Is a DB plan best for my situation?

[Guest confused]

I am a 44 year old practicing phyician in a solo practice with a few part time employees. In past several years, I tried to max out my SEP-IRA but now I need to have more tax-deduction if possible. Some agents are trying to sell me DB plan for higher deduction but I am afraid about all the restrictions and hidden rules as well. Especially some aspects they mentioned I am afraid it would be too aggressive that eventually IRS will dequalified the whole plan. I hope you guys here can give me some tips:

1. I have steady income about $400k - 600k every year from the practice. I will have no employee work more than 1000hr for year 2013, but for 2012 one of the employees works more than 1000 hours. If I set up a DB plan starting 2013, could it be a solo DB (assume no employee will work more than 1000hr in the following years also)? One company told me it is OK, another complany claimed that I can not exclude this employee unless the plan is for 2014.

2. If after several years I have some high-paid employee and DB becomes too expensive, can I terminate the plan in 5 years without IRS frown upon?

3. Does it make sense to have whole life insurance in DB plan at all or should I just do a cash balanced DB plan? The person who wants to sell the DB plan to me is a life insurance company agent, so she keeps on pushing the idea of whole life in DB. But after reading lots of articles, it seems not ideal.

4. If DB plan is not a good option, what other plans shoud I Consider? I try to avoid SEP-IRA or 401k etc startin this year since most of the plasn require me to cover employees and that become too expensive to me.

I am not sure it is appropriate to post this here, but your help or any discussion about this matter is greatly appreciated.

[Belgarath]

I don't think anyone can advise you what is "best" without a detailed knowledge of your financial situation.

Having said that, a couple of comments.

First, since you are talking about contributions that over the next several years are likely to be at least several hundred thousand dollars, I think it is worth your while to engage the services of an independent actuary to discuss and answer your questions.

Second - be very careful of advice from a person who is trying to sell a plan based upon commission-based products. The typical 1st year commission on a whole life policy is 50% or more. I'm not implying that anything unethical is proposed or going on, but there is an inherently powerful incentive for less than objective advice in such a situation.

[Guest rex]

You should read this and understand that contributing more wont give more defined benefit.

http://www.executivebenefitsgroup.com/images/EBGwp4.pdf

[Bird]

It sounds like your situation is a good fit for a DB plan, but you're going to have to address some issues about eligibility and such. You really need to engage a consultant or an actuary to dig into the details and design something that works best for you. I think there's a benefit to being able to sit down with someone, at least once, so you might take a look in your local yellow pages under Pension and Profit Sharing plans.

As a general rule, I'd suggest keeping life insurance out of a qualified plan.

[david rigby]

Strongly agree with comments about avoiding insurance as the primary funding mechanism for the plan. When you engage an actuary, select one (or more) who has experience similar to your situation (ie, small plans). The properly experienced actuary will also be able to recommend 2 or 3 similarly experienced attorneys that you might consider.

Your actuary will guide you in discussing what death benefit to include in the plan. The answer to that might require the plan to include some life insurance as part of its investment, but not the main mechanism for funding (ie, the death benefit is ancillary to the main purpose of the plan, which is to save money for retirement).

BTW, you are almost a prime candidate for a DB plan (a "prime" candidate is just a few years older than you), so your exploration of this option is very good.

[Lou S.]

1. I have steady income about $400k - 600k every year from the practice.

I try to avoid SEP-IRA or 401k etc startin this year since most of the plasn require me to cover employees and that become too expensive to me.

Really? I think you are one of the reasons the IRS nonsidrcimination rules are around in the first place.

Insurance in a DB can be a god thing, though I agree with others, I'd avoid especially if it is being pushed by a life insurance guy.

And as David Rigby suggests, once you hit around age 50 the DB may be more attactive as a tax deduction vehicle but seriously rethink the idea about covering your employees.

[John Feldt ERPA CPC QPA]

Starting some DB benefit accruals now in a brand new plan at age 44, if they are less than one-tenth of the 415(b) limit, can leave room for much much larger contributions at age 50 than a brand new DB plan that first starts up at age 50. Just something to consider.

Also, consider that the contribution limit in a 401(k)/PS plan is an annual contribution limit each year with no lifetime limit, but the DB benefits have a single lifetime maximum. When the DB contributions become large enough to squeeze back the contributions on the 401(k)/PS plan because of the deduction limits under 404(a)(7), you don't get those unused contributions from the 401(k)/PS plan back again in any future year. This could also affect how soon you want to establish the plan.

[Guest confused]

Thank you so much for all your replies. I agree with you that more information and consultation are needed to set up a good plan for my situation. Here are some of more information and questions:

1. If I need an independent opinion about the best planning of this, who should I talk to? An actuary? Retirement plan person?

2. My income is likely going to be very steady for next 10 years and expected to go higher if I wanted to work a little more. But I am a single mother with 3 children, so I may not be able to contribute too much when the kids hit college (the oldest goes to college in 6 years). That is why I wanted to start DB a little earlier than most people. But what is the pro and con of freezing the contribution or even terminate the plan after 5 years?

3. I do want to offer some benefit plans for my employees. But most of them wanted cash bonus instead of pension plans. That is why it becomes expensive if I do both..

Again, all your answers here are very helpful and I really appreciate it.

[JAY21]

1. Talk to an Enrolled Actuary (pension actuary).

2. The only con to freezing or terminating the plan after 5 years that I can see is that you forgo additional years of future funding, but if you situation necessitates that, then freezing or terminating after 5 years should be fine so long as you are not over funded at that time. If over funded (all DB plans are either over funded or under funded) then you might need to keep the plan accruals going another year or so to absorb any over funding.

3. Back to your initial eligibility comment for employees, if 1 employee worked 1000 hours in the prior year (2012) and thus met the eligibility for 2013 but then failed to work 1000 hours for the current year (2013) they may still need to receive a benefit accrual as they probably are included in discrimination testing for 2013. This would be an issue to discuss with the actuary. The 1000 hour rules is not absolute in all situations so this would be something you'll want to look into.