14 Dec 2013
Model #1 - The Younger Doctor: §401(k) Safe Harbor Plan. This extremely popular plan allows the doctor to make annual contributions of $51,000 ($56,500 if age 50) at a total staff contribution cost of about 11 percent of participating staff compensation. Part-time+ and full-time staff enter the plan after working a year, but vest in the majority of their benefit at 20 percent per year over six years. This means short-term staff ultimately cost little or nothing in contributions. The key is an annual, mandatory, fully-vested three percent contribution for all plan participants....it’s this contribution that permits the doctor to make “deferrals” (free contributions) up to $17,500 ($23,000 if age 50).
Model #2 - The Older Doctor: §401(k) Safe Harbor Profit Sharing Plan With Cross-tested Allocations. If the doctor is older than the average staff member, we suggest the safe harbor §401(k) plan described above with one significant adjustment all contributions are divided up on a “cross-tested” basis. This permits the doctor to reach the same maximum contribution of $51,000 ($56,500 if age 50) at a substantial savings in staff contribution costs.... sometimes as low as five percent of eligible staff compensation. The plan otherwise works the same as the plan described in Model #1 above. Annual administration costs will be slightly higher but the savings in reduced staff contributions should cover any increases many times over.
SPECIAL FEATURE FOR ADDED RETIREMENT SAVINGS -- the doctor wishing to contribute a bit more towards retirement should consider hiring their spouse so they too become a participant in the plan. The doctor pays the spouse approximately $25,000, $17,000 to $23,000 of which can be “deferred” directly into the plan on a pre-tax basis! The spouse takes home little, but rather directs their entire paycheck into the retirement plan where it stacks on top of the contribution already made by the doctor. If course, the spouse must actually work for the practice, providing legitimate and valuable services.
Model #3 - The Older, Highly Compensated Doctor: §401(k) Profit Sharing Plan and Defined Benefit Plan. For older doctors wishing to shelter substantially more than $56,500 under Models #1 and #2, we suggest the Model #1 plan as a base plan with a “defined benefit” plan stacked on top. This works best where the practice employs more than six staff who are, on average, younger than the doctor and where the doctor has considerable compensation to shelter from current taxation. The base safe harbor §401(k) plan continues to provide benefits to staff and spouse. The defined benefit plan, on the other hand, is set up as a carve-out plan covering only the doctor and certain younger staff. Depending on the number of staff, their ages, and other factors, the doctor may be able to contribute up to $180,000 annually under this approach. Staff contribution costs, although varying widely from practice-to-practice, will be higher than Models #1 and #2, as will annual administration costs. However, in the right situation the defined benefit “stacked plan” approach offers a very attractive tax planning opportunity.
Do not wait too long to review and evaluate your current retirement program. If you act quickly, some plans can be revised for the current plan year, allowing you to take advantage of the design that works best for you now. Our fee for designing and creating a safe harbor §401(k) plan (restated or new) and administrative documents ranges from $975 to $1,400. Costs of setting up the defined benefit component of Model #3 will be higher.
Please contact B. Kevin Burgess for further information.