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Home » Wealth Management Blog

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Submitted by on 06/08/2009 – 7:01 PM

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB 

Most doctors are not aware of the fact that industry altering legislation was passed in 2006 called the Pension Protection Act (PPA).  What’s so incredible about the PPA?  It allows for significantly increased contributions to a tax-deferred retirement plan for business owners and an ability to be even more discriminatory against the rank-in-file employees.

If it’s that incredible and was passed at the end of 2006, then why don’t doctors who own/run medical practices know about it?  Poor service from pension consultants would be the main reason.  If you have not been made aware of the changes that I will discuss in this article, you should either start looking for a new pension consultant or at the very least give a hard time to your current consultant(s).

            Higher Contributions

After the PPA, the 25% of payroll limit has been dramatically changed.  Prior to the act, whether you had a defined contribution plan (401(k)/profit sharing) or a defined benefit plan, your total contributions for all employees could not exceed 25% of payroll. Now, even if you max out a 401(k)/profit sharing plan, you can still add on top of that a contribution to a defined benefit plan (such as a cash balance plan).

Age

401(k) only

401(k) w/Profit Sharing

Cash Balance/Defined Benefit Plan

Super 401(k) Total

65

$20,500

$51,000

$188,000

$239,000

60

$20,500

$51,000

$181,000

$232,000

55

$20,500

$51,000

$138,000

$189,000

50

$20,500

$51,000

$106,000

$157,000

45

$15,500

$46,000

$81,000

$127,000

40

$15,500

$46,000

$62,000

$108,000

35

$15,500

$46,000

$47,000

$93,000

31

$15,500

$46,000

$38,000

$84,000

            The changes to the PPA have given rise to what is called a “Super 401(k) Plan” which is code for a maximum contribution plan that uses both, a 401(k)/profit sharing plan and a defined benefit plan. Prior to the act, if the 401(k)/profit sharing plan contributions for a business reached 25% of payroll, you could not add on a defined benefit plan to increase contributions.  Now, after the act, this is possible; look at the Super 401(k) totals on the right of the chart and see how much more money can now be contributed to a qualified retirement plan. 

            Flexibility in Contributions

            One other significant benefit to the PPA is that it changed the way employers were forced to calculate contributions to defined benefit plans.  One of the biggest dilemmas when helping design a “maximum contribution” qualified retirement plan is what to do when you have an older doctor who’s not terribly interested in contributing to a retirement plan and a younger doctor who very much wants to “max out” a plan?

            Prior to the PPA, when using a defined benefit plan, by design, the older you are, the more money an employer must contribute to the plan.  For example, if you had two doctors both earning $500,000 a year, if the younger doctor (45-years old) wanted to tax-defer $81,000 to the plan this year and the older doctor (age 60) only wanted to contribute the same $81,000, you were in real pickle. As the table indicated above, the older doctor’s calculated contribution would be $181,000 which is much higher than the $81,000 the younger doctor wanted to contribute.

            Under the PPA, you can now choose to equalize the values.  Therefore, even a 65-year old doctor could have the same level benefit as 35-year old.  This is a very positive change to the laws which makes using a defined benefit plan or a Super 401(k) Plan much more viable.         

           Summary

            If you are looking to maximize contributions to an income tax-deferred qualified retirement plan, there is no better time to do so with the passage of the PPA.  The PPA allows for higher contributions and more flexibility in design (which also allows for designs that allow you to legally discriminate in favor of highly-compensated employee owners).

            If you have not been approached by your pension consultant to discuss your planning options under the PPA, you should have and I recommend that you become proactive and take steps to find out how the PPA can help you craft a more doctor-friendly plan in your practice.

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

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