In today’s for-profit school environment, two concerns often expressed relate to cash flow and to net profit for owners. Since an optimal retirement plan design can help both increase cash flow through increased tax deductions and put more money into owners’ (and employees’) pockets for retirement, businesses and owners should re-examine the potential benefits of currently existing or new retirement plans.
Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans (DC Plans), or defined benefit plans (DB Plans). The US Department of Labor website contains a helpful chart-format summary of the advantages and differences among such types of plans and can be referenced here.
Employer DB Plan Versus DC Plan
In a defined benefit plan, participants are guaranteed a specific payable amount at retirement age. The amount paid is normally based on length of service and the participant’s annual salary. In a defined contribution plan, the plan does not promise a specific amount of benefit at retirement. Instead, employees or their employer (or both) contribute certain amounts to participants’ individual accounts under the plan, and at retirement, the participant receives the accumulated contributions plus earnings (or minus losses) on the invested contributions.
Plan Design and Optimization Issues
The key, however, is not necessarily the type of plan that may be in place, but instead, how that plan structure can be optimized or supplemented to maximize tax and contribution benefits. Business owners should ask themselves certain questions that may lead to additional value, such as:
- Is my Profit-Sharing Plan set at an optimal level?
- Does a defined benefit Cash Balance Plan make sense to supplement my DC Plan? (see this PDF for more information about Cash Balance Plans)
- Can a Third Party Administrator (TPA) save me time and/or money or reduce my plan costs?
- Am I maximizing contributions to owner-employees and key employees based upon my employee population?
We are able to help with these questions and have helped current clients to reduce taxable income and increase retirement funds to owners and employees. If it has been a while since the design and structure of your retirement plan has received a fresh look, please contact McClintock & Associates to help re-examine these issues.
Volume 2, Issue 3