Situation:
Two partners (ages 54 and 52) have a successful orthopedic practice which employs 8 full time staff. The practice had a small qualified retirement plan in place which did not offer the partners significant income tax deduction. Each partner earned $800,000 and the increased income tax rates were becoming a burden.
Need:
The partners were sensitive to the increased income tax rates and desired a solution which provided larger income tax deductible contributions to a qualified retirement plan. They were not opposed to making contributions for the employees as long as the amounts were reasonable.
Problem:
The doctors had been presented with a Cash Balance Defined Benefit Plan proposal from another Third-Party Administrator. They did not move forward since the employee contribution was projected to be about 40% of pay due to an older staff population. The financial advisor contacted PensionQuote for another opinion.
The PensionQuote Inc. Solution:
Initial review of the census confirmed the other Administrator’s calculations. However, in order to reduce the employee cost to an acceptable level, it was suggested that a partners’ spouse was added to the payroll (one spouse was already doing some bookkeeping but not on payroll) and that they include a 23 year old part time secretary for testing purposes. With these two minor changes, the contribution for the staff dropped from 40% to 11% of pay. The client was thrilled with the suggestions and moved forward with the plan.
Solutions/Services Utilized:
The FA, with the assistance of the Insured Solutions Consultant and PensionQuote, presented a Split Funded Defined Benefit Plan as follows:
| Total 401(k) for partners: | $48,000 |
| Total Split Funded Defined Benefit for partners: | $48,000 |
| Required contribution for the employees: | $32,000 |
| Total Firm Tax Deductible Contribution: | $520,000 |
- In a 45% tax bracket, the $520,000 represented a tax savings of about $234,000 with the partners realizing about 94% of the contribution for them.
- The plan provided each owner with approximately $1.4 million of whole life insurance. The two life insurance policies are assets inside the defined benefit plan with total target premiums of $177,000.
- In addition to the life insurance sale, the FA will receive at least $343,000 of new managed assets each year for the life of the plan.
For more information on Split Funded Defined Benefit Plans, please call your Insured Solutions Consultant or the PensionQuote Team:
Disclosure: PensionQuote and its representatives do not provide tax, accounting or legal advice, and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise). Any tax statements contained herein were not intended or written to be used for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their own independent tax and legal advisors as to any accounting or legal statements herein before establishing a retirement plan and to understand the tax, ERISA and related consequences of any investments made under such plan.