HELPING OUR tpa PARTNERS PUT THE

POWER OF DB PLANS TO WORK FOR THEIR CLIENTS

THE POWER OF DEFINED BENEFIT PLANS

If your clients are sole proprietors or small business owners with 5 or less employees, you may be missing out on a great opportunity to help them achieve two important goals – reducing their current tax burden and increasing their future retirement savings.

Most business owners have already established a retirement savings plan for their company (e.g., a defined contribution plan, such as a 401(k) plan or SEP-IRA). However, many business owners don’t realize they can also establish a defined benefit plan – a very effective tool for saving a substantial amount of money in a relatively short period of time while significantly lowering individual income tax liability.

Contact MB Actuarial Services to see how we can help you put the power of defined benefit plans to work for your clients.


IS THIS A QUALIFIED PLAN?

Yes. A defined benefit plan is a qualified retirement plan in which annual contributions are made to fund a chosen level of retirement income at a predetermined future retirement date. Qualified plan assets are protected from creditors in the event of bankruptcy. Since asset protection is important to most professionals and business owners, it benefits them to move assets from their businesses to an asset-protected vehicle, like a qualified plan, to assure their retirement savings.


WHAT ARE THE GOALS OF A DEFINED BENEFIT PLAN?

  • Reduce your client’s tax burden with a well designed tax-efficient qualified plan
  • Defer compensation for principals and other key executives to maximize retirement savings
  • Help your clients attract and retain top talent with a compelling retirement plan


WHO ARE GOOD CANDIDATES FOR DEFINED BENEFIT PLANS?
Defined benefit plans are ideal for clients who are self-employed or small business owners with high earned income who:

  • Are age 40 or older
  • Want to maximize tax deferred savings in excess of the limits of other qualified plans (e.g., individual 401k or SEP IRA)
  • Have a stable and predictable income (because of the large tax deductible funding commitment) and whose future profits are expected to be sufficient to support a plan contribution of at least $50,000/year


Good client candidates are typically independent contractors, self employed individuals and small business owners. Defined benefit plans can be established for businesses with W-2 employees or for a one person business, an owner and spouse business, or a partnership with no W-2 employees. Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) qualify.


Clients can establish a defined benefit plan for a side business even if they participate in another qualified plan through their primary employer, such as a 401(k), 403(b) or 457 plan.


Typical professions include: 

  • Accountants
  • Brokers
  • Consultants
  • Dentists
  • Doctors
  • Financial Advisors or Planners
  • Independent Insurance Agents
  • Lawyers
  • Realtors
  • Entrepreneurs
  • Independent Contractors
  • Self-employed Individuals
  • Small-to-midsize Business Owners


HOW MUCH CAN MY CLIENT CONTRIBUTE?
Contributions are made according to an actuarial formula to meet the target retirement income benefit. Calculating the annual dollar amount that can be contributed into a defined benefit plan requires a mathematical calculation performed by an actuary considering the client’s age, income, planned retirement age and investment performance. Annual contributions can be as high as $200,000 or more.


TAX DEDUCTIONS
One of the major advantages of a defined benefit plan is that the contributions are considered business expenses which will lower your client’s net business income and the amount of taxable income. They can often pay for a large portion of the annual contribution simply through the reduction in their income tax liability.


CAN CONTRIBUTIONS CHANGE?
Typically, annual contributions are not discretionary. Clients are obligated to make annual contributions once their plans are established, and they must commit to investing significant amounts each year for the life of their plans. It’s a commitment, but one of the reasons the clients get the reward of significant tax savings. Clients can decide how much of their current income they can comfortably afford to contribute to the plan, in keeping with IRS limits, but once this annual contribution amount is established, then funding a defined benefit plan is fairly rigid and must be made annually.


CAN DEFINED BENEFIT PLANS BE OFFERED WITH OTHER PLANS?
Yes, defined benefit plans can be offered in combination with other plans.