Rich Professionals are Using Pension Plans as a Tax Dodge

Pensions, also known as benefit-defined plans, are being utilized by lawyers, doctors, and other professionals earning a higher income to get around the recent limit placed by Congress to bar owners of pass-through entities, who report the firms’ income on their individual tax returns, from a decently sized tax break. With a pension, the business owner can stay below the threshold of $315,000 per year for a married couple.

Even before passage of the tax law, the popularity of cash balance pensions plans was surging for small business owners. There were 20,500 such plans in 2016, up almost threefold since 2010, according to Daniel Kravitz, president of retirement plan administrator Kravitz, based on Internal Revenue Service data. Most of the plans are run by businesses that employ 10 or less workers, with 37% being doctor or dental clinics and 9% being law firms.

A cash balance pension is the “next logical step” for successful business owners who are already funding their 401(k) profit-sharing plans up to their limits and want to avoid taxes by deferring even more income, said Keith Steidle of Steidle Pension Solutions, a small plan administrator based in New Jersey.

See Ben Steverman, Rich Professionals are Using Pension Plans as a Tax Dodge, Bloomberg, August 15, 2018.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.