Taxlater.Com - Profit Sharing

NEW COMPARABILITY PROFIT SHARING PLANS

GREAT NEWS FOR THE SMALL BUSINESS

Internal Revenue Regulations now allow innovative designs for Profit Sharing plans. This means great news for the small business. Profit Sharing contributions can be allocated heavily in favor of the owner in many situations. A favorable type of design for many small businesses is called the NEW COMPARIBILITY Profit Sharing plan.

This method of allocating Profit Sharing contributions was the subject of the Final Regulations issued by the IRS. This method of allocating contributions simply means the owner of the typical small business, if older than most of the employees, should get a much larger share of the Profit Sharing contribution compared to “traditional” methods of allocating contributions. Every firm with an existing Profit Sharing plan should examine whether this plan design would be beneficial to them. Other firms who had decided against installing a new plan in the past should also review their situation, especially in light of numerous pension provisions included in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Many favorable provisions were enacted to specifically encourage the establishment to ease the administration of small business retirement plans.

In testing IRS nondiscrimination compliance for New Comparability Profit Sharing plans, a comparison projected of BENEFITS of the participants is performed to prove that the plan is nondiscriminatory. In a “traditional” plan, only CONTRIBUTIONS are compared. This testing of “benefits” usually means more favorable allocations for the owners of small businesses. Consider the comparison below between a “traditional” Profit Sharing allocation and a “New Comparability” allocation:

Traditional New Comparability

Profit Sharing % of Profit Sharing % of

Age Salary Allocation Salary Allocation Salary

OWNER 60 $176,000 $26,400 15% $44,000 25%

Employee 33 $39,000 $5,850 15% $1,950 5%

Employee 34 $44,000 $6,600 15% $2,200 5%

Employee 54 $36,000 $5,400 15% $1,800 5%

Employee 42 $29,000 $4,350 15% $1,450 5%

Employee 43 $28,000 $4,200 15% $1,400 5%

$352,000 $52,800 $52,800

OWNER’S SHARE 50% 83%

The above example illustrates the allocation possibilities of the NEW COPMARABILITY plan compared to the results of traditional plan designs. The typical small business owner, needless to say, would be pleased to learn of this option for increased efficiency in the firm’s retirement plan expenditures. In the example, the owner allocated 25% of salary and everyone else is allocated 5% of salary. Without knowledge of this new plan design, small employers may be spending more than necessary for their retirement plans.

Each firm’s situation is different and the demographics of the employee group will determine how favorable this plan design will be in any specific fact situation. Small employers owe it to themselves to examine this concept, and accountants owe it to their clients to become familiar with this and other types of new plans now allowed for small businesses because of EGTRRA.

THE TAX ACT CREATED MANY

NEW RETIRMENT PLANNING OPPORTUNITIES

FOR THE OWNERS OF SMALL BUSINESSES