Discriminatory Defined Benefit Plans

My premise is that every business owner would like to have a defined benefit pension plan in his business if the business didn’t have to include the employees in the Plan. A defined benefit plan is the type of pension plan that provides you a fixed benefit at retirement usually based on your final or highest three year salary. From the business owner perspective it allows for the highest tax deductible contributions into the Plan, allowing a contribution level anywhere from 3-6 times greater than the defined contribution limit – $51,000 in 2013. The government red tape has caused defined benefit plans  to disappear from the retirement planning landscape in the last 25 years. As a result, no one has a decent pension plan and no one can afford to retire. What a surprise?

The only people that have defined benefit plans these days are federal, state and municipal workers. My parents (civil servants) had a great retirement at age 55. My retirement age is the earlier of age 95 or my passing! Several factors also point for the need for defined benefit plans. Most businesses are formed as S corporations or LLCs causing the business to be taxed at the business owner’s individual rate. Tax Reform has created combined marginal tax brackets of 45-55 percent. The qualified retirement plan is a remaining legitimate tax shelter. 

The goal of the discriminatory defined benefit plan is to legally exclude the “rank and file” employees from participation so that the Boss can create a defined benefit plan for himself, the spouse and any key employees. The Plan can be created in such a manner that the retirement plans will never be under-funded like virtually every state and municipal pension plan and will never be subject to stock market volatility.

At the same time, the Plan will provide tax deductible contributions that are 3-5 times the level of a defined contribution. The business owner can still stack plans – defined benefit, 401(k) and profit sharing. In fact, if the business owner has had a “Killer” year in 2013, he can “double up” contributions in 2013. The retirement benefits are guaranteed at the Plan level and at the funding or investment level. You should be asking yourself “Where do I sign up”.

If you are not a business owner but have high W2 income not to worry. Create a business. Create a Family Investment Limited Liability Company to manage your investments. This business is legitimate for federal and state law purposes. Once you have a legitimate business that won’t draw the ire of the “The Man” aka your Employer, you can create the type of pension plan that I just mentioned. In fact, you can put your spouse and kids on the payroll. You will be converting some of your investment income into earned income – management fees – which serves as the basis for your pension contributions in your family business. A number of planning benefits spin off of this concept but this is the First Step. 

If you want to see how these concepts can work for you, and walk through your specific act pattern. I can help you help yourself by either eliminating (legally) your employees from your new defined benefit plan or set one up in a new Family Investment LLC. 


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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