourcing, assisting clients in managing complex cases and reducing payment delays. These services are designed to enhance financial stability and improve payment practices across various industries.

Conclusion

Optimizing accounts receivable management is a critical step toward ensuring consistent cash flow and financial stability. By establishing clear policies, leveraging technology, conducting regular reviews, and maintaining strong customer relationships, businesses can minimize risks and improve payment efficiency. A combination of automated tools and human oversight, alongside a proactive collections strategy, allows organizations to manage their receivables effectively. Prioritizing AR management is not just about getting paid—it’s about securing the financial health and longevity of the business.

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Accounting

Tax Fraud Blotter: Partners in crime

Published

20 hours ago

November 22, 2024

Business Finance News

Captive audience; some disagreement; game of 21; and other highlights of recent tax cases.

Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients.

He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.

Sandiego, who previously pleaded guilty, caused a tax loss to the IRS of some $4,586,154.

He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.

Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.

The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.

According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.

The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.

The government contended that the total harm to the Treasury could be $10 million or more.

Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.

Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.

The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.

Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.

Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.

Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.

From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.

Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.

Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.

Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.

Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.

Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.

St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.

Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.

From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.

Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.

Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.

Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.

In total, the defendants caused a tax loss to the IRS of more than $22 million.

Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.