The Cutting Edge™ July 2005

AWFS® Fair 2005 Planning Tools

WMMA members are enjoying wide-spread exposure in these weeks leading up to the AWFS® Vegas Fair! Whether it be the digitally-turned WMMA member pages of "NXT Book" on ISW Online, a 12-page product locator and member listing in Wood & Wood Products, or a 28-page AWFS® Fair Guide to American Made Products in Wood Digest, our members are everywhere.

Members and end users can also look forward to a "Mini-Map," which shows a map of Las Vegas on one side (guiding you through the avenues of dining and entertainment) and a list of WMMA exhibitors on the other. These pocket-sized maps will be delivered to WMMA exhibitor booths for you to give to your visitors! There is a slot for your business card in the front for a lasting impression.

Extra copies of these promotional materials will be available at the WMMA booth, right outside the second floor hall at the Las Vegas Convention Center (Booth #200). Please stop by!

The WMMA website also allows AWFS® Fair show-goers to plan ahead. You can let your end users know that our online Product Locator can help them find they U.S. - Made Products they want to buy. Here's how:
Simply visit www.wmma.org and click on the "AWFS® Vegas" logo on the bottom left to start planning your personal itinerary, and visit the exhibitors you want to see at the Fair.

1. Create a profile by entering a username and password you will remember
2. Browse the companies and products you wish to visit at the Fair
3. Select "Add to Itinerary"
4. You are now building your printable list of WMMA member companies to visit at the Fair, with their booth number!
5. Sort your itinerary by Product, Booth Number or Company
6. Re-visit your itinerary as often as you like to add, delete or resort
7. Print your itinerary and bring it with you to Las Vegas in July
8. Focus your efforts! Plan your time well for AWFS® Vegas!

Public Policy

The IRS did something recently that I thought was pretty "cool." If you offer your employees benefits under a "cafeteria plan" that allows them to secure benefits with pre-tax dollars, you and they are familiar with the phrase "use it or lose it.' Under a qualified program, if you do not use the designated benefits by the end of the year, you lose the income.

A cafeteria plan is defined as a written plan maintained by an employer under which all participants are employees, and the participants may choose among two or more benefits consisting of cash and qualified benefits. A "qualified benefit" includes employer-provided accident and health plans, group term-life insurance, dependent care assistance programs, and adoption assistance programs

The IRS has decided it has the authority to allow for a grace period of two and one-half months at the end of the plan year before the "use-it-or-lose-it" penalty kicks in.

The grace period must apply to all participants in the cafeteria plan. Expenses for qualified benefits incurred during the grace period may be paid or reimbursed from benefits or contributions remaining unused at the end of the immediately preceding plan year. The grace period must not extend beyond the fifteenth day of the third calendar month after the end of the immediately preceding plan year to which it relates (i.e., "the 2 and 1/2 month rule"). The effect of the grace period is that the participant may have as long as 14 months and 15 days (the 12 months in the current cafeteria plan year plus the grace period) to use the benefits or contributions for a plan year before those amounts are "forfeited" under the "use-it-or-lose-it" rule.

During the grace period, a cafeteria plan may not permit unused benefits or contributions to be cashed-out or converted to any other taxable or nontaxable benefit. Unused benefits or contributions relating to a particular qualified benefit may only be used to pay or reimburse expenses incurred with respect to that particular qualified benefit. For example, unused amounts elected to pay or reimburse medical expenses in a health flexible spending arrangement (FSA) may not be used to pay or reimburse dependent care or other expenses incurred during the grace period.

For example, an employer with a cafeteria plan year ending on December 31, 2005, amended the plan document before the end of the plan year to permit a grace period which allows all participants to apply unused benefits or contributions remaining at the end of the plan year to qualified benefits incurred during the grace period immediately following that plan year. The grace period adopted by the employer ends on the fifteenth day of the third calendar month after the end of the plan year (March 15, 2006 for the plan year ending December 31, 2005).

Employee X timely elected salary reduction of $1,000 for a health FSA for the plan year ending December 31, 2005. As of December 31, 2005, X has $200 remaining unused in his health FSA. Employee X timely elected salary reduction for a health FSA of $1,500 for the plan year ending December 31, 2006. During the grace period from January 1 through March 15, 2006, X incurs $300 of unreimbursed medical expenses. The unused $200 from the plan year ending December 31, 2005 is applied to pay or reimburse $200 of X's $300 of medical expenses incurred during the grace period. Therefore, as of March 16, 2006, X has no unused benefits or contributions remaining for the plan year ending December 31, 2005. The remaining $100 of medical expenses incurred between January 1 and March 15, 2006 is paid or reimbursed from X's health FSA for the plan year ending December 31, 2006. As of March 16, 2006, X has $1,400 remaining in the health FSA for the plan year ending December 31, 2006.

I believe we can go one step further and through the Small Business Legislative Council (SBLC), of which WMMA is a member and on whose board Ken Hutton serves, we are working to make cafeteria plans more attractive to small businesses.

On April 6, 2005, Senator Olympia Snowe introduced the "SIMPLE Cafeteria Plan Act of 2005," S. 723. It would amend the tax code so that owners of small businesses, including partners and S-corporation stockholders who own more than two percent of the stock, to participate in a cafeteria plan if they worked in the business. Under current tax law, small business owners are excluded because they are not "employees," even if working full-time, but rather are self-employed individuals and thus ineligible by definition.

The measure also would permit the carryover of unused flexible spending accounts funds, as well as simplifying and increasing dependent care accounts for employers of all sizes. It would allow cafeteria plans to offer long-term care insurance as an optional benefit for the employees to select. It eliminates the despised "use-it-or-lose-it" rule all together.

SBLC feels that chances for passage this year are good. The issue has been steered towards the health care debate and out of the tax arena. It is hoped that this measure can become part of any health care legislation that moves this year, perhaps association health plans.

Public Policy

A strong majority of U.S executives rate healthcare insurance costs as their #1 concern. The poster company for this problem might be GM, which announced on June 7th that it will layoff at least 25,000 jobs or almost 8% of its U.S. workforce. In a renewed effort to cut costs, it will focus on its $5.6 billion annual healthcare bill that averages over $1500 per car. "Intense" discussions have begun on health insurance with GM union leaders.

Conditions are also painful at the small-business-end of the corporate spectrum. There are perhaps as many as 45 million US citizens who don't have any healthcare insurance, largely because over 50% of small business owners can't afford to offer any health insurance to their employees. And, at many other small firms the insurance that is offered is too expensive for many employees to subscribe to. As health insurance costs have risen - on average 12.5% per year from 1997 with no forecasted relief in sight - there are two clear patterns that have emerged:

• For every 10% increase in insurance costs, 1.3 million adults lose their employer sponsored health insurance .
• Employee deductibles, co-pays and share of the total health insurance expense are all rising. The average employee contribution for a family insurance plan in 2004 rose to $3,156, or 32% of the total cost ($9862), from $1670, or 25%, in 2000 (total cost $6,680).

• Forced to drop the insurance that might be offered to them by employers each year.
• Not participating in company 401K plans even with matching dollar inducements, because they can't afford to save after paying higher medical expenses.
• Putting their children on state medicaid insurance programs instead of company plans.

Small business faces higher health insurance costs per employee than big companies because of: lack of buying clout; higher administration costs per employee; and more sensitivity to state insurance mandates. The most populous and liberal states have been the most "progressive" in trying to mandate the best and broadest insurance coverage for all their citizens/voters by getting state-based firms to pay for it. For small businesses in these states, this means: paying super high insurance premiums; dropping coverage altogether; going out of business; or re-locating jobs out of the state if possible. Because the unintended consequences of mandates are dropped insurance coverage and disappearing jobs, 12 states are in the process of rolling back their mandates to become more business friendly.

HSAs: The Only Business "Solution" on the Horizon

What "health savings accounts" (HSAs) are and the details about how they work can be found at many web sites - just google "health savings accounts". Because it is easy to get lost in the details of HSAs, make sure that you don't miss these underlying concepts and trends:

• After 30+ years of health care "reforms", HSAs are the first "reform" that has addressed two of the core problems of our dysfunctional healthcare "system". 1) Only corporations, until now, have been able to buy (and save on) health insurance with tax-free dollars; 2) Having access to the finest, unlimited, unrationed healthcare regardless of one's personal health habits is not an entitlement; third parties - corporations, government and our grandchildren - can't afford it. However, HSAs now provide tax-free dollar incentives for individuals to be responsible for being more healthful and shopping frugally for personally, sufficient, healthcare solutions.
• Because health insurance costs and deductibles will continue to climb, most corporate health insurance plans will soon have high enough deductibles for all employees to qualify for HSAs. Since health insurance dollars are part of total employee compensation, companies might as well let those employees who want to have the ownership and control of the premium savings from high deductible, lower premium policies by flowing as much of it as possible through their HSAs. It's a simple empowerment and freedom opportunity that treats employees like the adults that they are.
• HSAs will be further enabled by: pending federal legislation for tax credits for funding HSAs for low wage earners and making comparison shopping for health care provider solutions viable. Independent supportive shopping services like subimo.com are already rushing to fill the consumer healthcare shopping information need.
• Enrollment rates for HSAs to date - by a greater variety of people - have surpassed all forecasts by all parties. And, the first wave of enrollees are decidedly not just the young, healthy, single and/or wealthy that the critics of HSAs have predicted. What are the most current, revised future forecasts for adoption of HSAs? Who really knows? Forrester Research, for example, recently upped their forecast for 2012 to 17.6MM HSAs with deposits/assets totaling $35 billion. The point is that this wave is big and broad based.
• While HSAs are not the solution for all of our nation's healthcare problems, there is no political momentum for creating any other type of significant "reforms" on the horizon. Perhaps the healthcare crisis will be a big 2008 election issue, but in the meantime every business has a survival imperative to continuously study and incorporate HSAs as an option, if and when possible.
• HSAs are already providing some true sustainable and continuously improving cost savings instead of the simple cost-shifting that critics feared.

True Savings From HSAs?

Where is the free lunch with HSAs? When employees are spending their own money for out-patient care, they start asking and negotiating with doctors about what is the minimally sufficient, cost-effective solutions. More generic drugs are prescribed. It would be nice-to-have diagnostics get waived. Both insurance companies and doctors are starting to offer discounted premiums and fees respectively that reflect the reduced cost of not having third-party paperwork costs for the first $2500 of care that is paid with credit cards out of HSAs.

• Five insurance companies have announced premium rate cuts on policies for HSAs in the past month (May '05) due to competition and better design of policies that let individuals custom tailor where the deductibles and varying sizes of co-pays apply to get only the insurance coverage that they want. One industry guesstimate is that by September rates for HSAs will settle 30% lower than rates in mid-summer 2004.
• Doctor offices are starting to post discounts for services that are paid with credit cards, and some doctors are moving completely to "cash or credit card only" practices. Check out simplecare.com for one national network of primary care physicians doing this.

1. Will HSAs control costs?
   Yes.
2. Will HSAs encourage people to forgo needed care?
   No, they've increased in several studies. Policies that provide first-dollar coverage for annual check ups and hospitalization while applying all other out patient care costs to the deductible are a big reason for this.
3. Will HSAs only appeal to healthy, young, single and/or wealthy people?
   No. The demographics for US enrollees show broad demographics and even counter-intuitive averages.
4. Will HSAs encourage employers to reduce benefits?
   No. Employers don't need an excuse to cut benefits or raise the employee's cost for insurance, they have to provide the best competitive compensation/benefit package that they can afford to attract and keep good employees.
5. Will HSAs force patients to pay retail prices while HMOs pay wholesale?
   No. HSAs can be part of provider networks that get network prices, and cash only doctors are sprouting up to offer the same services that network providers do for dramatically lower prices due to the absence of network overhead costs.

Conclusions

If companies look at the full cost of their employees and flow as much of their health insurance dollars through employee HSAs as possible, good things can happen. We shouldn't under-estimate the power of employees wanting to save their own tax free dollars or of the speed which health suppliers will change to meet consumer needs empowered by HSAs.

Because employees all along the personal health spectrum will have instant motivation to be incrementally more healthful and more savvy medical shoppers, they all have a chance to save money by shopping for sufficient solutions. To help employees become incrementally more healthy, every company regardless of size should (re)start a simple-to-scale, wellness program with the goal of creating a wellness, total-health productivity culture. It's possible that, in a few years time, offering HSAs will become an expected option and a necessity for luring the most responsible, health conscious employees from other employers that also have HSAs. Because HSAs have better total tax and spending characteristics than IRAs and 401K plans, they may well become the preferred vehicle for most employees to save.

But, why stop at empowering employees just for healthcare spending? Why not ask the employees to become "engaged" in creating better service value propositions for the right core and target customers in the right target customer niches? If employees could understand the chain of connections between their efforts, better service value, better customer retention, and bigger gainsharing bonuses, they could help to make it happen. Otherwise, most employees simply don't care about saving the company's money to improve the shareholders ROI; many even think profits are evil. They don't realize that company profits reinvested per employee per year is the cost of their having a secure and expanding career. Teach them so they can appreciate, play and win in the game of business too!

Reinventing a company's service value proposition with bottom up commitment requires a lot of up front education for all employees, but the total educational curriculum in a box does exist on a very affordable, guaranteed basis. Check out the details for the video/DVD product "High Performance Distribution Ideas for All" at www.merrrifield.com.

Notes:

1. Study from University of Cal-Berkley. If readers would like references for any other facts in this article, either google them or contact me at bruce@merrifield.com.
2. Also check under the HSAs/Wellness tab at www.merrifield.com
3. www.ncpa.org/prs/tst/JCG_Testimony.pdf
4. Read the article at www.merrifield.com/articles/5_16.asp

International Business Development

SABIT, a US Department of Commerce export development program, awards grants annually to U.S. companies and organizations that support training of Eurasian managers, to include representatives. This program, which WMMA members have taken advantage of in the past, can be an economical way to gain solid footing into the growing markets of Russia and neighboring Eurasia nations.

The objectives of SABIT program is to build partnerships and provide technical assistance by training Eurasian business leaders in U.S. business practices. These training programs directly support Eurasian economic and civil society development by encouraging market-based reforms. From the WMMA member perspective the program generates valuable export opportunities.

SABIT manages two training programs that turn partnerships into results:

GRANT PROGRAM - www.mac.doc.gov/sabit/grant_program.html
SABIT offers competitive grants to cover a share of the costs of hosting Eurasian managers from 6 weeks to 6 months of hands-on, professional training in the U.S. In discussing the program parameters with SABIT officials I learned the program can be used to train one or more existing and potential dealers from one or more of the Eurasian qualified countries and Russia. Additionally, grant funds can be shared by more than one WMMA member. As an example a program could be funded to train dealers from Russia, Ukraine and Belarus in the operation and application of several WMMA members' products over the course of 6 weeks to 6 months. Members that are interested in expanding sales to Russia and Eurasia may want to start discussing this opportunity within their organizations and with member colleagues.

Participating U.S. organizations may either nominate a candidate from their existing Eurasian business contacts, or work with SABIT to recruit and select a qualified candidate or candidates. Organizations can apply to host trainees from Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Structured as reimbursable awards, SABIT grants cover only the following three items:

• Round-trip airfare from trainee's home country to the training site
• $34 per diem to cover trainee's living expenses
• Up to $750 per month for housing costs

The host organization or organizations is/are responsible for any additional costs associated with the training (overhead costs, domestic travel, etc.)

GROUP PROGRAM - www.mac.doc.gov/sabit/group_program.html
The Group Program encourages U.S. exports and investment in Eurasia by bringing delegations of managers and technical experts to the United States for four weeks of industry-specific training at sites across the country. The training sessions also facilitate technical assistance and knowledge transfer, thereby promoting economic and civil society development in Eurasia.

SABIT recently funded a Timber and Wood Processing Program to train 18 Russian managers. These delegates came from private companies in Russia outside the cities of Moscow and St. Petersburg. From June 4-July 2 the program introduced participants to the procedures and equipment used for timber harvesting and management and wood processing in the United States. As part of the training, the group traveled to select regions and cities across the country to meet with industry experts and U.S companies, including member company Wood-Mizer. The group also attended the 28th biennial Forest Products Machinery & Equipment Exposition (EXPO 2005) June 23-25 at Atlanta's Georgia World Congress Center.

A detailed professional overview of each member of this delegation and what they are interested in learning during their SABIT experience can be found at www.mac.doc.gov/sabit/group_program/technology/timber/session_bios.pdf

I had the opportunity of meeting with the group in June to discuss their needs, the WMMA, the breadth and depth or our industry and our members' interest in expanding sales to Russia. Over the two hour meeting they provided the following insights:

Most were in the sawmill segment and looking to expand existing operations as well as branch out into mouldings, cut stock and furniture components;
• Their traditional markets are in western Europe but noted the domestic market is expanding rapidly;
• Infrastructure (transport, financing and distribution) has improved greatly over the past 5 years;
• Major European suppliers have set up extensive distribution networks in major commercial regions of the country;
• Most European suppliers visit the country at least twice a year;
• Only a few US suppliers are known;
• Service support is the major concern for purchasing US equipment without local representation;
• Payment terms such as letters of credit or payment prior to shipment are common and do not cause concerns;
• Despite knowing little about US suppliers, Russians are wiling to look at new sources of supply to support their growth.

Education & Scholarship

The internship at Accu-Router that I have just completed has been a great experience for me. When I started here at the beginning of the summer I was pretty nervous because, even though I had been through a fourteen month co-op with John Deere, I still felt as though I had not done any "real" engineering work. With a few exceptions, my duties at Deere consisted mainly of doing time studies and other mundane types of data collection and data entry.

My experience at Accu-Router has been totally different. The first day I started I was given a list of projects ranging from research to design that I was expected to complete within two months. They were all challenging in their own way and two of them in particular required me to be pretty creative.

For the first one, I was asked to come up with a small conveyor system integrated into the table that would help material onto and off of the table. It was difficult enough to find conveyor components that were compact and powerful enough to suit this application, but the conveyor system also had to have the ability to raise and lower itself. I was able to solve this problem by using pneumatic cylinders and recessing the conveyor system within the table, and I am pretty confidant that it will work.

The second project was to work on a support frame for the table that would allow the table to be made thinner and result in substantial weight reduction as well as, hopefully, cost reduction. I based my design off of work done by a senior design project group from Tennessee Tech University. The design team had come up with the basic layout of the frame, but I had to perform calculations to select the correct aluminum structure size and shape, as well as make modifications to the layout for the attachment of the drive, mechanical stop, etc.

I enjoyed these two projects the most, because they gave me a chance to be creative and it was the first time that I used some of the things that I learned in school on the job. One of the biggest things they taught me is that you always have to keep cost in mind as you are working on a design. You might come up with the coolest new thingamajig anybody has ever seen, but it will not do you any good if you can not afford to build it. These projects also gave me an idea of what being a design engineer would be like and I enjoyed it.

I think I learned more here in two months than I did on my previous fourteen month co-op. I was able to learn a lot about machine design and I also was able to spend some time out in the shop. I had always wanted to learn how to use metal shop tools and the guys who work in the spindle room showed me how to build a spindle, taught me about bearing preloads, taught me how to use a lathe, and helped me gain a better understanding of how electric motors work. I also learned the benefits of working in a small company. It gives you a lot more chances to get out in the shop and get your hands dirty, and it is pretty nice to be able to go to work and know everybody's name.

In conclusion, I am very grateful that I was given the WMMA scholarship and was given the opportunity to intern at Accu-Router. Besides helping to pay for school, the internship has given me a lot of practical experience that I believe will give me a leg up on the competition as I enter the work force.

To learn more about the WMMA Education & Scholarship Program, visit the Committee's webpage at www.wmma.org/members/edu_comm.cfm.

WMMA Members can create their OWN scholarship program! To view a synopsis of how you can use our program to benefit your company, click here www.wmma.org/members/secureDocument.cfm?docID=300.

Association News

Get to know a handy feature of the new and improved WMMA website (unveiled in May 2003). A SEARCH FEATURE on the left hand portion of the WMMA site acts much like your favorite search engine, but only scours the WMMA website.

Members and non-members can benefit by saving precious time - simply type in the topic, name, service, program or other resource you are seeking, and you will be directed right to the page containing the information you want. The search return actually gives you a list of the "site search results," and you can select the page or document that you desire.

Search returns could be an article in The Cutting Edge, a WMMA Committee page, a What's New page, Association Resources page, or a host of other types of informational avenues accessible through the WMMA website. When you find your target, make a note of the URL! Save it to your favorites if you will refer to it again.

Let the WMMA website become your #1 woodworking industry source of Education & Information!

Association News

Dear WMMA Member:

We just wanted to let you know that in 2004 your Association, WMMA, provided your company with a complimentary membership to the National Association of Manufacturers (NAM).

WMMA hopes that your NAM membership has been informative and that you've taken advantage of their issue information and member-value programs, including the Freight Alliance Program (FAP) where NAM members are saving THOUSANDS of dollars each year through FedEx, Yellow Freight and Emery.

The NAM, located in Washington, DC, continues to work very hard on your behalf. The results of the past election give us all a tremendous opportunity to improve our company's bottom-lines as the NAM fights to reduce costs and legislation that keep manufacturers in the U.S. from being globally competitive. For further details, check out the awarding-winning NAM website as well at www.nam.org

You'll soon be hearing from the NAM Membership Team about renewing your NAM membership. If you have any questions in the meantime regarding your NAM membership, please call the NAM Membership Team at (800) 736-6627.

Thank you for your support of and involvement in NAM!

Sincerely,
THE NAM MEMBERSHIP TEAM

*Note - WMMA Members who were not already direct members in NAM were enrolled via a complimentary service through WMMA from October 15, 2004 to October 14, 2005.

Association News

Please Note: WMIA New Contact Information

As of July1, 2005, the Wood Machinery Industry Association (WMIA) can be reached at:
WMIA
3313 Paper Mill Road, Suite 202
Phoenix MD 21131
P: 410-628-1970
F: 410-628-1972

Contact:
Bill Miller bmiller@wmia.org
Carol Hannan channan@wmia.org