Upscale Clients Can Benefit From New Comparability Plans

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For the past five years, savvy producers have made significant inroads into the new comparability marketplace, with new comparability plans representing a big share of the total plans written, particularly in the last year.

New comparability plans add increased flexibility to funding a business owner’s profit-sharing plan. Under these plans participants may be grouped into different classes, which in turn allows for one class to receive a larger portion of the contribution than another.

In addition, since projected retirement benefits are used for nondiscrimination testing, older owners/participants are able to allocate substantially more to their retirement account.

New comparability gives producers a great opportunity to sit down with both new and existing upscale market clients to develop the most effective retirement plans for themselves and the organizations they lead. These producers have worked hard to move their clients from a narrow focus on 401(k) plans, knowing that new comparability offers these clients and their employees a much greater level of flexibility and increased savings opportunities.

Last year’s passage of the Economic Growth & Tax Relief Reconciliation Act has only intensified that push, thanks to its provisions that offer tax and savings incentives to both the executives leading organizations and the people who work for them.

For clients in the upscale marketplace–people whose high incomes would be difficult to replace–the objective always has been to maximize the potential contributions of decision-makers and key employees to their retirement plans. And that objective meshes extremely well with the benefits offered by both new comparability and EGTRRA-designed plans.

Lack of Awareness

Even though these plans have been around for years, the typical business owner has usually never heard of them. Furthermore, because of unique document and year-end testing requirements, not all providers have aggressively marketed these plans. It is not unusual for attorneys or even CPAs to be unaware of these great retirement planning tools.

Most professional firms meet the target demographic that fits best for new comparability plans. Their key employees are generally older and closer to retirement. This means they have fewer years to save for retirement, and the Internal Revenue Code recognizes this fact by basically allowing the key employees to make up for lost time.

The other key element that makes new comparability plans work is when there is a fairly significant income disparity between key employees and the balance of the staff.

When firms currently offering a profit-sharing plan satisfy this profile, we’ve found that 80% of them are likely to amend their plan to adopt the new comparability feature. What is most exciting about these plans are the benefits that can be enjoyed by those companies that have been sitting because they simply could not get enough bang for their buck with a traditional 401(k) plan.

Now, these businesses will want to set up a retirement plan because the math works, with 85%-95% of a profit-sharing contribution often being allocated to the owner/key employees.

Under the traditional allocation formula, most key employees of these organizations aren’t able to set aside the maximum of $40,000 permitted under the law for 2002. With a new comparability plan, it’s much easier for key employees to achieve that savings target, and in the process, offer savings to non-highly-compensated employees as well.

If, for example, you’re working with an engineering firm whose two partners wish to contribute $90,000 to the organization’s retirement plan, they might be able to split $60,000 of that money among themselves and the remaining $30,000 among their other employees. But by converting the plan to meet new comparability guidelines, the partners may be able to set aside $80,000 for themselves, with the remaining $10,000 to be shared by their workers.

Again, the final allocation will be a function of the average age of the key employee group versus the rank-and-file employees. There are various tests that are conducted on the front end to determine if a company is a good fit for these plans.

More Opportunities with EGTRRA

And then came EGTRRA–which, I believe, is one of the most sweeping pension enhancement bills to be passed in more than two decades.

What EGTRRA added to existing retirement plans is the opportunity to increase annual individual contributions in defined contribution plans to $40,000, up to a maximum of 100% of the employee’s pay. The maximum compensation on which that contribution can be based rose as well, from $170,000 to $200,000.

While most employees won’t be able to reach that $40,000 limit, it’s a great opportunity for that group of surgeons or the law practice with several partners to boost their annual retirement plan contributions, with no negative impact on their plan’s compliance testing.

Even the firm’s lower-income employees can gain with EGTRRA, when their firm’s plan overlays a 401(k) feature onto a new comparability profit-sharing plan. This allows the firm’s employees to increase their individual annual contributions from $10,500 to $11,000. And for workers age 50 and over, EGTRRA’s “catch up” provision permits an extra $1,000 contribution each year beginning in the current tax year, and increasing to $5,000 in 2006–helping workers who weren’t able to maximize savings earlier in their careers to catch up on their retirement savings effort.

Benefits Abound

EGTRRA offers a number of economic advantages to both employers and employees. Firms that have 100 or fewer employees and have not maintained a retirement plan for the preceding three years, can establish a new plan and receive a tax credit of 50% of the costs up to $1,000 for plan set-up and maintenance costs during each of the first three years of the plan’s existence.

The many companies that have been offering profit-sharing plans and money purchase plans will be pleased to find out that the 15% of eligible payroll contribution limit has been lifted. For most firms this will mean they can shut down the money purchase plan and roll those assets into the profit-sharing plan. This means less hassle and less expense, as the administration fees for the money purchase plans will now be avoided since there is no need to continue to maintain two separate plans.

Targeting This Market

If you have clients with a profit-sharing plan, you have an excellent opportunity to get in front of them and tell the new comparability story. If you would like technical support–get in touch with a solid vendor with excellent wholesaling support to be there during the client visit to help tell the story.

To maximize that opportunity, I believe, producers must focus closely on the services they can provide, both to rank-and-file employees and to the leaders of their organizations. I say this because in most professional organizations, the rank-and-file workers are well paid and pretty well educated.

As a producer you may fall into one of many categories. You may already be in the retirement planning business, and you are ready to take your business to the next level. Or, you may not be in this business at all, but are ready to expand into this market to grow your business with the hopes of building a block of assets to drive trailer income.

Regardless of where you are in your career development, with the baby boomers starting to see retirement dates rapidly approach, I have never seen a stronger interest level in retirement planning than I see today. This is a wonderful time to bring new solutions to your clients. They need your help more now than ever.

is senior vice president and director of marketing and business development for Transamerica Retirement Services, Los Angeles, Calif. He may be reached at kent.callahan

@transamerica.com


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.