McIlhenny also recommends that professionals buy insurance.
“There are many different insurance-based programs that you can utilize inside
of the corporate space, such as a split-dollar plan where you split the
benefits of the insurance contract between the employer and the employees.
Depending on how you structure it, there is a win for each party,” he says.
“Then there are bonus programs where you leverage the tax-deferred structure of
the policy’s distribution mechanisms. Many times, you can have a policy that
beneficial to very high-income individuals by maximizing the amount of dollars
put inside the insurance contract. Life insurance policies also work well when
you tie them into a buy/sell agreement, thereby creating a succession plan.”
Along the lines of insurance, Russell Warye, professional
plan consultant with Benefit Partners Financial Group in Libertyville,
Illinois, recommends that HCEs take out disability insurance, to protect their
income in the event of an accident.
Wayne adds that highly educated doctors and lawyers
typically want self-directed brokerage accounts because they think they have
the acumen to select individual stocks or exchange-traded funds (ETFs).
Kasten believes self-directed brokerage accounts are a
mistake. “I have collected data on self-directed brokerage windows for 25
years, and people who invest in these do worse than those invested in the
plan’s diversified offerings 70% of the time, by 4% or more,” he says. “Once we
show them their underperformance against the plan, they finally see that they
would do better.”
As for nonqualified deferred compensation plans (NQDC),
which are popular among HCEs, Barrett says that their tax benefits only work
with C-registered corporations, and most professional firms are S-corporations
In sum, there are many retirement plan options available to
professional services firms, and as such, advisers need to customize each
organization’s plan design with the outcome for both HCEs and non-HCEs in
- Unlike typical retirement plans, those geared for
professional services are typically driven by the partners’ objectives.
- While doctors and lawyers’ inclination is to share profits
among themselves, a retirement plan paired with an auxiliary plan can be more
tax advantageous for them.
- Advisers can recommend safe harbor 401(k) plans paired
with cross-testing, cash balance plans, Roth options and insurance investments.