401k Recovery Advice

Defined benefit plans can provide larger tax deductions

Modern Medicine |

In Brief...

Defined benefit pension plans as well as cash balance plans are generating a lot of interest with medical practices, both large and small.. (Exhibit 2) * Includes 3 percent Safe Harbor, additional profit-sharing contribution and $20,500 salary deferral for owner and spouse. Pension Protection Act of 2006 Defined benefit and cash balance plans have become much more popular since the Pension Protection Act (PPA) of 2006. First, the PPA clarified the legality of cash balance plans. Second, the PPA explained how a company, such as a medical practice, might be able to sponsor both a 401(k) profit-sharing and a defined benefit plan to take advantage of the unique characteristics of each and benefit from the combination of the two. Third, the PPA explained how to cross-test the benefits from both types of plans and be able to weigh the contributions more heavily toward the professionals/business owners if the demographics were right.. A sample case is provided showing a medical practice where a physician's spouse is employed along with seven employees (Exhibit 1). When a defined benefit plan is added to an existing profit-sharing plan, contributions can be significantly increased, while keeping financial obligations to non-owner employees to a minimum (Exhibit 2). A comparison of "before and after" is provided to illustrate improvement of plan design from one year to the next (Exhibit 3).. The Pension Protection Act brought with it a new funding method that gives rise to a range of funding options. Another important change brought about by the PPA is the inherited IRA. Prior to the PPA, in the event of a participant's death, a spouse beneficiary could roll the account into his own IRA, stretch the benefits over his lifetime and pass them on to future generations, which provided for the deferral of the income tax for possibly decades. The PPA changed this and allows a non-spouse beneficiary to receive this inherited IRA, and stretch out the payments in a similar fashion to a spouse, putting non-spouse beneficiaries on a more equal footing. With a high rate of divorce or the possibility that your spouse might predecease you, this is an important change.. Conclusion If you want to find out if a defined benefit pension plan or a combination of plans is right for you or if your current plan provides for an inherited IRA, call OJM Group and speak to one of its retirement plan specialists.

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