In today’s economy, it is essential for physician practice owners to look beyond their short-term investment goals and consider their long-term retirement plan. Putting a company-sponsored retirement plan in place may be one of the most important tax and financial decisions physicians can make. The right plan will not only help to attract and retain talented medical professionals, but also enable you to accumulate personal wealth by reducing current tax obligations.
Many physicians put off establishing a plan out of fear the process is complex or costly, which is not necessarily the case.
There are several standard retirement plan options that physician practice owners can choose from, each with their own benefits and requirements. But remember, retirement plans for physicians don’t need to be static – physicians are actually encouraged to make changes to their retirement plan as their practice evolves.
The Savings Incentive Match Plan for Employees (SIMPLE) IRA plan for retirement savings is ideal for a physician practice with 100 or fewer employees, where the owner wishes to offer employee salary-deferral contributions. A SIMPLE IRA is easy to set up and administer, and usually costs less than other retirement plan options. Eligible employees can contribute upwards of $12,500 annually by way of practical payroll withdrawals, which in turn reduces their taxable income. Employees age 50 and older may be eligible to contribute additional contributions of up to $3,000.
With a SIMPLE IRA, physician practice owners must contribute either a non-elective 2% contribution for each eligible employee, regardless of participation, or a matching contribution of up to 3% of each participating employee’s compensation every year. Employer contributions are generally tax deductible, but practice owners may have concerns about ongoing financial commitments in an uncertain economic climate. In this case, owners can utilize an alternative plan, a Simplified Employee Pension (SEP) IRA.
A SEP IRA plan is a suitable option if the practice’s profits vary from year to year. Employers can make annual contributions that are tax-deductible for each eligible employee up to the lesser of $54,000 or 25% of a maximum of $245,000. The SEP IRA is less regimented than other retirement plan options and allows the employer to change their contributions based on their business’ performance.
Make Sure to Take Advantage of any Tax Credits
SIMPLE and SEP plans have become even more attractive for practice owners due to the tax credit created by the Economic Growth and Tax Relief Reconciliation Act of 2001. It stipulates that if a business owner establishes a SEP or SIMPLE plan and has 100 or fewer employees, they may be eligible for a non-refundable income tax credit. This credit can be equivalent to upwards of 50% of the first $1,000 administrative and retirement education expenses for each of the first three years of this plan.
If you’re concerned with the business’ cash flow, practice owners should consider a profit-sharing retirement plan. This plan’s administrative costs are typically higher than other options, but it comes with additional benefits. A profit-sharing plan is flexible in the annual employer contributions and can be established for businesses of any size. Practice owners have the freedom 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 but 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. 401(k) accounts allow employees to reduce taxable income by making salary-deferral contributions to a controlled savings investment vehicle. Employer contributions are optional and generally tax deductible. They can be made through employer matching or profit sharing contributions. Newly enacted tax laws have increased annual contribution limits, making the 401(k) plan even more desirable. However, physicians should be advised that 401(k) plans are subject to compliance testing and IRS Form 5500 filing.
Defined Benefit Plan
Defined Benefit plans have been replaced by more affordable large-scale plans. However, small business owners may still find these plans attractive, especially those approaching retirement age. A small practice owner may be able to make substantial contributions to build a retirement nest egg with this plan.
These plans will also require actuarial testing and are more complex than the other types of retirement plan options. But for the right physician practice they can provide significant tax savings.
Retirement Plan Alternatives
If physician practice owners don’t want to formally sponsor a retirement plan, they can still allow employees the opportunity to contribute to their IRA through payroll deduction. This is not typically an employer-sponsored retirement plan, but a retirement savings vehicle that gives employees the ability to contribute up to $5,500 to their IRA. Employees age 50 and older may be eligible to contribute additional contributions of up to $1,000.
When determining an employee retirement plan, it is important to keep open lines of communication to increase the likelihood of participation. Owners should create a checklist for employees to ensure that they have proper documentation for their application including a current copy of the Summary Plan Description and all other credentials required by law.
If a practice has an employee retirement plan in place, it is still necessary to reassess the plan on an annual basis. This allows the owner and his or her employees are enjoying the maximum benefits from the plan they’ve selected.
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 switch to a profit-sharing, 401(k) plan or defined benefit plan.
With all of this in mind, retirement planning may seem like a daunting task, especially for busy physicians. However, with the right preparation and enough research, you can make an informed decision that benefits yourself, your business and your employees. The most important thing to remember is that you don’t need to face this alone – reach out to a Financial Advisor to help develop a personalized plan that meets your business and personal goals.