What if you could help your high-income business owner clients convert a $500,000+ tax liability into retirement wealth—while maintaining complete IRS compliance? That’s the power of defined benefit and cash balance plans, a strategy that many CPAs overlook but that can transform your clients’ financial futures.
In a recent webinar, David Podell of Business Benefits Consultants shared how strategically designed defined benefit plans can provide CPAs with a powerful tax optimization tool.
Identifying Ideal Clients
According to Podell, the best candidates for these plans are high-income business owners who:
- Have consistent, significant profits
- Are comfortable with their current income
- Run companies with fewer than 50 employees
- Have stable employee bases
- Are currently overpaying in taxes
- Have underoptimized retirement planning
With these criteria in mind, let’s see how these plans have delivered results for real businesses.
Real-World Success Stories
Podell illustrated how defined benefit and cash balance plans can help business owners significantly lower their tax liabilities while enhancing their retirement savings.
Case Study 1: Law Firm Achieves $874,000 Contribution
A small law firm with two partners experienced an unexpected surge in income after winning a significant case that awarded them a substantial fee—much larger than their typical annual earnings. Facing a hefty tax bill, they sought a strategy to minimize their tax liability while making the most of this financial windfall.
They consulted with Podell to explore their options. By implementing a customized defined benefit plan, they were able to contribute $874,000 toward their retirement, with $814,000 being deductible. Remarkably, 96% of this contribution was allocated directly to the two partners.
The plan was meticulously tailored to account for the partners’ differing ages and financial situations:
- Partner A was older and closer to retirement, making it advantageous for him to maximize his retirement contributions.
- Partner B was younger, with student loans and young children, and preferred to contribute a smaller amount.
“This was very specific and customized in the design,” explains Podell. “We adjusted the plan to reflect the age difference and individual needs of each partner. By doing so, we turned a potentially large tax burden into a significant retirement asset for them.”
The result was a win-win:
- Immediate Tax Savings: The firm significantly reduced its taxable income for the year, saving hundreds of thousands in taxes.
- Retirement Growth: The partners boosted their retirement savings without disrupting cash flow or day-to-day operations.
Case Study 2: Solo Attorney Maximizes 1099 Income
A solo attorney was earning a substantial W-2 salary from his primary employer while also generating significant 1099 income through consulting work. Faced with a hefty tax bill on his consulting earnings, he sought a strategy to mitigate his tax burden and enhance his retirement savings.
He approached Podell with a straightforward question: “What if I can put away all the 1099 money? How would this work?”
By implementing a customized defined benefit plan, the attorney contributed $105,000 entirely for his own benefit. This strategic move not only provided a significant tax deduction but also allowed him to convert his side income into a substantial retirement asset.
Case Study 3: Family Business Secures Nearly $1 Million Deduction
A family-owned enterprise, involving multiple entities and several family members, faced a significant tax burden due to high profitability. The business had a complex ownership structure, including two primary owners, a minority owner, and other family members employed within the company.
Seeking a solution to minimize taxes while benefiting the entire family, they consulted with David Podell. By designing a highly customized defined benefit plan, they were able to make a $948,000 deductible contribution, with 86% of the benefits allocated directly to the owners and participating family members.
Key aspects of the customized plan included:
- Inclusive Design: The plan incorporated not just the main owners but also the minority owner and other family members, maximizing benefits across the family.
- Age and Role Considerations: Adjustments were made based on the ages and roles of each family member to optimize retirement contributions where they were most needed.
- Multiple Entities Coordination: The plan seamlessly integrated various business entities under the family’s control, ensuring compliance and optimal benefit distribution.
“We tried to maximize the family as best as possible, determining ages and everything else,” explains Podell. “We really created this in a way that was very customized.”
The outcomes were substantial:
- Significant Tax Reduction: The nearly $1 million contribution substantially lowered the company’s taxable income, providing immediate tax savings.
- Enhanced Retirement Benefits: Family members received considerable boosts to their retirement savings, strengthening their financial futures.
- Unified Financial Strategy: The plan aligned the family’s financial interests, promoting cohesion and shared goals within the business.
This case exemplifies how defined benefit plans can be tailored to accommodate complex family businesses while turning substantial tax liabilities into valuable retirement assets.
Strengths: Flexibility and Customization
The success of these case studies stems largely from the inherent flexibility of defined benefit and cash balance plans. “Every single plan design is different,” notes Podell. “That is not the world of the 401(k); that is not the world of a SIMPLE or a SEP plan.”
Key considerations for implementing these plans include:
- Plan Design Variations: Options like floor offset, new comparability, and cash balance designs can drastically affect outcomes.
- Flexibility in Contributions: Plans can be adjusted annually to match business performance, with options to freeze or reduce contributions in lean years.
- Coordination with Existing Plans: These strategies can often be layered on top of existing 401(k) plans without disruption.
While traditional plans may cap out at basic 401(k) limits, defined benefit plans can support pension balances up to $3.1 million per person, with annual tax savings often exceeding $100,000. For CPAs looking to deliver measurable value to clients, these numbers represent a compelling opportunity.
The impact of proper plan design cannot be overstated. Consider a young real estate investor who received three different plan proposals:
1. First design: Offered a $100,000 contribution—not insignificant, but far from optimal.
2. Second design: Increased the contribution to $140,000 through a cash balance approach with a 401(k) component.
3. Third design: Incorporating pre-funding and ancillary benefits, achieved a remarkable $216,000 contribution—more than double the initial proposal.
This dramatic range demonstrates why sophisticated plan design is crucial for maximizing client outcomes.
A Strategic Combination: Defined Benefit + Roth 401(k)
Beyond plan design, there’s another powerful strategy available to enhance the overall tax benefits.
While many business owners avoid Roth 401(k)s due to losing the tax deduction, pairing them with defined benefit plans creates powerful tax diversification.
When you’re already getting a $200,000+ deduction from your defined benefit plan, you can afford to make Roth contributions without the immediate tax benefit. This creates tax-free growth potential while controlling when and how taxes are paid—ideally during retirement when income levels and tax brackets may be lower.
Key Technical Considerations
While defined benefit plans offer powerful tax advantages, several important technical factors must be considered during implementation and ongoing management:
- Plans should typically remain open 3-5 years minimum to minimize audit risk
- For S-Corps, W-2 income levels are crucial for plan funding
- Plans can work with multiple entities and control groups
- Plans can be coordinated with existing 401(k)s without disruption
Given these technical complexities, successful implementation requires a coordinated effort among key professionals.
Implementing Success: The Team Approach
A successful defined benefit plan requires coordination among several professionals:
- Tax advisor/CPA
- Financial advisor
- Record keeper
- TPA/Actuary
- Plan consultant
Consider working with a consultant who can quarterback this process, bringing together the necessary expertise while simplifying implementation for you and your clients.
By mastering this coordinated approach and becoming fluent in these sophisticated strategies, you can transform your practice and your client relationships.
Elevate Your Practice Through Strategic Planning
By mastering these advanced tax strategies, you can:
- Deepen Client Relationships: Offering sophisticated planning sets you apart and fosters loyalty.
- Attract High-Income Clients: Demonstrating expertise in significant tax-saving strategies can attract referrals.
- Transform Your Role: Move from being a tax preparer to a strategic advisor who provides substantial, measurable value.
“Advice requires guiding your clients toward strategies that can improve their outcomes,” emphasizes Podell.
Ready to Transform Tax Outcomes?
Ready to explore defined benefit plans for your clients? Start by:
- Reviewing your client list for those with $100,000+ in potentially pensionable income
- Identifying business owners currently paying more in taxes than they’d like
- Considering clients with existing retirement plans that might benefit from optimization
- Reaching out to a qualified consultant to explore specific client situations
The difference between an ordinary retirement plan and an optimized defined benefit strategy can mean hundreds of thousands in tax savings for your clients—and a transformed advisory relationship for your practice.
Watch the full webinar to explore how you can implement these plans and transform your practice.