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Steven Jarvis, CPA (00:53)
Hello everyone, and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and I’m very excited for this week’s conversation. It’s a topic we haven’t covered before, so joining me to dive into this is David Podell, and we’re going to talk today about a really great opportunity for business owners in particular. So this could be for advisors themselves, listening to or clients that they serve. But David, welcome to the podcast. So excited to have you here.

David Podell (01:19)
Thanks, Steven. Been listening for a while, so this is nice. Nice to be on it.

Steven Jarvis, CPA (01:23)
Well, definitely excited for the conversation. Before we dive right into it, give us just a little bit of background about kind of how you’ve ended up where you are and what you’re doing now.

David Podell (01:32)
Yeah, so been in the advisory space for a long time. We niched into a defined benefit cash balance arena and practice and only did that. And then out of that,, started consulting. And that consulting is designed to be an outsource solution for CPAs and other financial advisors, as a one-stop place to come to, to look at and put in place, and the defined benefit type different strategies. What we found a long time ago in getting into this and got our first case from a CPA many years ago, looked at it, and said, let’s try to gather some information. Went out to different TPAs, got all different designs. Different actuaries we spoke to, there were tons of different ways of doing this and nobody actually gave us a full answer or had one place to go to with all those answers to design specifically for that client. And what I realized is all these different designs are different from the next. This is not a product. This is not like a 401 (k), a simple or a set plan. This is a totally unique tax strategy. And I always say it’s a tax strategy first, it’s a retirement plan second, just because that deduction and the dollar amounts that go in here really move the needle. When I figured this out, I said, we have a consulting business here because CPAs don’t know how to navigate around this, advisors don’t know how to navigate around this. Generally, there’s one outlet and that outlet is going to a third-party administrator and you’re getting one specific design. And that might work, it might not work, but most likely you’re not exposed to the other five or 10 other designs that are out there that might be so much better.

Steven Jarvis, CPA (03:24)
Yeah, you talk about people going directly to TPAs, and really it’s similar to when people go directly to CPAs for tax planning when most CPAs are really just doing tax preparation. Like TPAs are a vital piece of this puzzle of doing the record keeping and ongoing administration and things like that. But that’s not the same as understanding how these plans need to be set up and who they apply to. So let’s actually just take a step back for a second because I’m sure there’s a lot of people listening who maybe haven’t ever been involved in a defined benefit plan. And so this is an area where David, this is why I was so excited to you on the podcast. I’m very familiar with the concept. The clients that I serve directly, this is rarely applicable to. But when it is applicable, it’s such a powerful tool. And so if we take the entire population of the United States, it’s certainly going to be a very small portion of them that this even needs to be a conversation. But when we start narrowing that down and we start looking at high-earning business owners, wait a second. Now we’re earning at levels where just filling up a solo 401 (k) becomes nowhere close to the potential we have from a cash flow standpoint or from a planning standpoint. so David, before we get a little bit more into the plan design, for advisors listening or even as you think back through yourself getting into this, who are you looking for to say, OK, this is a conversation that needs to happen?

David Podell (04:38)
This is a plan for anybody who is maxing out a 401 (k) or is putting money in their retirement plan and is still complaining about taxes at the end of the year and saying, why am I capped? Why am I putting so much in here? Why am I not able to put so much in here? We look at those numbers on the 401 (k) and it just doesn’t move the needle for a business owner. We call these enhanced owner retirement plans or enhance owner tax strategies. We’re trying to enhance the owner’s benefit here, not the employees. Where a 401k is a great retention tool, recruiting tool for employees, it’s not gonna move the needle for a business owner that maybe has a nice W-2 income and a whole bunch of pass-through profits that are coming through to him or her. And something needs to do that. And this is also a strategy that doesn’t enter any gray areas, right? Pensions have been around forever. So this is not something like many other strategies that are out there where it’s being looked at and there’s concern. As long as it’s done the right way, you really could maximize a very large deduction going in there for an owner.

Steven Jarvis, CPA (05:52)
Well, and just real quick, David, I want to highlight something you said there because you went through it pretty quickly because you do this all the time. But I heard you saying there this is for people who are already maxing out a retirement plan. I always love talking to people who are an expert in their area, but don’t try to pretend that their answer is the only answer for everything in every situation. Because I’m with you. Just like when we look at who should do a back-door Roth contribution, there’s an order of operations to these things. And let’s do the easy things first, because it is way simpler, to max fund a solo 401k plan than it is to set up a cash balance plan or to find benefit plan. But for those people who are maxing out what’s easily available to them and they’ve still got the dollars and they’ve still got that angst of, well, geez, I’m paying a lot of taxes, what else can I do? Wait, we do have other options. We’re not simply capped at 70 or 80 grand or whatever it is in a particular year.

David Podell (06:40)
Yeah, and Stephen, you’ve seen all the business owner clients that will push revenue into the following year or go and increase expenses by buying cars, equipment or anything else toward the end of the year in order to reduce their tax liability. So…The ideal person or owner or owners or business for this… We use the guideline of saying a hundred and fifty thousand dollars or more that they can put away so if someone can put away a hundred fifty thousand dollars a year or more and we’ve done many plans above a million dollars annually then this is something that you could be a fit.

Steven Jarvis, CPA (07:22)
I love that framing. like that you’re talking about that of how much money they can put away, because this isn’t inherently a revenue or even net profit conversation. Like this has to fit in the bigger picture because especially for people who are new to these plans, this isn’t, there are some really important differences between a defined benefit plan and a solo 401k. This isn’t a one-time commitment and David, you can speak a lot more eloquently to that than I can, but it’s something you gotta be aware of going in that when you make this commitment, it’s not just, Hey, for 2025, yeah, I’ve got 150K, so let’s put it in and we never have to worry about this again. There’s some long-term planning that goes in here that becomes really powerful if we design it correctly and follow through, but we just gotta make sure we go in aware of what it is we’re committing to.

David Podell (08:01)
Yeah, and there’s a lot of misconceptions on this and I wrote an article many years ago for the AICPA on it, on these misconceptions. And I’d say the biggest one is that it has to be funded at these amounts every single year, which is incorrect. I mean, we have plans with huge flexibility built in where maybe they put in $700,000 in year one and in year two they put in $50,000. So there is a very wide range in flexibility depending on the design and things that can be done throughout that year and continuously so that that flexibility really fits a business owner. No business owner ever wants to be told, I have to put in $200,000 every single year for the next five years. Now we do recommend that a plan stays open for around that three to five year mark but there’s amendments that could be done, accruals that could be frozen. There’s all these different things and we kind of navigate and are fully involved around that.

Steven Jarvis, CPA (09:01)
So David, what are reasons a person shouldn’t do this? Other than, we don’t have that 150K or more to put away, like, where does this go wrong?

David Podell (09:087)
Yet generally, the people that don’t want to do it but still want to put money away, they don’t want to lock up money. So if you’re in your 40s and you said, I want to go do something else, I want to put money in a non-qualified area, want to put money in real estate, whatever they want to do, they don’t want to put as much into an actual retirement pocket. Where these do often go wrong, on cases that we’ve been brought to where we weren’t involved previously of problems that we’ve seen is there’s misconceptions throughout the year on target funding and that’s not established and if that target funding is changed well then no one has changed the design to adhere to it so there are so many things that can be done and there’s so many different designs that are out there where the code is kind of written for interpretation and then all these actuaries come up with a very specific set document and design different from the next.

Steven Jarvis, CPA (10:03)
So David, so if I’m an advisor and I’m working with some business owners, I’m even looking at my own situation and say, okay, clearly have someone who’s got this 150K or more to put away. If you like they’re getting killed on taxes, like we want to be able to set them up to defer taxes in their high-earning year so that we’re using them. Ideally, in a year where we’ve got a little bit lower tax rates. You mentioned earlier that it causes problems just go directly to a TPA. So who all should be involved tto make sure that this gets designed and executed correctly. Like who needs to be on the team?

David Podell (10:33)
Yeah, I mean the benefit to working with us is that the team’s going to involve, you have record keepers, there’s the current 401 document and what does that look like, does the formula have to be changed to adhere to the design, you have TPA, you have actuary, you have advisor, you know your advisors that are on this and listening to this, their main role is managing that money and that’s what they should be doing, that’s best. When managing money inside these plans, you do really have to manage to the accrual rate and the interest rate that’s embedded in that plan, which is often a range of around five to six percent. We have seen people go and try to buy aggressive-type equities in these plans, and there becomes an excise tax and overfunding and all these other things. So, we try to help the advisor and just kind of guide them on what they have and what they’ve put the client in, and let them know this is what the target funding and this is what should look like. So there’s all these moving parts and that’s another reason why in the past we created the consulting companies because nothing was bringing all this together. It was all very specific and set apart, and no one knew how to do what or when that should be done and some of these plans are; there’s even more nuances and niche areas such as aggregated benefits and other things embedded that we could do a whole other podcast on.

Steven Jarvis, CPA (11:58)
So David, I mean, there’s clearly a lot of power into being able to increase significantly the amount of money you can get into a qualified plan, especially if we’re doing that during our peak earning years. I guess talk to me a little bit. This, this episode is going to come out in October. What’s the, I haven’t been through the setup of this personally. What’s the timing look like as advisors listening to this? Is this something they should start identifying with clients, and they need to start working on this for 2026 is there time left in the year they can get going on this like talk to talk timing of setting something like this up?

David Podell (12:24)
Yeah, they really could set up a if it clients on extension for next for 2025 into next year. This plan could get set up in July or the you know around the June-July summer of next year funding needs to be completed by September 15th of next year. So they have plenty of time to to set up a plan and fund it. Now is a great time to get plans set up because then they have that, long runway between now and September to get that funding in for the deduction for this year, for 25. So we’re getting close to that Q4 end of the year. CPAs are talking about tax planning. Advisors are talking about tax planning. So now is a great time. The other thing, too is good CPA advisors who are doing advisory work and really looking at that tax planning are saying, what do the estimates look like? In a lot of these cases, those estimates are getting cut in half, and that money that was going to the estimate is going into these defined benefit cash balance.

David Podell (13:27)
Steven, another thing that you and I had spoken about when we were prepping for this that I brought up is, know, everyone always has the conversation back and forth and is always looking when it comes to financial planning as well, do we create this huge bucket of money that’s now going to be taxable, right? Are we just creating another time bomb like a huge 401k has? And one of the strategies that we always recommend and think is a good idea for when we talk to advisors to really work with their clients on is the number one reason of somebody if that a bit when a business owner has a 401k and they don’t use the Roth component in that 401k It’s because they want the deduction if you’re putting in a plan such as defined benefit and getting a deduction of 200, 500 thousand dollars, you really don’t care about that $20,000 deduction that you needed anymore. And that allows you to maximize that Roth contribution into the Roth component of the 401 every year, which is going to give you that balance on the tax side.

Steven Jarvis, CPA (14:28)
I love that perspective, David, that again, like you guys are focused on helping people set up to find benefit plans. But just like anything else under the tax code, these things don’t operate in a silo. And the most effective tax planning happens when we are considering the multiple different pieces of a client’s financial life, of their tax life, of how do these things go together. Because that was going to be one of my questions to you, of especially as we’re talking to sophisticated high-earning business owners, like what, how do you describe that value proposition to the client, like what’s the terminology you’re using? I’m really big on giving people scripts of here’s how I’m gonna explain, because you could take the one side of this of hey, we’re gonna help you create a million-dollar deferred tax bomb over the next few years, how great does that sound? Clearly that’s not how you’d say it that’s not the only way to look at it, but how are you describing this to clients?

David Podell (15:09)
could be described in many ways, the easiest to make it as a simple thing, it’s going to be that 401 (k) that’s on steroids. So it’s going to be that 401 (k) that you now don’t have those limits, the 20, $30,000 limit, and now you can really go and put in a whole bunch more money, which is going to give you a deduction and a bigger retirement. On these designs, we’re looking at a few different things. Number one is…What does the client actually want to put in? Because somebody wanting to put in $150,000 is a different design from the person who wants to put in a million, too. Next thing is efficiency, which we think is the most important, if there’s employees. So if you have a group of employees and there’s 10, 20, 30 employees, maybe 100, we’re trying to get the owner anywhere between 85 and 95 percent of that benefit that’s going away. They’re not going to get 100 percent unless it’s a solo plan, and we get a lot of solo plans. Before the podcast you and I were talking also I was explaining there are so many people out there that are getting consulting income, side income, income from being on a board, you know, all that can be deferred and can be used and pensionized in a plan if it’s active income.

Steven Jarvis, CPA (16:24)
Yeah, so many different ways to be thinking about this. Love the experience and perspectives you’re adding there. David, if we take a little bit of a left turn for a second here, because what I’m getting out of this conversation is tons of potential value. definitely is nuance you want to be aware of. This isn’t the kind of thing to go haphazardly into. And one of the things I’ve been seeing more and more over the last year, this isn’t going to surprise anyone, it turns out this is also an area that AI tools are popping up at a really rapid rate. And as all these AI tax planning tools are coming about, this seems to be one of the areas that I see come up a lot, and is a bit concerning to me. Because what I’ll see, actually I had a close friend go through this. They put their tax return and she’s involved in a couple of different businesses. So she put her tax return into one of these tax planning AI tools and the AI tool spits back out and tells her, here’s how much you can put into a defined benefit plan and here’s the tax savings and all of these things. And the AI tool, I mean, missed some really key pieces here, not the least of which the wording and terminology was almost completely wrong, but also they were conflating income from different business sources. They were treating it as if all these different types of income she had could be used in the same way. And so, I’m not opposed to AI, I like tools, but I would just love your perspective on how to stay balanced of where we can use software and tools to help us identify opportunities or even design plans versus, there’s pieces of this that really need to be professional and who know what they’re doing. What’s your kind of take on that?

David Podell (17:53)
Yeah, I don’t see this. I don’t see how this could ever become automated. I just think there’s too much intellectual knowledge. This is a huge puzzle. And it’s not as simple. Maybe a 401 (k) or an IRA could be kind of automated if somebody puts in, I’d like to do this. I’d like to set this up. And there’s some kind of four or five steps to do that because those do not have to do with different designs. There are so many nuances in this. If we get wrapped up on calls with CFOs and controllers, and they wanna know what things are gonna look like, if this happened, if that happened, and we’re running different scenarios. And there’s so much constant communication, even on plans that have been in place for a few years. Wanna, a person wants automatically suddenly wants to retire because they got an offer or they want to buy a competitor or they’re buying a building and they’ve been putting money in this plan they need to put nothing in. What do they have to give to employees? Or suddenly the efficiency of what the owner was getting at 95% went down to 82% because they hired a bunch of people that were in a different demographic. There are so many different pieces of this puzzle I don’t see how that could be taken over and done, which is good because what does that mean? It means that this is a piece that the advisor, whether tax or financial, is now adding value that can’t be replaced.

Steven Jarvis, CPA (19:19)
Well, I’m totally with you. There’s a human element that’s very, very needed in there. And like I said, I’m not opposed to software tools, AI tools, but we gotta make sure that we’re keeping in mind, especially for people who are newer into some of these tax planning strategies. We should always be learning and improving what we’re doing. The fact that you’ve never done a defined benefit plan before shouldn’t stop you from ever doing one in the future, but let’s not have the misconception that because I heard it once on a podcast and now I have an AI tool that tells me how it should be designed, that I’m all set. Well, you can take that approach if you’d like, but you’ll probably be on a podcast later with me telling me all about how that went wrong for you. So definitely appreciate the perspective there, David. If we think for a second about someone who hasn’t ever been through this with a client before, what do you recommend to people, to advisors who are like, okay, I wanna try this for the first time? They’re reaching out to somebody who’s an expert in this before they even bring the idea even bring up the idea in a client meeting like how do you even help with like the basic education around somebody who wants to do this for the first time?

David Podell (20:11)
Yeah, we have an intake and proposal tool on our site that asks some very basic questions and it’s designed in a way for the CPA or advisor to fill that out on their own on behalf of a client. They don’t need to know a lot about what’s going on. Eventually, a census will be needed, though. Like anything else where you have to look at a demographic, there’s gonna be a census that’s needed and that’s oftentimes because, sometimes you need to class out certain employees and give weightings to certain employees to maximize that owner’s benefit. But they can fill that out, and it’s going to ask certain questions on there. And then we generally are going to have that conversation after we get that to really pinpoint and find out what the goal is, what are we looking to do. We had somebody recently who said I want to fund this once and then I’m retiring so I want to do one year of funding and then I’m retiring, and I’m not gonna have income again, and I don’t want to ever put money in again so we did a plan of one year funding and Then we froze the accrual for the next two to two to three years and that plan is only getting funded once so we kind of pushed everything forward one contribution and that was it you would never know that without a conversation or just getting some kind of you know, intake tool back. So we we’re always going to have a conversation about the case first. What are the goals? And from there we determine what TPA slash actuary we want to go and send this to, and that could sometimes be two different ones that could sometimes be five or six. And then we’re going to look at all those. We will often make tweaks in them and then we put it on a very simple two-page proposal for anyone to understand and explain to the client or involve us to do so.

Steven Jarvis, CPA (22:01)
David, what do you look for in a TPA that you want to work with? Because I know I get questions all the time, whether it’s to find a benefit plan specific or just TPAs in general. Are you looking for who has capacity or who’s done a particular type of plan or who’s in their area? What are things that make a TPA stand out on your list of, let’s work with them?

David Podell (22:18)
We’re looking for something that is not the same as the arsenal that we already have. So we’re looking for a different design that’s different from what we already have in that toolbox. So if we have five or 10 in there that are of all different things and fit all different, you know, the client that has 100 employees and wants to put away $2 million or $3 million versus the person that does not have a lot of income, maybe has a few employees and wants to put away $150,000. They’re very different designs.

Steven Jarvis, CPA (22:53)
Okay, so you’re looking for a TPA with experience with that specific plan type, so you know that they are experts in that particular plan, not just divide and benefit plans broadly.

David Podell (23:02)
Yes, yes. It’s going to be, it’s going to be what’s, why is your design different from the next?, There’s ones that are cookie-cutter, we’re just not interested in. have, we have places to go for that and that’s okay. We’ve contacted them sometimes and asked them to do certain things, and they won’t break away from just what they do because they want to do it in a repetitive basis. So that’s why there is those other designs out there that can, be customized.

Steven Jarvis, CPA (23:29)
That makes a lot of sense because again I drawing the contrast from what we talking about before like this isn’t a solo 401 (k) plan where we just need a place to to stick our employee and employer deferral every year like there there are a lot more unique aspects to this.

David Podell (23:37)
Yeah. And we’ve seen a lot of problems sometimes. There’s been great designs, but we’ve found that TPAs, we’ve had situations where they weren’t filing what they needed to. They were not just not putting the filings in. They were overwhelmed. Some just don’t respond when you reach out to them and maybe take a week or two. Well, that doesn’t work either. So, the TPAs we, I have found are designed for getting input using their specific design. That’s all they have and giving me output and saying, this is what this looks like. And that’s kind of it. And the void that was missing that we fill is all the conversation and consulting in between and really walking everybody through not just the implementation, but the continuous work that needs to get done every year from the compliance side of this and making sure everything gets in and filed as well as all the changes that need to happen because addition of employees, reduction of employees or just changing target funding.

Steven Jarvis, CPA (24:40)
Yeah. David, before we wrap up here, how can people reach out and get connected with you if they need help on plan design or they’ve identified a situation, but hey, they’re looking for it, have an expert in their corner. How do people get connected with you?

David Podell (24:49)
Our website’s the best source, businessbenefitsconsultants.com. Best source to go to. They needed to reach out to fill out an intake form and have us look at a case, or just schedule time with anyone on our staff and we’re happy to meet and walk through anything.

Steven Jarvis, CPA (25:04)
Well, I appreciate that. We’ll make sure that gets linked in the show notes. And then just to kind of recap our conversation for, for especially for people who are newer to this, mean, I really like that framework you gave in there of we’re looking for business owners who have that 150K plus that they’re looking to put away. These are people who are already maxing out their existing retirement plans or looking for additional ways to get money into qualified accounts. That’s who we’re really looking for. And then especially if you’re new to this, like this is something you need to take some time to get your arms around, and then you need to make sure those the right people on their team, whether it’s David and his team. This isn’t something that you want to just haphazardly do on your own. It’s a really great way to make a lot of clients really, really mad. So David, really appreciate you taking the time to come on and share your expertise.

David Podell (25:44)
Thanks, Stephen. Appreciate it.

Steven Jarvis, CPA (25:46)
And to everyone listening, until next time, good luck out there, and remember to tip your server, not the IRS.