Our Services

When Deferring $54K is Just Not Enough

A defined benefit plan offers numerous tax advantages to the plan sponsor – either by itself or in conjunction with a 401(k) / profit sharing plan.  When contributing $54K through a 401(k) profit sharing plan does not “move the needle,” many plan sponsors look to adding a defined benefit plan into the mix.  Regardless of which type of defined benefit plan design you use, the ultimate payout will be the same (as required by the IRS).

But while the payout at retirement age is ultimately the same, the risk the plan sponsor takes in getting there is different.

Traditional Design: Great for solo practitioners.
Pros: easy straight forward design and administration.
Cons: Investment gains or losses are amortized over 7 years which could cause the plan sponsor to contribute more into the plan than intended.

Variable Cash Balance Plan:  Easiest design to communicate to partners and their staff.
Pros: employer contributions are communicated as a percentage of pay (similar to a profit sharing plan).  Actual return on the Trust investments determines benefits paid out at a participant’s termination date.
Cons: plan sponsor must guarantee the principal (i.e., a 0% minimum rate of return on a participant’s contributions at time of distribution).

The RiskFree Plan^®: One of the innovative plan designs offered by The Benefit Practice is its RiskFree Plan® – a defined benefit plan that eliminates the need to make increased plan contributions when investments perform poorly.  Unlike a conventional defined benefit plan, the RiskFree Plan® benefits are adjusted annually based on the plan’s actual rate of return. This feature ensures contributions do not unexpectedly increase or decrease.  The RiskFree Plan® allows plan sponsors to take advantage of the greater tax deductions available under a defined benefit plan while enjoying the reduced investment risk profile of a defined contribution plan.
Pros: flexibility of design and a unique feature that eliminates the majority of any investment risk to the plan.  When plan assets perform better than a predetermined “hurdle” rate, plan benefits are increased.  When returns fall short, benefits decrease. When a participant takes his full distribution, it is based on the value of the Trust at that moment.
Cons: No guaranteed monthly benefit even after retirement.

Presented below are examples of an owner of an S-Corp with no employees looking to maximize his tax deductible contributions.

* Tax deductible contributions for solo plans (when combined with a defined plan) are limited to 401(k) deferrals plus 6% profit sharing contributions.

But how do you know which approach is right for your organization? How do you know how much is enough?

The Benefit Practice can help. Our program consultants and actuaries analyze the needs of your organization, your employees, cost constraints, market conditions, and other key factors that determine the viability and suitability of an effective defined benefit program.

Top