Advanced Underwriting Consultants

Question of the Day – August 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is a sole proprietor with no employees.  Is it possible for her to implement a defined benefit pension plan for herself?

Answer: Yes, although the administrative costs for doing so may be high.

A defined benefit plan is a type of pension plan in which the employer promises each eligible employee a specified monthly benefit at retirement.  The retirement benefit is defined in that it is based on a formula that is set forth in the plan document.

The formula used might be based on the employee’s average earnings, or highest earnings. Generally, the defined retirement benefit begins at a specific age, and is paid until the employee’s death.

Defined benefit plans are typically funded only with employer contributions.  Implementation requires adoption of a plan document.

Administration can be complex, often requiring the services of an actuary to calculate the employer’s potential pension liabilities, and determine the appropriate employer contributions to fund those liabilities.  For that reason, closely held business owners often choose the simplicity of IRA-based plans, such as SEPs.

A defined benefit plan may make the most sense where the business owner is the only employee, the business is making huge profits, and the employee-owner is older.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.