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THE CASE OF THE OVER-TAXED BUSINESS OWNER

It was mid-December 2010. A business owner’s CPA gave him the bad news: federal, state and self-employment taxes would reduce his and his business partner/wife’s seven figure income by half.

Fortunately, earlier that year we provided the CPA with an educational presentation on combining 401k profit-sharing plans with defined benefit plans to help business owners increase tax deductions and build wealth.
We gathered info on the specific employee group, such as years of service and income, and then met with the business owners and their CPA. Based on their data, we provided a couple of design options, including the plan they settled on. As a result, they added a defined benefit plan to their existing 401k profit-sharing plan.

The impact? Increased tax deductions of $406,522 with 90% of the DB plan funding benefitting the two owners. Each owner’s annual income benefit of $210,000 will be fully vested in 2019.

Defined Benefit Plan with Required Profit Sharing Plan

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  • Owners receive 0% allocations in profit sharing plan.

  • HCE (Highly Compensated Employees) receive 6% allocations in profit sharing plan.

  • NHCE (Non Highly Compensated Employees) Employees receive 7.5% allocations in profit sharing plan.

This case study is provided for illustrative purposes only. Results may vary significantly based on your individual situation. Defined benefit plans may be appropriate for businesses with consistent revenues for long-term funding where owners are older and earn more than the average employee. These types of plans have additional costs and generally involve engagement of an actuarial firm for plan administration.
 

This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.