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October 14, 2001 at 08:00 PM
Small Business Retirement Plans Can Mean Big Opportunities
A first year commission of $100,000 or more is very possible in a small business with one owner and no employees. This fact alone should make a producer want to know more about the small business retirement plan marketplace.
There has never been a better time to be in this market. One of the major goals of the new tax legislation just passed in June of 2001 (EGTRRA) was to encourage the establishment of small business retirement plans. The enhancements in the new legislation make the qualified plan much more appealing to the small business owner and employees.
In the small business marketplace, its no secret the appeal of the retirement plan is directly related to the benefits provided to the owner. The tools are now present to benefit the owner to a large degree, yet still create a meaningful plan for the employees.
In the past, restrictions on owners benefits in small plan design resulted, much too often, in no plan at all for the employees. The new legislation combined with two already existing and very appealing small plan designs now create tremendous opportunities in this marketplace.
One existing design that works well in many small businesses is the new comparability profit-sharing plan. The goal of this plan is two-fold. One goal is to give the owner the largest possible share of the plan contribution. The other goal is to add flexibility to the plan to benefit different groups of employees to varying degrees. This flexibility has never been present in any type of plan in the past. Combine this design flexibility with the contribution flexibility inherent in a profit sharing plan and you create an appealing plan for the owner that also receives the nod of approval from the firms CPA.
The accompanying chart compares the allocations of a traditional profit sharing design to a new comparability approach with identical contributions from the business. Its easy to create interest in the mind of the owner with allocations like this. (See Chart 1.)
In 2002, the new tax law raises the dollar limit from $35,000 to $40,000 and raises the percentage limit for an employee from 25% of salary to 100% of salary! The employer profit sharing deduction is also raised from 15% of total salaries to 25%.
This creates many possibilities for a combination of the new comparability approach with a “safe harbor” 401(k) allowing numerous variations to produce great results for the owner. The limit on 401(k) elective deferrals for an owner over age 50 goes to $12,000. The “safe harbor” approach will assure the entire deferral is allowed even if none of the other employees make deferrals. This combination new comparability profit sharing and safe harbor 401(k) can be an excellent design for the small business.
If a producer is able to introduce a new appealing design to the owner (and his advisors), it can easily result in large rollovers of existing assets and referrals to other business. The pension plan is the door opener. That is key and a major reason for being in the small plan marketplace.
Another existing plan that works well for the small business is the 412(i) defined benefit plan. The goal of this plan is to create a larger deduction than would be allowed in any other type of plan.
Usually this means the insurance company must have contracts that comply with 412(i) and the situation is more convenient if the company also does the plan administration. In todays world, there are very few insurance companies administering plans in the small plan marketplace so the “word” about this type of plan doesnt spread in the same way other designs do.