Try a 412(e)(3) for the highest deductions and tax savings

Try a 412(e)(3) for the highest deductions and tax savings

By Paul Breslau, Breslau Insurance & Benefits Inc.

Are you or someone you know a professional or small business owner without employees or with just a few? Do you make $300,000 or more filing jointly or $150,000+ filing singly? Then you may be losing important Qualified Business Income or QBI tax deductions that could be avoided. Even if not earning that much or losing the QBI deduction you should investigate implementing a 412(e)(3) retirement plan, or at least a defined benefit plan.

There is a hierarchy of possible retirement plans for small business owners and professionals. For example, in 2019 a SIMPLE Salary Deferral plan allows a $12,500 deduction. The 401k deduction limit is $19,000 or $56,000 with profit sharing. These plans have an extra allowance for older people. A SEP IRA plan also allows $56,000 without an age boost option. These are defined contribution plans.

There are many employer considerations, such as the business match percentage and the inclusion of loan provisions. Another is post-tax Roth contributions verses pretax contributions. A safe harbor 401k plan will offer protection from discrimination testing. Work through these issues with a retirement plan adviser.

There is another angle called nonqualified deferred compensation plans. These are often regarded as a great benefit for C Corps or key executives of a pass-through entity. Nonqualified means taxes have been paid and many of the rules and regulations on qualified funds can be avoided.

The hierarchy moves on to defined benefit plans, which are less common, however favorable for small business owners. These plans allow older business owners to save significantly more in a short period of time. These include cash balance plans with limits over $60,000, which can be combined with a 401k Plan for an extra boost.

Near the top of the hierarchy is the 412(e)(3). For example, this plan allows a high contribution amount of $354,000 for someone age 55 and wants to retire at age 62. Larger contributions for older participants are part of the plan. However, changes resulting from the “2018 Tax Cuts & Jobs Act” are what make these 412(e)(3) plans most compelling. The costly impact of the qualified business income or QBI tax rules can be greatly reduced or avoided.

Ideal 412(e)(3) candidates are professionals and small business owners with five or fewer employees. Also necessary are high and stable profits with an older owner and younger employees. Finally, the ability to make ongoing contributions for at least a five-year period is recommended.

One big take away is that the options and alternatives; the pros and cons; the regulations and requirements are all incredibly complex. These frequently change over time. Working with a team of seasoned and experienced professionals in tax and retirement plan fields is imperative. The 412(e)(3) defined benefit retirement plan is only invested in a life or annuity policy.

Consult with your tax adviser or CPA. Then if considering for defined contribution or defined contribution plan, seek out a retirement plan specialist or contact me for some names of those I know and trust.

For a 412(e)(3) plan, seek out your own financial adviser who is also a specialized insurance agent or contact me to be connected to ones who are pioneers in this strategy. Another alternative is to refer your tax or investment adviser to me for initial discussions.

I am partnering with leading local experts in all lines of insurance and business services. Reach out to me at 602-692-6832 or for an initial conversation, evaluation, or referral.

Paul Breslau, registered health underwriter, registered employee benefit consultant, chartered life underwriter, chartered financial consultant, chartered adviser for senior living, is president of Breslau Insurance & Benefits Inc. Contact: 602-692-6832;;