New 430(d) Plan Seen As Choice For Many
Ideal for Business Owners, Self-Employed Professionals

There’s good news and bad news for business owners and self- employed professionals.

The good news is that the economy, outside of the housing sector, is showing signs of recovery. Retail sales exceeded U.S. Commerce Department forecasts for March and April. In early April, the Dow Jones industrial average closed above 11,000 for the first time since the collpase of Lehman Brothers and the various government stimulus packages are reported to have created up to two million jobs for the first quarter of 2010.

The bad news is that the Bush tax cuts of 2001 will expire at the end of this year, which means that successful business owners and self-employed professionals will see a tax increase next year by default. Moreover, the budget problems in Washington make it very unlikely that taxpayers will see a relief from the alternative minimum tax, which results in another tax increase by default.

Combination Plans Provide Relief

As the economy recovers, more and more business owners and self-employed professionals will look for relief from this difficult tax environment. Certainly, the time is ripe for ideas that promise both tax relief and solutions to other financial needs.

One such idea—the combination retirement plan—can provide tax relief, pre-retirement survivor benefits and estate liquidity solutions for many business owners and professionals.

The various combination plans are particularly effective for family businesses, solo practitioners (lawyers, CPAs, architects and designers, etc.) and for employees who receive 1099s rather than W-2s (some stockbrokers, realtors, wealth managers and manufacturers’ reps, etc.)

Let’s look at the important tax savings and retirement accumulation potential offered by combination plans.

Making Comparisons

Exhibit 1 below compares a basic Profit Sharing Plan (column A) to a DASH 401(k) Plan (column B), a Cash Balance/401(k) Combination Plan (column C), and an Insured 430(d) Defined Benefit/401(k) Combination Plan (column D).

The comparison assumes that the owner is age 57 and that his business, an S corp. or LLC, generates enough K1 cash flow to fund the various plans. The comparison also assumes that there are four employees in addition to the owner-employee. Their respective compensation is indicated in the chart.

As the chart illustrates, owners of successful businesses and professional practices can achieve higher tax-deductible retirement plan contributions by choosing the right combination plan. The chart also illustrates that a430(d)/401(k) combination does not work as well as a Cash Balance 401(k) combination in cases that involve non-owner employees. The 430(d)/401(k) combination is ideally suited for sole proprietors and sole practitioners who have no employees or few employees.

DB Plan with Life Insurance

See Exhibit 2 on page 27 for an example of the 430(d)/401(k) combination math for the first year of a plan. Here, we are assuming an owner only business (no other employees.)

Exhibit 2 illustrates that these new classic defined benefit plans with life insurance—430(d) plans—will likely become the plan of choice for sole proprietors, sole practitioners and business owners and practitioners who employ only family members or who have only one or two other employees. In cases that involve employees, it will be important that the employees be much younger than the owner or practitioner.

This new defined benefit plan will also appeal to full time employees of large organizations who “moonlight.” The plan design is a byproduct of the pension plan funding regulation proposed by the Internal Revenue Service in December of 2007 and finalized by the Service in December of 2009. Since this plan design is so new, you can assume that most of your business owner and professional practitioner clients have not yet seen it.

The principal advantages of the 430(d) design are that it offers flexibility in plan investments, life insurance product types and funding and some contribution flexibility. To learn more about Combination Plans and how they work, contact me at gkozol@smlny.com or 800-346-7171, Extension 7304.

FA

George Kozol is the Senior Vice President for Marketing at Security Mutual Life Insurance Company, which offers financial advisors the products and services they need to meet the changing needs of their clients.