A Pension Solution That Is Good for Both Owner and Company.

written by Steve Scott

Businesses differ from each other in countless ways, from what they offer to how they are run.  But they all have one thing in common, and that is the desire to reduce expenses and increase profits. Business Owners are willing to explore every avenue to get there but they often overlook the opportunity to do so through their company retirement plan. Under the right circumstances, working with a consultant experienced in the complex area of advanced plan design can produce a dramatic boost in tax savings and wealth accumulation for both Employers and their Employees.

Like many small business owners looking to grow their footprint in a targeted territory, I started out by joining some B2B business groups in the interest of building a referral network in the Chicago-land area. There, I met another business owner whose company seemed to be fit as a valuable referral partner.  His company is in the business of helping other employers with cost management and profitability.  The details of this business concept was edgy and cool, and in many ways above my pay grade. That said, as we discussed our respective firms for referral purposes, we also uncovered an opportunity for RSG to provide direct value to his company.  

Demonstrating The Value Proposition

The synergy came to light when the owner shared a few details about his company’s compensation structure. His affiliation to a larger company provided him a W2 income.  Also the majority of his compensation actually came from his own consulting firm which employed only him and his wife. Additionally, he held the advantageous position of not needing the consulting monies because the W2 income was steady and provided his lifestyle needs.

Overall, both the consulting firm and affiliate company were doing well.  But my new associate’s taxes were a pain point. He wanted to save more, pay less in taxes and be more strategic with the extra income from the consulting practice. And this is where RSG was able to help by delving deeper and start by asking three simple questions:

  1. Currently, your consulting business employs only you and your wife. Any chance this will substantially change in the future and you hire a handful of non-family employees in a few years?    His answer was no.
  2. Are you looking for a tax deduction that would be in the 6-figure arena or is that more than you are looking for? He said it would be ideal if he and his wife could both take an additional 6-figure deduction through tax-deferred savings.
  3. Are the revenue and profit numbers on the consulting business sporadic or consistent? He told me they are consistent.

At this point, I knew we had a solution that would not only personally benefit my new associate and his family but also provide him with a real-life understanding of RSG’s business and value proposition, which was the original reason for our meeting.

Advanced Plan Design For The Win

Our recommendation was to start a 401(k) and profit sharing plan as well as a defined benefit plan for the consulting firm.  Here are the reasons why:

  • My new associate was already maxing out his tax deferrals, and could not double dip.
  • As a business owner, however, he could double dip on profit sharing and get monies that way.
  • With this new plan, his wife who had no access to a plan could now defer as well as get a profit sharing allocation.
  • By using an “overlay” plan design with two different trusts, we could go up to 31% of payroll instead of the normal cap in the defined contribution side of 25%.
  • Also, by focusing on and front-loading the defined benefit plan, we saw some larger (6-figure) deductions. And taking a more measured approach with profit sharing allocations was important for tax maximization strategies.

The circumstances as they were, allowed for this particular design to benefit a two-person company in a manner that felt more like a personal solution even though it was fully a pension solution. And, while most of our new clients these days have more employees and more assets, RSG can still provide creative retirement plan consulting to navigate the many and complex tax laws for the best outcomes.