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Increase Retirement Contributions for Key Employees With a Carve-Out Plan

By Cameron Short

Today’s economic and political environment has left many physicians working increasing hours, left with little time to ensure their hard-earned money is working just as hard in a retirement plan. So when it comes to building your practice’s retirement plan with viable options for wealth building and deferring taxable income, what is the best solution for you?

There are many different available options for your practice in setting up retirement plans such as defined benefit and defined contribution plans.  A defined benefit plan, such as a pension, is designed to provide a specific amount of monthly income in retirement. It is advantageous in that it allows for significantly larger contributions during working years than does a defined contribution plan, such as a 401(k).  And of course, larger contributions result in decreased income tax bills or increased income tax refunds. Investments within both types of plans are professionally managed, providing the opportunity for your money to grow as efficiently as possible and risks to be minimized.

Defined benefit plans can be a great option for high-earning physicians who are looking to invest significant amounts of their income toward retirement. Yet, because employers are required to fund defined benefit plans for employees in a non-discriminatory manner (by providing a contribution on behalf of all eligible employees), this option can be prohibitively expensive for employers.

If you’re facing such a dilemma for your practice, consider incorporating a “carve-out” plan – a plan designed to focus the majority of an employer’s contribution to a select group of employees, usually key or highly compensated employees, yet still offer solid benefits for all employees.

A carve-out plan is created when the employer offers both a defined benefit plan and a defined contribution plan at the same time. In a carve-out plan, the majority of employees are covered in the defined contribution plan, while the owner and highly compensated employees are “carved out” to be covered in the defined benefit plan.

By including the key or highly-compensated employees in a defined benefit plan and the remaining employees in a more affordable 401(k) plan, you can keep your retirement plan in compliance with non-discrimination regulations, while keeping expenses at a minimum.

Consider the following example: (An actual case of pretax contributions)

A 52-year-old physician earning more than $245,000 yearly
2010 401(k) safe harbor contribution:               $36,700
2010 Defined benefit contribution:                   $143,000

Total pretax contribution for 2010: $179,700

For more information on whether or not a carve-out plan would be a good fit for your practice’s retirement plan, consult your financial advisor and tax advisor today.

Cameron Short, CIMA, is a Senior Vice President/Investments with Stifel, Nicolaus &

Company, Incorporated. He and his team focus on the wealth management issues and

practice management of high net worth physicians across the country. He can be reached in the Pittsburgh office at (412) 456-0208.


  1. Concern magnifies in any plan where change of personnel can impact a plan at or near year end. Carveouts, to our way our way of thinking can lead to a disaster as suggested by Frank Hoffman.
    We prefer the cash balance approach, aggregating CB with a PSP. Changes in employee status can be easily handled with PSP % differences on an annual basis. Additionally, CB plans are easy to understand and explain as well as allowing the opportunity to create flexibility through wage change.

  2. I like the idea, but I think it’s important to remind readers that a defined benefit plan is still subject to 401(a)(26), which requires that the plan benefit the lesser of 50 employees or 40% of all employees. So, in your example, depending on the number of HCEs compaed to the total , a ohysician’s practice nay be ok as is, or have to adjust eligibility to make sure the plan satisfies the minimum participation rules.

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