By Sheree Tallerman, CEO PlanPerfect, Inc. 

Retirement plans fall into one of two categories: Defined Contribution Plans and Defined Benefit Pension Plans. Defined Contribution Plans, also known as retirement savings programs, cover a broad range of programs such as Profit Sharing and 401k Plans. These types of programs allow owners and employees to make contributions that are allocated to individual participant accounts. They generally favor younger employees who have a longer time horizon until retirement.

Defined Benefit Pension Plans come in two varieties: Traditional, and Cash Balance Pension Plans. Both promise participants a specific monthly lifetime benefit amount at retirement. Contribution amounts are calculated and adjusted annually to ensure that the target goal is reached. Contributions for all the plan participants are kept in a single account or “pool” that is used to pay the promised benefits. These types of plans tend to favor older, highly compensated business owners, partners and key employees who are in their peak earning years with a shorter time to retirement. They offer a way to quickly increase retirement plan assets.

A combination of these two Plans, referred to as a “Combo Plan,” can accomplish both a significant tax deduction and wealth accumulation objective in a way that a standalone defined benefit or standalone profit sharing plan cannot.

This highly sophisticated plan design layers a 401(k) Profit Sharing Plan together with a Cash Balance or traditional Defined Benefit plan, helping owners significantly reduce their taxes while hyper-funding their trust accounts.

Combining these Plans also allows you to maximize the benefits for owners and highly- compensated employees, and at the same time provide a minimum type of benefit formula to younger employees.

Combo Plans work best in the following situations:

  • Owners or Principals looking for a tax-deduction of more than $61,000 or are making more than $275,000 per year
  • Successful businesses with stable profit streams for companies of all types and sizes
  • Older, highly compensated owners who need to compress 20 years of savings into 10
  • On average a younger group of employees

Below is a sample of how a Combo plan design compares to ordinary retirement plans:

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Under the right circumstances, Combo Plans can produce dramatic tax savings for the employer while allowing the business owner and/or key employees to receive significant retirement benefits.

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