Are Your SEP Plans Safe From Other Financial Advisors?
Posted on March 23, 2014 by Legacy Retirement Solutions
If you are a financial advisor that works with company sponsored retirement plans, you more than likely deal with different types of plans from SEPs and Simple IRAs to 401(k)/Profit Sharing plans and Defined Benefit plans. If this is the case, do you spend enough time evaluating your SEP plans? SEP plans are typically set up for several reasons:
Although there are good reasons for certain employers to establish a SEP, their limited design flexibility with regard to benefitting owners or certain key employees also makes them easy targets for other advisors. Therefore, you need to makeyour clients aware of all possible plan designs, including those that would be more beneficial to owners and key employees, in order to “close the door” on other advisors who want to take your business.
A lot of SEP plans can benefit from a New Comparability plan design utilizing safe harbor as a plan feature. In many cases, this allows the plan sponsor to provide a greater benefit to the owners or a specific group of valued employees while reducing the overall employer contribution to the other employees as well as possibly even to the plan as a whole. By using this 401(k)/Profit Sharing plan design which is not available to a SEP, you can possibly save them a significant amount of money. The savings associated with the more efficient design can then be used to defray, if not eliminate, the added plan administration cost associated with a 401(k) Profit Sharing plan.
Legacy Retirement Solutions can help you evaluate your SEP business to make sure you retain your clients regardless of the type of plan they sponsor. Now is the best time to start evaluating your plans as certain timing deadlines impact the establishment of different types of plans. We can create free, customized illustrations to show your clients the impact of a plan change. We can also look at your SIMPLE IRA business as well.
Please take a look at the sample illustration to see how this can work for your clients.
What is a Solo 401(k) Plan?
A Solo 401(k) plan is a 401(k) plan for a self-employed individual, partnership, or a business owner with no employees. In general, a spouse who is an owner or employee of the plan sponsor may also participate.
What are some advantages?
What is the deadline to set-up a Solo 401(k)?
The deadline is the end of the plan sponsor’s tax year, typically 12/31.
What are the costs?
Legacy’s first year costs are $500. This includes a plan document, set-up and first year administration. Each year thereafter is $350. This includes full year administration, IRS mandatory amendments and the Form 5500-EZ filing, if applicable.
What is New Comparability?
New comparability is a profit sharing allocation formula that allows a business owner to permissibly skew benefits to a select group or tier of employees. This allocation formula is also referred to as cross-tested.
How is New Comparability used?
Typically, new comparability is paired with 401(k) and safe harbor non‐elective features. This helps to maximize the plan design by skewing the most benefits to the selected group. The Plan Sponsor determines the groups to target within the plan, subject to certain restrictions associated with the additional testing that must be performed. In smaller plans you will often see only two groups: owners; and all other employees.
Is there additional testing needed?
Yes there is. The allocation formula itself (or the fact that such allocation generally heavily favors highly‐compensated and/or key employees) requires careful consideration of the Top Heavy, Minimum Gateway, Average Benefits and General Tests. However, most of these tests can be satisfied by employing certain plan design features.
What are the limits to this plan?
New comparability is simply a way to allocate a profit sharing contribution within a profit sharing plan. Therefore, other than the uniqueness of the new comparability allocation formula, a “new comparability” plan remains a profit sharing plan subject to all of the other rules associated with a profit sharing plan.
What if a company wants to contribute more than what can go into a 401(k) profit sharing plan?
If a client would like to contribute more than the annual defined contribution limit to their retirement plan, we are capable of exploring the appropriateness of pairing a new comparability plan design with a cash balance plan. A cash balance plan is a type of defined benefit plan that also can skew benefits to a selected group of employees. These “paired plans” can be very powerful if designed correctly.
The illustration shown above is based on hypothetical data and is for illustrative purposes only. Legacy Retirement Solutions, LLC does not provide tax, legal or investment advice. Therefore, this illustration is not to be construed as tax, legal or investment advice. Please consult with your own individual accountant, attorney and/or financial planner for such guidance as retirement plan sponsorship is generally a single component of an overall tax and investment strategy. Further, this illustration assumes that the employer does not sponsor any other qualified plans. If the client elects to use Legacy Retirement Solutions, LLC as the provider for this allocation service, the employer will be instructed to supply actual employee census data to be used in the preparation of a final allocation report at the completion of the plan year. The same methodology illustrated above will be applied to the final allocation report. However, results may differ from this illustration to the final allocation report.