There has been much discussion in the news lately regarding the tax code. Whether the discussion centers around different tax plans proposed by the presidential candidates, the Bush tax cuts set to expire at the end of the year, the fiscal cliff, or Congressional gridlock, it appears small business owners will be adversely affected in some form.
If tax rates increase and small business owners look at different alternatives to manage their tax liabilities, will we see changes to their retirement programs? In particular, will there be interest in adding tax-advantaged cash balance plans to their existing 401(k) profit sharing plans, or perhaps adding newly minted DB(k) plans for those without retirement programs?
For those with 401(k) profit sharing plans, a separate cash balance plan can be established and coupled with the existing plan in order to help small business owners substantially increase contributions to their retirement programs. This allows these small business owners to maximize their tax-deductible contributions and manage their tax liabilities. This type of retirement program is especially feasible for groups of professionals, such as organizations staffed mostly by accountants, lawyers, or doctors.
For those without current retirement programs, the DB(k) may be the way to go. The DB(k) was introduced as part of the Pension Protection Act of 2006. A DB(k) is designed to incorporate the best parts of both a defined benefit (DB) plan and a 401(k) plan into one single plan. These plans provide for a guaranteed income stream at retirement, while allowing for employees to contribute to a 401(k) savings account. Although these plans could be effective January 1, 2010, Congress has not provided any guidance on how they should be operated, leaving employers reluctant to set them up.
It will be important for small business owners to look at all alternatives to manage their tax liabilities. Making a change to their retirement programs may be part of the solution.