DBPP Planning:  A Few Practical Things to Know About DBPPs

  • A DBPP allows you to make much larger contributions than a profit sharing/§401(k) plan.
  • A DBPP can have different contribution levels for each business owner, depending on their individual contribution objectives.
  • Based upon the 2024 limitations, your maximum accumulations at age 62 can be approximately $3,519,100 (the limit changes each year).
  • In simple terms, a DBPP can be viewed much like a sinking fund for a mortgage.  If you want $3,519,100 at age 62, and you are now 53, that dollar objective is amortized over 10 years, with an average contribution of approximately $279,700 per year (assuming 5% interest).  But your annual contributions can be flexible, ranging from nothing to a multiple of the average targeted contributions, which are determined each year by an actuary. The actuarial calculations and the IRS allow a variable cushion.
  • You can adopt a DBPP after the end of your taxable year as late as the due date of your tax return, including extensions, to be effective retroactively for the prior closed taxable year.
  • DBPPs are generally trusteed by you as the business owner allowing you full investment control over the plan investments.

If your high consecutive 3-year compensation averages the following amounts (including any prior 3 consecutive years long before the plan is adopted), you can contribute up to the following amounts to a DBPP based upon your current age:

Age/Average Compensation

$100,000

 $150,000 $200,000

$275,000 or More
40 $110,500 $121,500 $133,700 $147,100
45 $141,700 $155,800 $171,400 $188,600
50 $159,900 $175,900 $193,500 $212,800
55 $205,100 $225,600 $248,200 $273,000
60 $263,100 $289,400 $318,400 $350,200
65 $247,800 $272,600 $299,900 $329,900

Success Story

It was already 2023 when we were approached by a physician and his S corporation asking what we could do to help minimize his taxes. His wife also worked for the corporation as a nurse practitioner, and she too was a 50% shareholder of the medical corporation (her share ownership is allowed in California).  They both had received W-2 compensation of $120,000 in 2022, and anticipated the same for 2023. Since they had no qualified retirement plan to date, it was obvious that they should have a DBPP since they said they wanted to contribute about $100,000 per year.

In discussing the DBPP, we asked for their high consecutive year salaries and learned that it equaled the maximum compensation allowed for qualified plan purposes in prior years more than 3 years ago.  A consulting actuary ran the numbers and concluded that the corporation had a potential contribution range of from $101,500 to $405,444 per year.  When the physician and his wife learned this, they changed their contribution objective up to $400,000.

It's not too often that you can do retroactive tax planning, but when they also learned that they could adopt the plan retroactive to 2022 (the S Corporation had not yet filed its tax return for 2022) with the same contribution range, they ecstatically chose to do so.  Needless to say, they were very happy clients.

Request a DBPP Proposal

Do you want to know more?  We are happy to answer any DBPP questions you may have.