Defined Benefit/Defined Contribution Combination “Carve-Out” Plan
A “Carve-Out” Plan is a two-plan benefit program which allows plan sponsors to take advantage of the best features of both a defined benefit and a defined contribution plan.
The two plans work together to provide the high deductions and benefits of a defined benefit plan for the sponsor and a select group, while benefiting the remaining employees at a lower cost in the defined contribution plan.
Key Plan Features and Commitments
Plan Features
Allows for large tax deductions and rapid accumulation of assets.
Requires that 40% of the eligible participants benefit in the defined benefit plan.
Ideal for older business owners with mixed employee demographics who have stable cash flows and wish to defer taxation.
Plan Sponsor Commitments
The plan is generally required to be sponsored for three to five years.
Contributions have some flexibility but are required on an annual basis.
Plan sponsors must immediately notify their plan consultant of staffing changes.
Plan requires annual certification by an enrolled actuary (included in APC fees).
May require government Pension Benefit Guaranty Corporation (PBGC) premium payments.
Sample Combined Plan Allocation
Defined Benefit Plan
| Participant | Age | Compensation | Benefit/Deduction |
|---|---|---|---|
| Owner | 58 | $265,000 | $203,000 |
| Employee #1 | 43 | $51,000 | $10,000 |
Defined Contribution Plan
| Participant | Age | Compensation | Benefit/Deduction |
|---|---|---|---|
| Employee #2 | 24 | $25,000 | $1,875 |
| Employee #3 | 30 | $38,000 | $2,850 |
| Employee #4 | 35 | $42,000 | $3,150 |