Looks like pension plans as a tax dodge are making a comeback with wealthy business owners. That’s an area where traditional pension plan’s are getting new life. Pensions, also known as defined benefit plans, can be used by doctors, law partners and wealth managers to stash hundreds of thousands of dollars in income a year. By doing so, they’ll get around the income limits Congress created to bar them from generous new tax break for owners of pass through entities, who report the firms income on their individual tax returns.
The Treasury Department proposed regulations last week specifying who qualifies for 20 percent deduction, which effectively slashes the top tax rate to just under 30 percent from 37 percent. The rules also say that planning techniques using a pension plan as a tax dodge are in fact not legal, but are considered “crack and pack”-where business owners split their firms into different entities to lower their tax bills-are considered abusive.
That’s pushing top earning service professionals to figure out other ways to get below the income limits of $315,000 if they’re married, or $157,500 if they’re single, so they can take full advantage of one of the tax law’s biggest gift’s. One of the workarounds is a retirement plan more associated with union workers. “Doctors and lawyers got really annoyed when they were excluded from the pass through deduction,” said Daniel Kravitz, president of retirement plan administrator Kravitz. “After tax reform, these plans became even more beneficial.” Finding a tax dodge became very important to those seeking shelter form taxes.
Kravitz said his firm, a specialist in defined benefit plans for small businesses, is actively marketing pensions as a way for service professionals to get around the new rules. Before the tax overhaul, clients typically used them to defer paying taxes on income. Defined benefit plans are generally set up in the last few months of the year, but Kravitz said he’s already having his busiest sales year ever, as clients start new pensions called cash balance plans and boost contributions on existing plans.