Hidden Legal & Financial Risks as Your Law Firm Grows with Megan Robin

Megan: If you roll out a non-compliant health plan in your law firm, the penalty is $100 per day per employee, up to $36,000 per employee per year. 

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Melissa: Welcome back to The Law Firm Owner Podcast. I am so thrilled to be here today with a repeat guest who was a favorite with guest episodes that we’ve had in the past. Megan Robin, thank you for being here again.

Megan: Thank you for having me.

Melissa: For listeners who haven't heard Megan on the podcast before, if this is your first time hearing her, I highly recommend going back to listen or watch the episodes that we did with her previously. We'll put those in the show notes. They were great episodes. I know that we've had clients that have reached out to you and been working with you since then and they're so glad that they did. I think it just shows what a gap you fill in the market.

Megan: So, I'm a tax attorney, and I help law firm owners design tax and financial strategies for their firms and for their personal finances.

Melissa: Today, we're going to be talking about the silent legal and financial risks that are lurking inside of a law firm owner's firm. So, I'm just going to dive right into the questions if that's okay with you.

Megan: Yeah, let's do it.

Melissa: When most law firm owners are focused on financial or tax strategy, what are they typically focused on? 

Megan: Usually, they're focused on increasing income and reducing taxes, which makes sense. Those are very important goals. But we also want to look at the structure underneath your tax strategy. So, if you have things like a compensation plan that's not substantiated or a benefit plan that's structured incorrectly, this can create unintended exposure and liability.

Melissa: And what kinds of risks are owners exposing themselves to if their benefit plans aren't structured correctly?

Megan: Benefit plans are governed by ERISA. ERISA stands for the Employee Retirement Income Security Act. That's a mouthful, but what it is is it's a federal law that governs most private sector benefit plans like retirement plans or health plans.

So, if your law firm has something like a 401(k), that's not just a retirement plan. It's a regulated fiduciary structure governed by ERISA. And that means that you have obligations such as to act in the best interest of the plan participants, which are your employees. If something goes wrong with your 401(k) plan or one of your benefit plans, in certain situations, you can be held personally liable.

Melissa: Are they protected if their firm is structured as an LLC or a corporation?

Megan: This really surprises a lot of law firm owners. So an entity like an LLC or corporation can protect you in a lot of instances with regard to things like contract disputes or issues with vendors. But ERISA liability is different. It attaches to you personally. So if you are the plan sponsor or you're administrating the plan yourself, then that can be a personal liability that goes around and through your entity directly to you unless you delegate it, which is an option.

Melissa: I would think that most advisers or 401(k) administrators would handle the fiduciary responsibility, but you're saying no, that's not true.

Megan: Sometimes they do, and sometimes they don't. So there are options where a third-party administrator, a 401(k) provider, for example, will take on that fiduciary liability. There are bundled providers, things like Guideline or Human Interest. These are some companies that will bundle together a lot of the responsibilities that are on you under ERISA.

So there are many obligations. You have to have a plan trustee, an investment adviser, a plan administrator, all of these different roles. There are companies now that have bundled those and will actively take on fiduciary liability. But you have to check and make sure that has happened in writing and understand in your contract with that provider what portions of ERISA liability that they are taking on versus what portions you are taking on.

There can be little traps too. Maybe you have a provider such as this that you're using, but then you have an employee that is handling the investments or funds or has access to them in some way. If that happens, then that individual in your firm and potentially even you could be personally liable.

So you have to tread very carefully and make sure that you understand what liability falls with you and which falls with the people you hire. Whether that's one of these bundled providers, some financial advisers will take on that liability or farm it out for a fee. But understanding where that structure lies is really important, and I think it's very poorly understood.

So law firm owners offer these benefits because they care about their employees and they want to have a great workplace, but they don't understand the exposure that they're generating under ERISA when they do this.

Melissa: What kinds of law firms are most at risk?

Megan: Any law firm with employees where you are not the only employee. So if you have employees other than yourself and you're offering benefit plans, then you are governed by ERISA.

Melissa: So far we've talked about retirement plans and let's shift to health plans. What mistakes do you commonly see law firms make when it comes to health plans?

Megan: Health plans are very heavily regulated and can be very complex to administer and to understand the different options. There are specific options that are supposed to be easier to handle that are developed for smaller businesses. But the problem I've seen when talking to law firm owners is that there's not a lot of good information to help you assess which type of structure is correct for you.

So, an example I saw with a recent client was a benefit broker and her financial adviser had told her that she should use an ICHRA, which is an Individual Coverage Health Reimbursement Arrangement. A lot of acronyms in today's episode, but essentially, an ICHRA can be a good option for certain types of firms, but you really have to look at the fact pattern. You have to look at what kinds of employees you have, what are their income levels, etc.

So, for her firm, she had a lot of lower-income employees or employees that were part-time or not making very much money, support staff, that kind of thing. And what ended up happening when she rolled out the ICHRA was ICHRAs can cause you to lose access to Affordable Care Act premium tax credits in the marketplace. Lower-income individuals often are eligible for some tax credits to help them pay for their health insurance premium costs.

What happened was her ICHRA that she was providing through her firm was considered affordable, and that meant that these employees were no longer eligible for the premium care tax credits. When she was trying to do a good thing by offering health plans to employees, it was a net negative for these employees because they were losing their marketplace benefits. And so you want to be really careful when rolling out a plan. Make sure it makes sense for the makeup and income levels of your staff.

The second issue is when she came to me, she was so frustrated with this plan that she had gone to ChatGPT and asked it to develop a health plan for her, and she was about to roll this out. She had me take a look at it, and thankfully, we caught her in the nick of time because the plan that ChatGPT had designed for her was not compliant with the rules under ERISA.

And the penalties can be severe if you don't follow the rules, especially with health plans. If you roll out a non-compliant health plan in your law firm, the penalty is $100 per day per employee up to $36,000 per employee per year. If you have a lot of employees, that can add up really quickly. She had no idea what she was about to expose herself to.

So, you want to be really careful here. I also see issues most common when law firms are growing. Something that you might do or make sense when you have one or two employees may not make sense when you have 10 or 20.

Melissa: That is wild and complex. You know, you got to find the right partner. You and I talked about this on the episodes before, how important it is to have your team of trusted individuals. I don't know if this is causing fear in anybody, but my blood pressure is rising slightly.

It sounds like these issues arise as firms start growing. When do owners typically realize that they need to be thinking about these things more strategically?

Megan: Law firm owners come to me at all different stages along their journey, but the most common by far is when they're rapidly growing. What often happens is the business grows faster than the financial structures that they have in place. When law firm owners come to me, the big two categories of questions that they have, the first is structures. How do I compensate myself and my employees? How do I do profit sharing, health plans, retirement plans, bonus structures, usually structural questions, and how do we do that in a tax-efficient way?

And then the second category of questions that I get is during rapid growth, sometimes they have more profit and more income than they're used to or have had in the past. So they'll ask me, "How do I handle this influx of income? What do I do with this money? How do I manage it in a tax-efficient way?"

For some law firm owners, they've been growing, paying off student loans, building a business for a long time, and this is the first time that they've had a surplus, and they want to make sure they're managing it correctly. 

Melissa: How do structural issues, like we've been talking about, how do they get missed?

Megan: There are a lot of professionals involved. You have your payroll provider, your accountant doing your accounting, your TPA, your third-party administrator. So that's like a Guideline, Human Interest, 401 Go, financial advisors. People are staying in their lane, but they're not looking at the structural integrity of the entire financial and tax structure. So that's what I help clients do.

I think the reason that this comes up a lot in growing law firms is the more complex your firm is, the more oversight and intentionality you need when building out your financial and tax structure. It touches every financial decision in your business. It's about designing the financial and tax strategy structure that will underpin your success.

Melissa: For a law firm owner who right now feels like they are growing faster than the structure that has been put into place, or they may be outgrowing that, what do you think their next step should be just to make sure that everything is in line the way it should be?

Megan: Rapid growth is very exciting, but it can also expose weaknesses and problems in your existing structure. You probably see this all the time as a consultant, where growth can break things or require completely new scaffolding. This is something you probably share and tell your clients as well, which is make sure that your strategies and structures are aligned with where you're going and not still archaic and set from where you were or where you started.

Melissa: Yeah, definitely. You help with this. I didn't realize how broad things are with what you look at. Just like you said a minute ago, through your work, the tax work, it touches everything and feels like a great place to start is with you. I don't know if that is what you would recommend as a first step is to reach out to you or if there's a resource. What would you say to someone who's like, "Okay, tell me what to do"?

Megan: So, that's exactly what I help clients with. You can come earlier when you're newer in your firm, and we can make sure that you're starting on the right foot. If later you're hitting growth and things are breaking, we can get in there and figure out what's going on.

It is interesting that a lot of my clients do come to me and say exactly that, that they don't know where to turn, that they're getting conflicting advice from multiple areas, and that's why I started my firm. Because I saw I worked in firms, in government, in-house counsel, in all these different areas, and most of my career was working with small business owners, and I saw the same issue where everyone was siloed. And when I looked at fellow tax attorneys, I have a post-doctorate LL.M. in tax law, almost all of my classmates went on into big law, so in-house counsel for Chevron or a big firm, and continuing in those silos.

But what I didn't see was, the only solo practices with tax attorneys were doing audit work, if you're getting audited by the IRS, and things like that, maybe one-off tax questions. But I did not see anyone putting all these pieces together. And it seemed to me it's so necessary and so essential because you have to have a lot of knowledge in a lot of different areas to be able to run a successful law firm.

You have to understand personal finance, business finance, employment regulations, all the things that we've talked about today. Where is the liability? How do we structure benefit plans, compensation plans? There are so many moving pieces, and you can kind of cherry-pick from different professionals to get some of the answers you need. But what I'm trying to provide is that holistic one-stop shop where you can get the answers you need and know that you're operating at a higher level.

Melissa: Yeah, absolutely. In particular, I'm thinking about my clients. I'm thinking about the work that we do with them. I have visibility into their people and dynamics with their people, and I really try hard to get them to the right people to make sure that there's a holistic view going on or make sure that things are being cared for in the way that they need cared for.

Even though I'm deep in the data and even though I have opinions about how things should look and how a P&L should be structured, I'm not an accountant. I would never pretend to be. They need one. They need a great one. Many, many, many, if not all firms need someone that they can rely on for people dynamics as the firm grows.

One area that I haven't had until you was this piece. I haven't had someone to direct people towards to say, "Hey, this is a new member of your team. You need to go get this person on your team." Because there are so many complex facets to growing and beginning to, as your team grows, offer benefits of sorts.

And also for the owners when it does come to tax strategy. First, if I'm first working with someone and let's just say that they had that first year just insane growth, they are not set up to handle that; they all of a sudden owe a bunch of taxes because of how it was handled. And I know enough to know that there's a way to handle that so that it's less painful when it comes to their tax bill. But they need someone on their side to help really look at things and really restructure things or make sure that things are structured properly.

And so all this to say, I really appreciate deeply that you do what you do because since I've met you, I even see other professionals cropping up. I don't know how they're finding me because you've been on the podcast and they may do good work, too. But there is something about your work that's very approachable. It's like taking your car to the mechanic. You want to know that the people who are helping you are doing a good job, but you're like, "I don't know, they're just giving me the bill, I hope everything's set up okay."

I can really say, after getting to know you a bit and also having clients work with you, there's a trustworthiness about the way that you work with people and I deeply appreciate it. I know that people, listeners and viewers would get something out of these episodes and if anyone has an inkling that maybe they should consider taking a step to ensure that the way that they are structured and the way that they're set up is not only compliant, but also giving them the biggest benefit that they can get as an owner.

So, I deeply appreciate the work that you do, and I love listening to answers to these questions. It's a world that not many people have the depth of knowledge that you do. So really grateful to have you on the podcast.

Megan: Oh, thank you so much. And in my profession, I'm a tax attorney, but in my heart, I'm a teacher. I really like to make sure that my clients understand what we're doing. Even if it's complex, I want them to understand what the general gist of it is, what the goals are, and I try to educate them on a broader financial level, so that I can't be by their side all day, every day. And the average business owner makes a ton of financial decisions both in their business and in their personal life, all day long, every day.

And so I want to make sure that in a moment where I can't be there holding their hand that they have general frameworks that they can use to assess whether something is a good financial decision. Even just silly little bumper sticker things I share with my clients like "follow the money," how is this person getting paid? Little basic things where it can help you assess a new engagement, a new vendor, a new financial advisor, an accountant, what is their incentive in the engagement or things like that along the way. How do you understand a stock portfolio? How do you understand compensation, etc?

And I think I pair that also with risk assessment. So, I think a lot of accountants, I'll see things like they'll set owner compensation too low, and what they're trying to do is save on payroll taxes. It's a good tax strategy, but there's, in my opinion, too much risk. So, it's a high audit flag. And so, when I'm looking at it, I'm looking at it not only as a tax strategist, but as an attorney as well. So, how can I protect you? How can I lower your exposure and your risk and make sure that you're safe? So, I care about my clients and I want to educate them. I love what I do.

Melissa:  That's so cool. I love meeting other people who just geek out about their world. Thank you for coming on. We're going to have you back. This has been really useful and helpful. So, thank you.

Megan: Thank you for having me. I look forward to coming back.

Melissa:  This content is for informational purposes only and does not constitute legal, tax, financial, or investment advice. Before you go, be sure to hit subscribe so you don't miss an episode. And if you'd like to hear more on this topic, let us know in the comments below.

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