As the name suggests, a DB / DC Combo Plan is when a Defined Benefit Plan is paired with a Defined Contribution Plan, such as a 401(k) Profit Sharing Plan. By combining the two plans, a business owner is able to increase their deductible limit and reduce the cost of providing retirement benefits to employees.
A Defined Benefit Plan allows a business owner to make large deductible contributions. What's more, by combining a Defined Benefit Plan with a 401(k) Plan, the deductions are even larger!
Here is a comparison of a standalone Defined Benefit Plan and a DB / DC Combo Plan. By adding the 401(k) Plan, the owner and spouse are able save an additional $72,800 in pre-tax dollars.
In addition to increasing deductible contributions, DB / DC Combo Plans reduce the employer's cost of providing benefits to employees.
Generally, when a business adopts a Defined Benefit Plan, non-owner employees also must receive a benefit. In fact, nondiscrimination rules describe the requirement for minimum employee benefit amounts. Usually, providing all benefits in a standalone Defined Benefit Plan is significantly more expensive than providing benefits in a DB / DC Combo Plan.
The illustration provides an example of the difference. Significantly, the DB / DC Combo Plan increases owner benefits by $66,000 per year while nearly cutting the cost of employee benefits in half!
To learn more about how a Defined Benefit Plan can help you, see these resources:
• How much can I contribute? Defined Benefit calculator and Defined Benefit Contribution limits
• Setting up a Defined Benefit Plan: How to set up a self employed Defined Benefit Plan
• Case Studies: Defined Benefit case studies
• Illustrator video and FAQs: Defined Benefit video and FAQs
• Defined Benefit Plans vs Cash Balance Plans: Defined Benefit Plans vs Cash Balance Plans
• Defined Benefit Plans vs SEPs or 401(k) Plans: Defined Benefit Plans vs Defined Contribution Plans
• Defined Benefit Plan rules: IRS Summary