Decisions, Decisions The Art and Science of Selecting a Retirement Plan for Your Practice

Selecting a retirement plan is an important decision for physician practices, as well as other small businesses working in the healthcare sector. Retirement plans come in multiple shapes and sizes to help businesses in different types of situations find a plan that is the best fit.

But having multiple options makes the decision process more complicated, and many businesses will find it helpful to have a retirement-plan adviser help them choose a plan.

Most owners will find a retirement plan to be one of the best ways to tax-efficiently save money to fund their retirement. For highly compensated owners, the ability to defer income taxes on a portion of their salary while their tax bracket is high and pay a lower tax rate when they are retired is very attractive. Often, owners want to defer taxes on as much of their income as possible. In addition, offering a retirement plan may be a way to attract and keep more highly qualified employees.

Business owners can’t start a retirement plan just for themselves; it must be offered to all employees who meet certain minimum thresholds. When owners are deciding what plan to adopt, they want to carefully consider how much they want to contribute for themselves and also how much they would like to contribute on behalf of their employees. Contributions for employees are a tax-deductible expense. Owners also want to consider whether they want to enable employees to defer a portion of their own salary into the retirement plan.

Most small-business retirement plans fall into one of the following three buckets: Individual retirement accounts (IRAs), defined-contribution plans, or defined-benefit plans. A plan document is required describing how the plan will function and whom it will cover. Since there are rules prohibiting plans from favoring highly compensated employees, practice owners will also want to consult with an adviser to review the plan.

IRA-based retirement plans are the easiest plans to set up and the least costly to administer. For a SEP-IRA plan, only the employer makes contributions to the plan. The plan must be offered to all employees who are at least 21 years old and meet a very minimal work history. Contributions can be up to 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of compensation, not to exceed $53,000 in 2015, and generally needs to be a consistent percentage for all employees. For SEP-IRA plans, employees set up their own IRA account and are responsible for investing the funds the employer deposits in the account.

A simple IRA allows employees to automatically defer a portion of their salary to make contributions to their IRA account. Simple IRAs allow all employees, including owners, to set aside up to $12,500 of compensation in 2015 for retirement. An additional $3,000 in catch-up contributions can be made by employees over age 50. Like the SEP-IRA, the simple IRA requires employees to set up their own IRA account, into which the employer makes deposits. Employees are responsible for investing the funds. Simple IRAs require employers to match employee contributions up to 3{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of compensation (can be reduced to 1{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for two of five years) or contribute 2{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of each eligible employee’s compensation (whether the employee makes a contribution or not).

Many small businesses and physician practices with more than a few full-time employees will choose some variation of defined-contribution plan such as 401(k) or profit-sharing plan. These plans allow owners to set aside a relatively large amount for retirement while also allowing employees to make contributions. These plans do not promise a specific benefit in retirement, but the employer is taking some responsibility for selecting appropriate investments and potentially for providing employees with investment education. Typically, the employer is the ‘fiduciary’ of the plan, and there is a requirement for annual reporting to the Department of Labor. These plans must generally be offered to all employees who are at least 21 and who worked at least 1,000 hours in the previous year.

A 401(k) plan allows employees (including owners) to contribute up to $18,000 of their salary toward retirement in 2015. Employees over age 50 can make additional ‘catch-up’ contributions of $6,000. Employers can make additional contributions or matching contributions to the plan, but must treat all employees in a consistent way based on the plan document. There are complicated rules to ensure that plans meet non-discrimination testing to make sure that they are not favoring key employees.

Safe Harbor 401(k) plans are a favorite of smaller businesses and physician practices because they reduce issues with IRS non-discrimination testing. To be a Safe Harbor 401(k) plan, employers need to meet minimum contribution, vesting, and notice requirements. Employers will generally choose to either match contributions of employees of at least 4{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of salary or make a 3{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} contribution of salary for each employee (whether the employee makes a contribution or not). In either case, the contribution immediately vests.

Profit-sharing plans can be very attractive to physician practices because they allow contributions to reach $53,000 in 2015. Often, profit-sharing plans are combined with 401(k) plans, but they don’t have to be. There are also ‘safe harbor’ provisions for profit-sharing plans. These provisions, such as uniform percentage pay method, may result in relatively large required payments to employees. Non-safe-harbor methods, such as an age-weighted or new comparability method, may be more financially advantageous for small businesses and physician practices. Employers may choose to make profit-sharing contributions to employees vest over several years.

Individual practitioners without employees other than a spouse can choose a solo 401(k), which is a very simple, easy way to defer up to $53,000 of income for retirement.

Recent rule changes have provided greater transparency of costs in 401(k) plans and will help business owners make sure they understand all the costs involved with maintaining a retirement plan for themselves and their employees.

Defined-benefit plans promise a specific benefit at retirement and are generally not very popular with small businesses. However, with the right circumstances, defined-benefit plans can be very advantageous to business owners because they may allow hundreds of thousands of dollars to be set aside for retirement each year.  Older principals in a medical practice with a younger workforce may want to evaluate defined-benefit plans.

It is most common for defined-benefit plans to promise a benefit that is a combination of factors such as salary, service, and years to retirement. Annual allowable contributions for each employee must be calculated by an actuary. The maximum benefit allowed by the government is 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of compensation (averaged over 3 years) indexed to a maximum benefit of $210,000 in 2015. The plans may permit payouts in the form of a lump sum rather than a monthly or annual benefit.

Retirement plans are an important way for physician practices to help owners and employees save money for retirement. There are many options to consider, and practices are encouraged to seek out a retirement-plan consultant for advice.