MSO Deferral Plan: A Smart, Simple Strategy for Majority Owners with Extra Cash

For many years, majority owners of S Corporations (S Corps) had no way to defer large amounts of income and accumulate their wealth on a tax-favored basis. Similarly, majority owners of C Corporations (C Corps) faced the challenge of double taxation when distributing  profits to shareholders.

Now, there is a solution: the MSO (Management Services Organization) Deferral Plan. But is it the right strategy for everyone? The short answer is no. Every business owner has unique financial goals, obligations, and circumstances that impact whether this plan makes sense for them.

Who Should Consider an MSO Deferral Plan?

Business owners who choose to defer income typically have extra cash on hand they don’t need for financial commitments such as:

• Business operations and growth
• Personal living and/or lifestyle expenses
• Significant life milestone purchases
• Other financial obligations (such as family support or charitable giving)

Without a deferral plan, this extra cash is taxed and then invested in a taxable account, where the investment returns are also subject to taxation. The MSO Deferral Plan allows owners to utilize a tax-favored strategy that will allow them to determine when they want access to their funds in the future.

Understanding Income Deferral
Before committing to an MSO Deferral Plan, owners must plan the timing of their payouts in advance. This means they cannot access the deferred funds on demand; instead, they must select a future distribution date.

Deferred compensation plans follow IRS regulations under Section 409A, which require participants to elect when they want to receive their funds. For example, an owner might elect to defer $2 million annually. They have the ability to elect to receive it, along with investment earnings, at a future point in time. The typical payout options that are available can include the following: 

1. Retirement age
2. A specific future date (i.e., 2030)
3. When leaving the company (i.e., upon termination)
4. Upon a change in control
5. Upon disability or death
   
   

1. Are you the majority owner (holding more than 50%) of an S Corp or C Corp?
2. Do you have at least $1 million in extra income that you can defer without needing immediate access?
3. Are you comfortable waiting at least five years before receiving your deferred funds?
4. Do you have at least seven employees, or are you part of a larger organization or affiliated group?
5. Are you interested in retaining your key employees and providing them with additional benefits?