Introduction
A properly designed retirement program can increase a physician's retirement plan benefit by more than $80,000 while decreasing the practice's contribution to the non-physician and even non-owner physician employees by $20,000. If this $100,000 plus difference catches your attention, read the rest of the article! Our examples illustrate how similarly situated physicians can have dramatically different retirement plan benefits.
Examples
Dr. John is a 55 year old physician who makes approximately $350,000 and is the sole owner of his practice. Dr. John has one 36 year old physician working for him and has 4 staff employees. In 2007, Dr. John had a commonly-used profit sharing plan with a 401(k) feature for his practice. He wanted to put as much money away as allowed by law on a pre-tax basis for his retirement. (For 2007, the defined contribution limit was $45,000.) For Dr. John to receive the maximum personal benefit under the profit sharing plan in 2007, Dr. John’s practice had to make a total employer contribution of $55,883. The portion of the employer contribution Dr. John received was $29,500, which was equal to roughly 53% of the total employer contribution. (Dr. John could have contributed another $20,500 as a 401(k) contribution, consisting of a $5,000 catch-up contribution that is permitted because he was over 50 in 2007.) [1]
Dr. Jane is also a 55 year old physician who makes approximately $350,000 and is the sole owner of her practice. Dr. Jane also has one 36 year old physician working for her and 4 staff employees. Like Dr. John, Dr. Jane wanted to put as much money away as allowed by law on a pre-tax basis for her retirement in 2007. However, unlike Dr. John, Dr. Jane’s share of her physician group’s total contribution to the retirement plan was 87.8%! Dr. Jane was able to accomplish this by adopting a special kind of profit sharing plan with a 401(k) feature and by adopting a second kind of retirement plan called a “cash balance plan”. Contributions to the two plans for all employees totaled $141,168, of which $124,000 was allocated to Dr. Jane’s accounts under the two plans. (Dr. Jane also could have contributed another $20,500 as a 401(k) contribution, consisting of a $5,000 catch-up contribution that is permitted because she was over 50 in 2007).
Summary of Examples
- In 2007, Dr. John’s practice contributed $55,883 to its retirement plan where Dr. John received a personal benefit of only $29,500, i.e., 53% of the practice’s total contribution.
- In 2007, Dr. Jane’s practice contributed $141,168 to its two retirement plans where Dr. Jane received $124,000, e.g., (87.8% of the practice’s total contribution.
- Dr. Jane’s practice contributed a total of $85,285 more to its two retirement plans, and Dr. Jane received $94,500 more contributions to her retirement plan accounts.
[1] All examples were based on actuarial runs performed by Mark K. Dunbar and Molly Balkey of db&z, Inc.
HOW IS THIS POSSIBLE
Many small employers, specifically medical practices, often times have basic retirement plans without understanding the flexibility that can be achieved within their retirement programs. Many employers (similar to Dr. John) provide a straight level of benefit to all employees. However, it is not necessary for Dr. John’s practice to provide the same percentage of contributions for every participant.
Effective retirement program planning takes into account several factors in determining the appropriate retirement vehicle for a practice. Two of these factors are: (1) the amount the owners want to contribute on behalf certain groups of individuals and (2) the amount the owners wish to contribute for themselves.
In very general terms, many physician groups may take advantage of a two qualified retirement plan system: (1) a profit sharing plan with a 401(k) feature and a "new comparability" or "cross-tested" component to their defined contribution plan and (2) a “cash balance” defined benefit plan. Under the first type of plan, employers can group certain employees and provide different levels of contributions to different groups of employees.
Under the second type of plan, i.e., the cash balance plan, physicians may receive the benefit of contributions in excess of $100,000 each. In this situation, certain employees will participate in the defined benefit plan while others will participate only in the defined contribution plan. The amount of contribution that can be made will depend upon the number, salaries, and ages of the employees and physicians. Using the two qualified retirement plan program can help the owners seriously increase contributions made on their behalf while still passing nondiscrimination tests.
In addition to increased flexibility, the use of both of these types of retirement plans may ensure that a higher percentage of employer contributions are made for owner physicians and, thus, make the program more efficient.
The following chart illustrates how Dr. Jane’s retirement plans would work with a new comparability defined contribution plan (“DC Plan”) and a cash balance defined benefit plan (“CB Plan”):
|
Name
|
Age
|
Compensation
|
DC Plan
|
CB PLan
|
Total Employer Contribution
|
% of Total Employer Contribution
|
|
Dr. Jane
|
55
|
$225,000[1]
|
$29,500
|
$94,500
|
$124,000
|
87.84%
|
|
Other Doctor
|
36
|
$150,000
|
$10,725
|
$0
|
$10,725
|
7.60%
|
|
Staff 1
|
52
|
$25,274
|
$1,372
|
$505
|
$1,887
|
1.33%
|
|
Staff 2
|
30
|
$20,271
|
$1,101
|
$405
|
$1,506
|
1.07%
|
|
Staff 3
|
30
|
$21,980
|
$1,194
|
$440
|
$1,634
|
1.16%
|
|
Staff 4
|
32
|
$19,193
|
$1,042
|
$384
|
$1,426
|
1.01%
|
As mentioned above, the demographics of the physician group can impact the numbers, but many, if not most physician groups, can improve their retirement plan benefits through effective planning and design. A qualified actuary must review the employer's census and an attorney should be retained to draft, review and update the retirement plans themselves. There are numerous federal tax and ERISA requirements that must be satisfied to effectively plan your retirement program, and only experienced employee benefit attorneys can ensure that an employer is meeting all of the requirements.
Tucker Arensberg, P.C. has the capability to design and draft these types of programs for physician practices and any employers at reasonable costs. Please contact Jonathan Grossman at 412-594-5574 for more information regarding this planning idea.
[1] The maximum compensation that retirement plans may take into account when determining a participant’s benefit was $225,000 for 2007. The limit for 2008 is $230,000.
