Your Practice: Finding the Right Retirement Plan
By Peter Rohr
Despite the economy’s ups and downs, it is essential that physicians who are business owners look beyond their near-future investment goals and consider their long-term retirement plan. Taking the time to establish a company-sponsored retirement plan may be one of the most important decisions physicians can make. Not only does finding the right plan help to attract and retain talented medical professionals, but a plan can also enable one to build personal wealth by reducing current tax obligations.
There is a simple approach practice owners can take when establishing and maintaining a retirement plan. Putting off establishing a plan due to perceived complexity or excessive costs is unnecessary. Working with a Financial Advisor and tax professional is a strategic and effective way to craft a plan that helps ensure flexibility for your practice, rewards for your employees and potentially, an increase in your personal wealth.
Below you will find several standard plans that physician business owners can choose, each with their own benefits and requirements. It is important to note that retirement plans need not be static – physicians should be encouraged to make changes to their retirement plan as their practice evolves.
If a physician’s business has 100 or fewer employees and the owner wishes to offer employee salary-deferral contributions, consider the Savings Incentive Match Plan for Employees (SIMPLE) IRA plan for retirement savings. Many other retirement plans necessitate filing requirements and cause owners to incur administrative costs; however, the SIMPLE IRA is not subject to many of these complex and cost-inducing processes. Eligible employees can contribute upwards of $11,500* each year by way of practical payroll withdrawals that may reduce their taxable income. Employees age 50 and older may be eligible to contribute additional “catch up” contributions of up to $2,500*.
With a SIMPLE IRA, small business owners are required to contribute either a non-elective two percent contribution for each eligible employee, regardless of participation, or a matching contribution of up to three percent of each participating employee’s compensation on an annual basis. Although employer contributions are generally tax deductible, owners may have concerns about ongoing financial commitments in an uncertain economic climate. If concerned with a long-standing commitment, owners can utilize a convenient alternative plan, a Simplified Employee Pension (SEP) IRA, discussed below.
Some retirement plans afford business owners more flexibility to alter their contributions on a yearly basis. A SEP IRA plan may be particularly suitable for a business if the practice’s profits vary from year to year. Employers can make annual contributions that are generally tax-deductible for each eligible employee up to the lesser of $49,000 or 25 percent of a maximum of $245,000*. Less regimented than other plans, the SEP IRA allows the employer to change their contributions based on their business’ performance.
SIMPLE and SEP plans have become even more appealing to small business owners due to the tax credit created by the Economic Growth and Tax Relief Reconciliation Act of 2001. If a business owner establishes a SEP or SIMPLE plan and has 100 or fewer employees, he or she may be eligible for a non-refundable income tax credit. This credit can be equivalent to upwards of 50 percent of the first $1,000 administrative and retirement education expenses for each of the first three years of the plan.
If mindful about the business’ cash flow, business owners should consider a profit-sharing retirement plan. This plan’s administrative costs may be higher than other options, but there are additional benefits. A profit-sharing plan allows flexibility in annual employer contributions and can be established for businesses of any size. Business owners are afforded the ability to decide how much to contribute to the plan, if at all. If contributing, a business owner sets the percentage of each participant’s compensation to contribute to the plan each year. This contribution is generally business tax deductible. Profit-sharing plans are subject to compliance testing and IRS Form 5500 filing.
The 401(k) plan is one of the most well-known types of employee benefit plans. With 401(k) accounts, employees may reduce taxable income by making salary-deferral contributions to a controlled savings investment vehicle. Employer contributions are optional, generally tax deductible and can be made either through employer matching or profit sharing contributions. Due to newly enacted tax laws which increase annual contribution limits, the 401(k) plan became even more desirable. It is important for physicians to keep in mind that 401(k) plans are subject to compliance testing and IRS Form 5500 filing.
Defined Benefit Plan
Popular among large corporations during the 80’s, Defined Benefit plans have since been replaced by more affordable large-scale plans. However, small business owners may find these plans more attractive, especially those approaching retirement age. A small business owner may be able to make substantial contributions to quickly build a retirement nest egg with this plan.
Younger employees should consider some potential drawbacks to Defined Benefit plans. Because they have many years to save before retirement, their contribution limits are lower than more senior employees. If younger employees cannot pay their contributions on time, then they should switch their plan, as contributions are compulsory. In addition, Defined Benefit plans have several filing requirements including IRS Form 5500 and Pension Benefit Guaranty Corporation (PBGC) reporting requirements and premium payments.
Retirement Plan Alternatives
If averse to formally sponsoring a retirement plan, physician business owners can still allow employees the opportunity to contribute to their IRA through payroll deduction. Though not an employer-sponsored retirement plan, this retirement savings vehicle gives employees the ability to contribute up to $5,000* to their IRA. Employees age 50 and older may be eligible to contribute additional “catch up” contributions of up to $1,000*.
The most important thing to remember when determining an employee retirement plan is to keep open lines of communication to increase the likelihood of participation. One way to ensure employees understand their options is to offer pre-enrollment and enrollment education seminars. Additionally, physician business owners should create a checklist for employees to guarantee that they will have proper documentation for their application including a current copy of the Summary Plan Description and all other credentials required by law.
If a physician’s practice has already established an employee retirement plan, it is still essential to reassess the plan on an annual basis to ensure the owner and his or her employees are enjoying the maximum benefits from the plan. With changes in a practices’ success, the business may grow or shrink, and every plan outlined above caters to different models of business. When first starting out, practice owners may find that an SEP IRA or SIMPLE IRA is the most appropriate choice. As cash flow improves, or as employees are added, owners may want to consider changing to a profit-sharing or 401(k) plan.
As the practice evolves, physician business owners should review revenue streams from the past several years, as well as future business plans, with a financial and a tax advisor to determine if the designated retirement plan still complements the business’ needs and goals. At the same time, business owners should work with tax and legal advisors to ensure that the retirement plan meets all applicable legal requirements and regulations.
At times, retirement planning may seem like a daunting task, particularly for busy physicians, but, if well prepared and maintained, it can be one of the most important moves you can make for yourself, your business and your employees. The most important thing to remember is that no one has to face this task alone – take advantage of working with a Financial Advisor to help develop a personalized plan that meets your business and personal goals.
Peter A. Rohr is a Senior Vice President–Investments and Private Wealth Advisor with the Private Banking and Investment Group at Merrill Lynch in Philadelphia. He can be reached at (215) 587-4731 or firstname.lastname@example.org. Neither Merrill Lynch nor its Financial Advisors provide legal or tax advice. You should consult with your own legal/tax advisors regarding your particular situation.