Breaking Down Owner-Only Benefit Plans

Once a staple of the American workforce, benefit Plans – more commonly referred to as pension plans – are quickly becoming the lesser known and least utilized retirement fund. In comparison to more popular retirement funds like 401(k) plans and IRA’s, the benefit plan is lagging behind. In large part the decline of benefit plans can be attributed to companies moving away from these sort of long-term benefits to employees and moving towards more flexible savings options. Before we get much farther into our discussion of Owner-Only Benefit Plans, it’s important to fully understand what this type of plan is.

What is a benefit plan?

A Benefit Plan promises employees a specified monthly amount when they retire, regardless of market conditions i.e. profits and losses. These plans are usually completely funded by the employer who is responsible for contributing enough funds monthly to cover the promised benefits. The payout amount specified is determined by the length of the employee’s employment, position, salary, and age. Unlike individual 401(k) and IRA’s – both Roth and traditional – Benefit Plans are not dependent on the market and the fiduciary responsibility falls on the employer.  Knowing this, it’s easy to see why companies have moved away from this model.

When is a benefit plan a smart decision?

For small business owners, benefit plans can still make a lot of sense. A benefit plan is “owner-only” when it’s designed to work when a business is run by only one employee i.e. the owner and his or her spouse. These types of plans offer significant advantages for the small business owner. Unlike more common retirement savings plans like 401(k) and IRA’s, the defined benefit plan has higher contribution limits; allowing one to contribute more money yearly towards retirement. Forbes magazine estimates a small business owner can combine benefit plan investments with other retirement savings plans to stow away over $100,000 a year for retirement. Money that will be taxed upon distribution, when the beneficiary’s taxable income is likely to be much lower. Without using this tool, standard limitations on 401(k) and IRA plans is $53,000 – $59,000 yearly.

Additional benefits to consider for defined benefit plans.

There are a few other important considerations when deciding whether a defined benefit plan is right for you. Plans like this can help mitigate risk; something small businesses are especially susceptible to. By contributing every month to a defined benefit plan – either one that serves as a pension plan for multiple employees or one that works as an owner-only plan – contributions are protected from potential creditors. For example, if the business faces a lawsuit, funds in the defined benefit plan are not subject to seizure. This additional diversification helps protect employees and business owners.

Rules and conditions to remember

Lastly, it’s important to evaluate whether a defined benefit plan is right for you and your company. Most plans of this nature require the company to be making over $100,000 in revenue. Many have age requirements, typically age 40 is the benchmark before plans like this can be an option. And, you must want and have the resources to contribute over the set limit of traditional retirement services – i.e. 401(k)’s and IRA’s – of $59,000. If you fall within these parameters, a defined benefit plan can be a great option to meet your retirement needs.

For more information on creating a defined benefit plan or for information and advice on running your business, contact your financial representative at TrueNorth Retirement Services.