Upscale Clients Can Benefit From New Comparability Plans
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.
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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.