Tax changes give defined benefit plans new life


Defined benefit plans may be especially interesting now to certain entrepreneurs, investors and professional practitioners with earnings too high to take advantage of the QBI, said Timothy Speiss, partner in charge of EisnerAmper Personal Wealth Advisors. “It’s very significant, and the 2017 tax legislation is important,” Speiss said.

The Tax Cuts and Jobs Act passed by Congress and signed into law by President Donald Trump in 2017 didn’t directly address defined benefit retirement plans, which pay pension benefits based on an employee’s years of employment and final salary. However, it did change tax deductions in ways advisors say make defined benefit plans more appealing.

One important 2017 tax change created the QBI deduction. This lets the owner of a partnership, sole proprietor, trust or S corp deduct from his or her taxable income the lesser of 20 percent of the business’ QBI or 50 percent of W-2 wages the business paid the owner. At the top tax rate of 37 percent, higher deductions can result in hefty savings.

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The catch is that business owners in a number of fields — including health, law, sports and performing arts — cannot use QBI if their adjusted gross income is too high. For married couples filing jointly, the cap is $315,000. It’s $207,500 for heads of households and $157,500 for single filers. This incentivizes business-owning taxpayers to make adjusted gross income fall under the QBI cap.

Speiss said business owners whose income is too high to let them use the QBI may be candidates for defined benefit plans in combination with defined contribution plans, such as a 401(k). If deducting the maximum allowable contributions to a 401(k) still leaves them over the $315,000 cap, they may be able to add a defined benefit plan and use deductible contributions to that to bring their incomes below the cap and save thousands in taxes, according to Speiss.

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