Harness the defined benefit plan; serve your clients better

As automation redefines the financial landscape, CPAs face a challenge: adapt or become obsolete. One solution? The Defined Benefit Plan.

We recently chatted with Jeffrey K. Lemerman, CPA, of Labuda & Lemerman LLC, who's harnessed this tool to serve his clientele better. We asked him why CPAs should care about Defined Benefit Plans, and what are the basics CPAs need to know to offer it as a resource to clients.

James: How would you describe a Defined Benefit Plan in simple terms?

JL: At its core, a Defined Benefit Plan is a powerful tool for deferring significant taxes. Envision it as delaying certain taxes until retirement. Ideally, it's best suited for high earners, especially those with a small business or those in a 1099 employee status.

James: What are its pros and cons?

JL: The benefits include robust retirement funding coupled with tax breaks. On the downside, the complexity of managing the plan grows as more employees are involved. This is due to the necessity of calculating individual benefits based on factors like age, salary and years of service. For smaller firms, these calculations are more straightforward and manageable, making the plan more advantageous. Larger firms might find the administrative burden outweighs the benefits.

James: How do you determine client eligibility?

JL: For a client to be a strong candidate, they typically need to be in a top tax bracket and either have small business ownership or be a 1099 employee. Meeting these criteria sets the stage for deeper discussions on tax deferral and bolstering retirement contributions.

James: How do you introduce the plan to clients who have never heard of a Defined Benefit Plan?

JL: I accentuate its tax-deferral merits. By opting for this, they might pay taxes in retirement, potentially at reduced rates. Additionally, the money deferred in the plan isn't just sitting idle; it offers the chance to be invested. This means they have the potential to grow their savings substantially over time, leveraging investment returns to amplify their retirement funds even before they start drawing from them.

James: Why advocate for this as an accountant — because you don’t get a cut of their gains?

JL: In the age of automation, many CPA tasks risk becoming commodified. Yet, the true value of a CPA isn't just in number-crunching, but in strategic financial guidance. Embracing tools like the Defined Benefit Plan showcases this shift. It's more than tax deferral; it's a comprehensive approach to retirement and financial planning. By championing such strategies, CPAs evolve from basic processors to invaluable financial strategists, solidifying their importance in a tech-centric world.

James: What do you understand about the costs of a Defined Benefit Plan?

JL: The costs involve actuarial fees, typically ranging from $2,000 to $3,000 annually, and asset management, which sits around 1% of the managed assets. Although clients can opt out of asset management, the responsibility to ensure returns align with plan objectives then falls squarely on them.

Stable returns are crucial. Market downturns can trigger heightened contributions subsequently, notably if the client's enterprise is also adversely affected. For CPAs looking to stand out in this shifting landscape, embracing tools like the Defined Benefit Plan offers a path to enduring relevance.