The Pandemic and Your Pension Plan 

Why Defined Benefit Pension Plans are more valuable then Ever

As entrepreneurs, the pandemic has uniquely impacted every corner of our businesses and our lives.  It has created stress and anxiety, upheaval, loss, new business models, migration from urban centers to suburban and rural locales and in our business, has removed the need for a centralized location.  Just a few weeks back, I had six 'Zoom' calls on the same day in six different states spread out across four separate time zones.  Pre-pandemic, I could never have imagined such efficiency. 
 

While it has been a very difficult environment for many traditional business, the restrictive setting has forced innovation and creativity, and ultimately adaptation. Some business survived, some failed and some have thrived and continue to do so.  Many small business' have experienced record financial outcomes.  With these large increases in revenues, the small business owner is left to figure out how to optimize the utility of their increased revenue.  This brings interesting planning opportunities for us financial professionals and tax planners.

 

One of the biggest questions (and opportunities) right now has to do with business retirement plans, both the popular 401(k) and the fast growing pension design, the Cash Balance plan.  Business owners want to (and in some states are required to, The State of the State Retirement Plans) offer retirement plans to their employees.  It is well known that these benefit plans help incentive and retain staff and provide an excellent setting for tax advantaged saving and investing.  But the question of what the right type of plan is TODAY for these newly thriving business' can feel overwhelming.
 

There is good news.  Back in 2019, when the CARES Act passed, it removed a legacy barrier to plan formation, the December 31st deadline for calendar year plans.  Removing this has solved a major planning problem which is the delay between December 31st and when the business owner and their CPA determined their annual compensation.   The CARES Act extended the deadline to implement and fund a new plan to the employers tax filing deadline, including extensions.  For plan designers like us at Integrated Pension Services, this means we'll be helping our partner advisors, CPAs and their clients to put together 2021 retirement plans potentially until as late as September 15, 2022.  
 

Think about the planning opportunity before us.  Because we'll know the 2021 (and prior) information early in 2022, we can design customized employer contribution arrangements with perfect tax-based hindsight!  The results of these designs may still end up being a common single-plan design, like a 401(k) profit sharing plan, but offers the opportunity to explore more creative formulas and plan types.  

The most common "sophisticated" solution we're implementing are DB/DC Combo plans.  These pair a 401(k) Profit Sharing plan (with an advantaged profit sharing formula) with a second plan in the form of a Cash Balance pension plan.  These are a modern form of a defined benefit plan. When structured properly, these plans create huge tax advantaged savings opportunities. 

 We're commonly structuring plans where the business owners and "favored few" are putting away hundreds of thousands of dollars into these plans.  Over time, this can work out to several million dollars in savings and depending on their state, can save as much as 50% in income taxes.
  
While almost any business could benefit from deferral through a retirement plan, this more sophisticated DB plan, is going to be more interesting to employers who have most of these characteristics:

• Robust and, as or more important, consistently high cash flows
• A strong desire/need to minimize income taxes, even if it means increasing benefits to staff
• As a minimum "rule of thumb", a desire from the business owner to save $100k or more in tax advantaged savings annually for themselves, with an idea that these will be made every year for 7-10 years OR longer
• Understanding that these are long term investments that will not be accessible until retirement
  

If you're a business owner reading this, including financial advisors and CPAs who own their practices, and you meet the above criteria, this can be a very powerful planning tool that needs exploration.  If you're in the latter camp and would like help in this area, we're here for you.  Just reach me at Jason@integrated-pension.com OR at (978) 847-0140 Ext. 820.