You may have heard of the special retirement planning design called a “Cash Balance Combo” Retirement Plan. These special types of defined benefit plans allow professionals to save a lot more for themselves, while requiring a relatively small additional contribution for employees. Importantly, if planning is done correctly, contributions to these plans are tax-deductible practice expenses; the money grows in a tax-deferred environment, and is free from creditors’ claims under Federal law.

Rather than get into all the detailed laws and rules that surround this planning approach, we thought it best to jump straight into a real-life example; see the example below.

Facts:
The client had a “Safe Harbor” 401(k) Plan for a long time. This type of plan allowed the business owner / Doctor to defer up to the $16,500 maximum deferral amount for himself each year, but also required that he contribute a certain amount to his 18 employees’ accounts. The Doctor made in excess of $500,000 and did not require more than about $100,000 for living expenses. On the rest, he was paying income tax and saving in a taxable account. We were able to design a plan where he could save significantly more money on a pre-tax basis, and even buy life insurance on he and his wife with pre-tax dollars. The life insurance will likely be needed for future estate tax liquidity.

Before:
With only the Safe Harbor 401(k) and Profit Sharing Plan, the Doctor was able to contribute roughly $50,000 to his own account and $23,000 to his wife’s account (who also works in the practice). In order to do so, he had to contribute approximately $45,000 toward employees’ accounts. In total, the Doctor and his wife were receiving in excess of $73,000 of income tax-deferred contributions and had to expend roughly $45,000 (in the form of contributions for the employees and staff) in order to do so.

After:
After consulting with the client, we were able to design a Cash Balance Combo Plan (the 401(k) + a new Cash Balance Defined Benefit Plan) which allows the Doctor to contribute $184,000 toward his own retirement, $75,000 toward his wife’s retirement, and only $64,695 of total contributions toward his employees’ accounts. In order to do this, the Doctor’s wife received a pay raise, and we included life insurance as one of the investments held by the Cash Balance Defined Benefit Plan.

Thus, the total contribution for the Doctor and his wife is $286,000 and the required contribution for employees is $64,695. These contributions are all income-tax-deductible, therefore greatly reducing the Doctor’s income tax bill, allowing him to save more money toward retirement, in a tax-deferred account.

Difference from the previous plan design:

Doctor & wife:	+ $ 213,000	(+ 291%)!
All others:	+ $ 20,000	(+ 44%)

About the Authors:
Larry Boord, JD* CLU ChFC and Steve Haxton, CPA are partners in Jacob, Haxton & Boord, LLC; an actuarial, retirement plan administration and consulting practice located in Worthington, Ohio. JHB traces its history back over 40 years and specializes in providing consulting, administration and actuarial work to defined contribution plans (401 k), defined benefit pension plans, non-qualified executive compensation programs and other company-sponsored benefit plans.

Tom Wyatt, JD* CFP is a retirement plan consultant and Certified Financial Planner® working in Worthington, Ohio. Tom is a consultant at JHB. Tom also is a licensed attorney and Certified Financial Planner®, and maintains a financial planning and business planning practice in addition to his work with retirement plans.

* Not practicing for Guardian or any subsidiaries or affiliates thereof.