For year-end tax savings, a particular type of pension may be the right remedy


01 December 2021

3 minutes to read

Source / Disclosures

Disclosures: Bhatia, Mandell and O’Dell do not report any relevant financial disclosures.


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As the end of the year approaches and the possibility of tax hikes in 2022 looming, many physicians and their practices are looking for ways to reduce taxable income in 2021.

Setting up a particular type of pension plan will certainly work well for some practices, but not all. It can also often be used with the incidental income of a doctor obtained through moonlighting or outside work. If done right, this tool can provide significant tax relief, not just in 2021, but for all the years in which it is in place.

In this article, we discuss the type of retirement plan known as the Cash Balance Plan (CBP).

Cash balance plans: “Innovative pensions”

Sanjeev Bhatia

Sanjeev Bhatia

David B. Mandell

David B. Mandell

We call CBPs “innovative pensions” because their use has grown rapidly in private enterprises, including medical practices, in recent years. CBPs are a type of Qualified Retirement Plan (QRP) for high-income practice owners looking for tools that can provide them with significant tax deductions in the short term as well as a strong economy in the long term.

In a PBC, a participating employee will have access to a certain amount upon retirement. Take $ 100,000 as an example. To reach $ 100,000 in retirement, the plan assumes a combination of employer contributions and compound interest over time. When the employee retires, he or she can receive the $ 100,000 either as a lump sum or as an annuity that pays part of the $ 100,000 in periodic installments.

CBP: the basics

CBPs are like traditional pension plans in terms of funding and reporting requirements. Minimum funding standards apply; there is a minimum annual employer contribution which is declared on tax from 5500 for the CBP. An actuary is required to calculate this contribution amount using a reasonable actuarial funding method and actuarial assumptions specified by the IRS. The employer may choose to contribute an amount between the minimum funding requirement and the maximum allowable deduction, but should attempt to fund up to the contribution level recommended by the actuary in order to meet the current benefit liability of the plan.

On the other hand, CPPs are different from traditional defined benefit plans which promise a specified monthly benefit amount upon retirement (i.e. 3% of salary per year of employment, payable at age 67 years old). CBPs define benefits as an account balance rather than a periodic amount. This can be useful because employees always understand what they are entitled to under the CRP, since it is a specific amount. Both owners and employees know what’s going on in the plan on their behalf and what will happen when the employee leaves.

CBPs work well with 401 (k)

PBCs are not mutually exclusive to 401 (k), which many medical practices already have in place. In fact, a firm can generally use both types of plans simultaneously, “overlaying” a CBP on top of their existing 401 (k) plan.

Four strengths of CBP

There are four compelling reasons why medical practices are interested in PBC:

Significant increase in deductions for contributions to the plan

In 2021, the 401 (k) are subject to deductible contribution limits of $ 19,500, with profit-sharing plan limits of $ 58,000. (The catch-up contribution for people over 50 is an additional $ 6,500 per year.) These limits will increase slightly each year. Properly structured PBCs, on the other hand, can allow business owners to make tax-deductible contributions of $ 200,000 or more, saving them from $ 80,000 to over $ 100,000 in income taxes. income per year.

The additional costs are much lower than the additional tax savings

CBPs typically involve higher annual administrative costs and higher employer contribution amounts for employees than 401 (k) plans and / or profit sharing plans. Nonetheless, the tax savings usually overshadow these additional expenses, which makes CBP extremely attractive.

Possibility of second level of tax deduction

For those whose incomes place them above the tax code’s recent Qualified Business Income Threshold (QBI) limits, CBPs can be a tool to reduce taxable income enough to qualify for the QBI deduction, creating a deduction which leads to a second deduction.

Better access to the higher level of asset protection (+5)

As an exempt asset under federal and most state laws, ERISA qualified QRPs are protected at the highest level (+5). Unless a CBP is set up for a single owner, with no other employees, this ERISA protection will generally apply to CBP as well. With higher contribution levels allowed in CBP, this means that more wealth can be protected in CBP than in most other QRPs.

Conclusion

PBCs are powerful planning tools that can help an orthopedic surgeon reduce taxable income in 2021 and beyond. CBPs can be attractive to those looking for larger tax deductions, asset protection, and superior retirement savings.

For more information:

Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free of charge in print or electronic download by texting HEALIO at 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.

Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be contacted at [email protected] or @DrBhatiaOrtho.

David B. Mandell, JD, MBA, is a lawyer and founder of the wealth management company OJM Group www.ojmgroup.com, where Jason M. O’Dell, MS, MCG, is the managing partner. They can be reached at 877-656-4362 or [email protected]

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