Top Benefits of a Pension Plan

As a business owner, there are many different retirement plan options available to you, regardless of your type of business, the number of employees or the number of years you have been in business. Here is a quick summary of the types of plans that are available, depending on your goals and objectives.

Knowing what’s out there, and deciding to move forward and sponsor a plan, are two different things! If pension plans are in the news, it’s generally a story about big business yanking away the hard-earned retirement funds from employees, or companies that are ‘selling’ their pension plans to insurance companies. With these kinds of stories, why on earth would you want a pension plan for your employees?

An employer-sponsored retirement plan can be an extremely valuable tool for business owners for several reasons, and can offer many benefits to your employees as well. Here are some of the top benefits of a pension plan, and why you may want to sponsor one.

Lower Business Taxes

There are a variety of ways that a pension plan can lower your businesses taxes.

First and foremost, any contributions made by the business for the employees are a top-line deduction off of your business returns. You may choose to match the contributions that your employees make, or to make contributions regardless of whether they contribute. In either case, these contributions up to applicable limits are tax-deductible to the business.

Because pension plan benefits can vary by participant, a majority of the contributions can often be made for the business owners. The IRS requires that the plans pass testing requirements, to assure that the owners aren’t receiving too much and that the rank and file are receiving a minimum amount. Within these boundaries, plans can often be designed to provide 80% to 90% or more of the contribution to the owners – even though the employees are required to receive a benefit, the taxes saved could be more than enough to pay for it.

You may also qualify for a tax credit as a result of setting up a pension plan. The credit is 50% of your startup costs for the plan, up to $500 per year, which includes education for your employees abut the plan. This credit is available in each of the first three years of the plan, and can start claiming the credit in the tax year in which the plan becomes effective. Additional information on the credit, and qualifications needed, can be found here.

Third, the 2018 Tax Cuts and Jobs Act included a 20% deduction on a business’s Qualified Business Income (QBI), called the 199A deduction. This deduction is available IF the owner’s total taxable income is under certain thresholds. If it was over the threshold? This deduction was limited, or potentially eliminated, depending on the business’s industry. If your business is thriving, and your total income is over the limits, you may not be eligible for this deduction at all. One strategy to become eligible for the deduction is to contribute to a pension plan. This would lower your business’s taxable income, and could reduce your total taxable income enough to qualify for the 199A deduction. The details on the 199A deduction can be found here.

Finally, some businesses elect to pay bonuses into the pension plan, instead of paying it in cash, which is subject to payroll and social security taxes.

Attracting and Retaining Quality Employees

Very few businesses have a pension plan, due to the negative publicity and press that these plans tend to receive! Sponsoring a pension plan can help your business stand out from your competitors, especially in a tight job market. Having a pension plan is a benefit most job seekers consider, and can ultimately be the differentiator in which job they choose.

Not only can a pension plan attract employees, but it can also help you retain employees. Vesting provisions within the plan require employees to work for a certain number of years before being eligible for their entire retirement benefit, and higher benefits can be given to your most valuable employees as an incentive to stay. Some businesses even pay bonuses into the pension plan, instead of paying in cash, reducing payroll taxes as well as increasing retention.

Creditor Protection

Contributions to a pension plan are made to a qualified plan trust, which exists separately from the business accounts and is for the sole benefit of the participants in the plan. If there is at least one participant in the plan who is not the owner, or the owner’s spouse, the plan is covered under ERISA and is protected from creditors upon bankruptcy. Regardless of what is owed by the business, or the business owner, the pension plan assets are protected and aren’t available to satisfy your debts.

Guaranteed Benefit at Retirement

Almost half of all Americans fear that they’ll outlive their savings in retirement, according to AARP. Having a guaranteed payment over your lifetime could be a large factor in alleviating these fears.

For most account-based plans (such as a 401(k) or a profit sharing plan), the only payment option was a one-time lump sum that could either be taken as income, or rolled into an IRA. The SECURE Act, that was passed in December 2019, required these plans to also provide a lifetime income option that would guarantee payments in the future to the participant and possibly a beneficiary. Because most businesses only offer account-based plans, this gives millions of participants the option to increase their guaranteed monthly income, and to reduce the worries of trying to spread a large balance over their future lifetime.

If your business sponsors a defined benefit plan, by definition, the monthly benefit at retirement is guaranteed. Often there is an option to take the benefit as a one time lump sum, but the default payment is an annuity over your lifetime. If you’re like many who worry about outliving their savings in retirement, a defined benefit plan may be a great option for you.

Funding of Business Insurance

While life insurance cannot be owned in a SEP or IRA, IRS regulations do allow the inclusion of life insurance policies in some profit sharing and pension plans. The plans must adhere to strict rules that require the life insurance protection provided be only “incidental” to the retirement benefits provided by the plan, which could be up to 50% of the amount contributed for each participant.

The opportunity to pay life insurance premiums with pre-tax dollars is appealing, especially if the business is considering funding buy/sells with insurance policies, or placing insurance on their key employees. Generally, these premiums would not be deductible to the business.

If a participant passes away prematurely, the retirement benefit is fully funded by the death benefit from the insurance, which is paid tax-free to the beneficiaries. This is one of the few times where a policy’s premiums have not been taxed, and the death benefit (for the most part) is also not taxed!

Monarch Financial Advisors

There are many other benefits of a pension plan for a business owner, and there are also many types of plans that are available. Pension plans can be designed specifically for your goals and objectives, with contributions in a range that is comfortable for you and your business. Proposals are done at no cost, and confidential information is not required – if you think a pension plan may be right for you, contact us! Our team is ready to answer your questions, and start planning for your future!