Why
As business owners, we have the opportunity to help our employees reach their retirement goals while at the same time take advantage of tax benefits of implementing a corporate retirement plan. Additionally, it is important that business owners diversify their wealth out of their primary business and into something that is tax protected and asset protected.
When
Typically, we recommend looking at a corporate retirement plan when the income of the practice gets to a point at which there is a significant tax liability. We also need the business owner to be at a point that they have the free cash flow to fully fund a retirement plan. Many times, we’re getting this information from the client’s CPA. A good CPA firm will perform 4th quarter tax projections to give the client time to make any capital purchases or plan for a corporate retirement plan.
Who Is Involved
CPA
As mentioned above the CPA is an integral part of this plan and the timing of when to implement it.
TPA (Third Party Administrator)
If you think about a CPA being the professional in charge of managing, preparing and filing your tax return; a TPA is that same but for your retirement plan. There is an immense amount of plan design, government filings, and participant notices that are required in order to stay compliant. The TPA assists the financial advisor on plan design in order to ensure the retirement plan benefits both the employees but also the business owner to get a maximum tax advantage.
Recordkeeper
The recordkeeper, also known as the provider, is the platform that holds the plan assets, the participants use to select their deferrals and manage their investment direction. The TPA works hand in hand with the provider to post disclosures for the employees to review per IRS regulations. This is also where contributions are posted from the employer.
Financial Advisor
Your financial advisor is the quarterback of the entire corporate retirement plan. A good financial advisor that works in the retirement plan space will be in charge of hiring and firing all of the consultants listed above. They are responsible for implementing and maintaining an efficient retirement plan. Efficient meaning effective and fee conscious. Our firm proactively manages the plan during the 4th quarter of each tax year to discuss any adjustments to the retirement plan so as to maximize the client’s tax plan. The financial advisor, acting in a fiduciary capacity, is also tasked with choosing and monitoring the investments inside the retirement plan.
The Corporate Retirement Plan
There are many components a business owner can implement to maximize their tax savings. We like to say this plan is implemented in stages:
Stage 1: Initial Plan Design
A business owner might want to just implement a basic 401(k) plan with a match. This allows the owner to defer up to $23k annually (2024 limits). With the match they can plan on getting a decent tax benefit to start the plan this way. This initial plan design allows us to minimize plan administrative fees. Until the owner is ready to do a much more substantial contribution, we feel this is the best way to start.
Stage 2: Profit Sharing Design
Once the owner is ready to contribute more, we add the TPA as a consultant and start profit sharing to the plan. Don’t think of this as profit sharing per se but more like an additional bucket within the 401(k) plan that allows the owner to contribute much more to the plan ($69k in 2024). This plan design is a more complex plan which is why we must lean on the TPA to assist with plan design and ongoing management. The 4th quarter review with your tax team is now very important to maximize the benefits of the retirement plan.
Stage 3: Defined Benefit Plan
The last piece of the corporate retirement plan is called a Defined Benefit Plan. There are many names this type of plan can take but think of this as the pension plan for the business. Before we dive deeper into this plan let’s discuss the difference between a Defined Benefit Plan and a Defined Contribution Plan (401k, Profit Sharing). A defined contribution plan means simply that. The employee/owner gets to “define” the contribution they make to the plan each year. This is voluntary and can change at any time. A defined benefit plan is where the owner “defines” a benefit to receive at normal retirement age. Let’s imagine an owner wants to define the benefit as $1mm at retirement. The government announces a pension benefit interest rate each year which is used to discount the “premium or payments” going into the plan to reach that defined benefit. This type of plan is very strict and once implemented the owner MUST be prepared to make this annual contribution every year unless the business is sold or goes out of business. Because of this, the owner and their CPA have to really know and be comfortable with future cash flow before implementing this type of plan. However, there is a VERY SUBSTANTIAL tax benefit to implementing this type of plan.
Conclusion
If the business owner has a good CPA that is proactive with annual tax planning and a financial advisor who is very versed and experienced in managing these types of plans; we strongly recommend implementing a corporate retirement plan. It has become increasingly difficult to recruit and retain good talent. These plans are very effective in dealing with the struggles business owners continue to have. Effective tax planning, growing a positive workplace culture, asset protection, and further ensuring the business owner will be able to retire – we recommend exploring options when you’re ready.
Virtus Financial Partners is an investment advisor registered with the U.S. Securities and Exchange Commission. Any statement of past performance is not indicative of future returns. Virtus does not provide legal or tax advice. You should consult with your attorney or tax professional for any advice pertaining to legal and/or tax questions you have.