What Are the Obstacles to Using Professional Benefit Plans Today?
For a few decades, some professional benefit plans were not readily available to owners due to Congressional law. With the recent changes in the law, the financial opportunity for business owners has returned and expanded. Yet, difficulties still impede access or implementation of this option for business owners. As a result, many business owners, as well as their accountants and attorneys, still are neither aware nor properly informed of their options. If they are knowledgeable, they do not know who should implement their professional benefit plans.
CPA’s, Tax Attorneys, and Financial Advisors
Business owners’ financial advisors (CPA’s, tax attorneys, and financial advisors) are often limited in their knowledge of professional benefit plans (OBP).
Generally speaking, CPA’s are knowledgeable in tax preparation and deductions, but cannot address operational or legal aspects of an OBP. Their expertise is tax deduction and deferral, but not plan design and operational aspects of professional benefit plans. ERISA codes govern OBP’s. CPA’s readily default to enrolled actuaries concerning ERISA code and OBP suitability. They also know that an enrolled actuary carries the liability concerning design and suitability for these plans.
To understand the limitations of attorneys with professional benefit plans, examine their orientation and training. Attorneys deal with legal questions and implications. They do not give opinions on the operational merits of a plan. Yet, this issue is the crux of where all forms of qualified plans usually fail a Department of Labor audit. Commonly, attorneys base opinions upon case law, especially with tax cases. However, legal information about professional benefit plans will not be found in court cases. This is due to the voluntary compliance process the Internal Revenue Service requires a business owner to go through to remedy a defective plan. These plans never become a court case because of the IRS’s compliance standard. Thus, there are no court cases that attorneys normally rely upon to determine case law. The authority is the ERISA codes, not the courts. The actuary is responsible for upholding the development of these plans in accordance with the ERISA codes and standards. His license and ability to practice could be lost if he develops a non-compliant plan.
Unless a financial advisor makes a living implementing professional benefit plans, this is no arena for part-time practitioners. Creating a plan with errors causes the plan to be disallowed, with years of deferrals reversed. What is the result? The owners or principals pay fines with compounding interest penalties. Worse yet, the non-deductible expense must be paid personally, not from a corporate account. This is a major enforcement rule of the Department of Labor. A plan properly designed through an actuary eliminates this risk. Proper design, installation, and administration through an actuary create immediate tax relief to the owner or executive and accelerated financial benefits result.
Who addresses operational concerns of a professional benefit plan? Why is this important?
Clearly, attorneys, CPA’s, and financial advisors are neither responsible nor liable for compliance or operational issues of an OBP. Under ERISA and the Department of Labor (DOL), the burden falls upon the licensed enrolled actuary. The DOL is the government agency that oversees all qualified plan operations, including 401(k), and assesses penalties for non-compliance. In 2003, the DOL imposed over $300 million in fines and penalties for qualified plans that were operationally non-compliant. Companysizes ranged from sole proprietorships to major corporations, some of which employ in-house plan administrators. The DOL’s audit rate has increased from 3% in prior years to an anticipated 8-11% for 2004 and beyond.
The opportunity is available, but who will do the job?
Here is the business owner’s crisis. Obviously, an enrolled actuary is necessary to create the structural integrity and proper implementation of an OBP as a sound and legitimate retirement investment. However, business owners today feel the impact of complex ERISA codes and prior laws of Congress even though repealed. Baby boomer owners, professionals, executives and highly compensated individuals now have the legal freedom to have OBP’s again. They also have the need. But, now that the opportunity is here, who will do the job?
Even if owners recognize the power of an OBP for themselves, how will they find the right person to create it? The demand and need for an actuary’s expertise far surpasses the supply. The decisions of Congress in the past created the current “brain drain” of actuarial expertise. Most actuaries with these skills either retired or left the profession after two decades because they could not financially sustain their career during the near dormant years. Now there is a scarcity. It will take newer, younger actuaries years to develop a thorough understanding and knowledge of the implementation of the codes requisite for effective OBP plan design. They may be familiar with the past five to seven years, but they do not know the complexities and tax exceptions that occur over a fifty-year span of law. An actuary with this knowledge and experience is necessary to design and implement these plans.
Yet, soon-retiring business owners cannot wait. This level of competence is exactly what is needed to design and implement complex professional benefit plans. Unless an enrolled actuary has been involved on an on-going basis with professional benefit plans for a minimum of several decades, they would not have the ability to create such specialized plan designs that meet ERISA standards and individual owner needs.