Combo Plans: The Perfect Retirement Plan for Your Business
Retirement plans fall into one of two categories: Defined Contribution Plans and Defined Benefit Pension Plans. Defined Contribution Plans, also known as retirement savings programs, cover a broad range of programs such as Profit Sharing and 401k plans. These types of programs allow owners and employees to make contributions that are allocated to individual participant accounts. They generally favor younger employees who have a longer time horizon until retirement.
Defined Benefit Pension Plans promise participants a specific monthly lifetime benefit amount at retirement. Contribution amounts are calculated and adjusted annually to ensure that the target goal is reached. Contributions for all the plan participants are kept in a single account or “pool” that is used to pay the promised benefits. These types of plans tend to favor older, long-service, highly compensated business owners, partners and key employees who are in their peak earning years. They offer a way to quickly increase retirement plan assets.
A Combination Plan aka “Combo Plan” combines a Defined Contribution (401k Profit Sharing) Plan and Defined Benefit Pension Plan, allowing the plan sponsor to offer a two-fisted approach to saving for retirement. This hybrid design can substantially increase the annual maximum dollar amount allocated to an individual, when compared to a stand-alone profit sharing plan.
Sample Construction Company
DB /DC Combination Plan
| NAME | AGE | Annual Comp | Defined Benefit Contribution | Deferral | 3% Safe-Harbor Non Elective | 3% Employer Discretionary | TOTAL CONTRIB. | % |
| Owner | 60 | $245,000 | $222,511 | $22,000 | $7,350 | $0 | $251,861 | 84.80 |
| Daughter | 23 | $37,500 | $0 | $16,500 | $1,125 | $1,125 |
$18,750 |
6.31 |
| Staff (9) | 23-54 | $256,250 | $0 | $12,812.50 | $7,687.50 |
$5,887.50 |
$26,387.50 |
8.89 |
| TOTAL |
– |
$538,750 |
$222,511 |
$51,312.50 |
$16,162.50 |
$7,012.50 |
$296,998.50 |
100.00 |
Sample Technology Company
DB/DC Combination Plan
| NAME | AGE | Annual Comp | Defined Benefit Contribution | 401k Including Catch-up Contribution |
Safe Harbor Non-Elective Contribution |
3% Employer Discretionary |
TOTAL CONTRIB. | % |
| Owner 1 | 58 | $245,000 |
$191,832 |
$22,000 |
$7,350 |
$0 | $221,182 | 36.57 |
| Owner 2 | 56 | $245,000 | $184,655 | $22,000 |
$7,350 |
$0 | $214,005 | 35.38 |
| Son 1 | 26 | $104,000 | $0 | $16,500 |
$3,120 |
$3,120 | $22,740 | 3.76 |
| Daughter 2 | 27 | $104,000 | $0 | $16,500 |
$3,120 |
$3,120 | $22,740 | 3.76 |
| Staff (61) | 26-70 | $3,137,251 | $0 | $0 |
$62,111 |
$62,111 | $124,223 | 20.54 |
| TOTAL | – | $3,835,251 | $376,487 | $77,000 |
$83,051 |
$68,351 | $604,890 | 100.00 |
Combining these plans allows you to maximize the benefits for owners and highly-compensated employees, and at the same time provide a minimum type of benefit formula to younger employees.
Combo plans are best suited to the following circumstances:
- Successful businesses with stable profit streams
- Proven start-ups or business reveling in a windfall year
- Older, highly compensated principles of an employer
- On average a younger group of employees
Under the right circumstances, Combo plans can produce dramatic tax savings for the employer and allow the business owner and/or key employees to receive significant retirement benefits.
For more information please contact Sheree Tallerman at 917-828-5888 or sheree@planperfectretirement.com