Discriminatory Defined Benefit Plans

I have been chatting for awhile on the possibilities of a discriminatory defined benefit plan for business owners in some of my articles. I will say it again, the days of a defined benefit plan — the backbone of retirement planning – are long gone. As a backdrop, an employee is lucky these days to even have an employer match in a 401(k). So pretty soon, employees working in small (or large businesses) won’t have a retirement plan or benefits that they don’t pay for themselves.

It is my belief that every business owner or owner of a professional practice would love to have a defined benefit plan if they did not have to include their employees. 

The tax law says you can exclude employees from participation in company pension plans if they are unionized. The business owner’s immediate reaction to a union is almost very defensive. They hear about all of the large companies and unions that have very adversarial relationships with large employers. As a practical matter, what type of “insurrection” could a union mount with four employees in a dental practice. In some parts of the country, it is embedded in the regional culture where everyone has had a relative or two that were members of a union. 

In any negotiation, the first question is usually, “What is in it for me”. In the Discriminatory Defined Benefit Plan, the business owner is able to exclude his employees from plan participation allowing the business owner to make a pre-tax contribution of several hundred thousand dollars into a defined benefit plan. The benefit can be doubled if the business owner adds the spouse to the Plan. The tax authority for this proposition is “black and white” in the tax code. No questions asked!

The second rule of every successful negotiation is that everyone needs to leave feeling like that got something. The employees walk away with a match to the union 401(k) plan. The business owner on a voluntary basis can add some of the other welfare benefit plans – group term life,, health, short term disability – through the union arrangement on a fully employer paid or partially paid basis. The tax benefits for the business owner from the defined benefit plan arrangement that the tax savings can be used to finance these additional benefits. 

In the litigious environment in which we live, a business owner should not be lulled into believing that he is free of any employer liability in a Right to Work state. Plaintiff’s lawyers down the street from the business owner would be more than happy to take the case of the terminated employee on a contingency basis and make the business owner’s life hell. 

For the staunch right-wingers among us, here is a chance to use the Democrats favor of labor unions for the business owner’s (and employees) favor. The Devil is always in the details. Of course, you need the right union as a partner that is business-friendly so that the collective bargaining agreement is a true partnership. 

My point is that you don’t need to be a member of the American Communist Party to like this idea. You need to be a business owner that has his business set up as a S corporation or LLC and paying taxes at a personal rate of 45-55 percent and a desire for a secure income. If you know of a legitimate tax deduction that provides the same level of tax and retirement benefit as a defined benefit plan, please let me know so that I can focus on that idea!

If you would like more information on how to implement this strategy, give me a call. Operators, are waiting to take your call!

 

 

 

 

 

 

About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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