Barry Oliver, CPA, PFS

	Retirement statistics are dismal: fewer than half of Americans have calculated what they need to retire. Yet the average American spends more than 20 years in actual retirement. The personal savings rate is less than 5%. Most individuals do not save or accumulate money in a personal account. 

	A retirement plan offered at the workplace can help fill the gap or replace it completely. Which plan is right for you and your employees?  Many factors must be considered. Is the main purpose to attract and retain quality staff?  Are you looking for a tax deduction? Do you want the plan to be employer-funded only or will the staff be allowed to contribute through salary deferrals? 

	Smaller practices may want to first consider a Simplified Employee Plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE), both of which are Individual Retirement Accounts (IRA). They are relatively easy to establish and maintain, but eligibility and funding options are limited. A SEP offers a maximum eligibility of 3 years of service out of the previous 5 years. A year of service is credited to any employee that performs any service during the year, regardless of the number of hours worked. If you have part-time or seasonal employees who return each year, the plan could grow faster than expected. Eligibility requirements are minimal.

	Funding the plan is optional each year. When you contribute you must give the staff the same level contribution as you give the owner. If you have many eligible employees, this plan quickly becomes too expensive in staff contributions.

	There are many situations where a SEP plan works well: Offices with high staff turnover or recent acquisition of a practice/office are good examples. If you find yourself in a situation where a limited number of employees are eligible, this may be the plan for you.

	What if your employees want to be more involved and contribute from their own wages to a retirement plan?  A SEP does not allow for employee contributions, but a SIMPLE does. However, the SIMPLE’s eligibility requirements are more restrictive, as is the funding.

	The SIMPLE’s maximum eligibility is 2 years of service.  A year of service is credited for anyone who earned more than $5,000 during the year. Employees may contribute their own money to a SIMPLE on a pre-tax basis through payroll deductions up to a maximum set by the Internal Revenue Service each year. (In 2013 the limits are $12,000 or $14,500 for those age 50 or older.) These salary deferral options are available to the eligible owners and staff. 

	The employer must commit to annual funding in a SIMPLE either as a match or employer contribution. If the funding is an employer contribution, all eligible participants must receive 2% of their gross wages each year.  If the match is chosen, then anyone that deferred must receive a match of up to 3% of their wages, but not more than the employee deferral. Hence, if the employee chooses not to defer a portion of their own wages, then there is no match from the practice.

	Why look at the SEP or SIMPLE options first? Because the plans are easy to set up, participants control their own accounts and there are no added tax filings for these plans.

	There are comparable plans to a SEP and SIMPLE in the qualified plan arena: Profit Sharing (PS) and 401(k) feature, respectively.  The PS plan is similar to a SEP, in that it is funded entirely by the employer. Employee eligibility is based on hours rather than wages earned (typically set at 1,000 hours per year).  The PS plan’s eligibility can be set to a maximum of 2 years of service, unless a 401(k) feature is added in which case the eligibility is limited to 1 year of service.

	As with a SEP, PS funding is optional each year.  In addition, certain plan designs, called comparability or cross-tested plans, allow you to contribute different amounts to different groups of participants. For example, owners and non-owner, and fund owners at 20% of their salaries and non-owners at 5%. The effectiveness of this plan design is created by a difference in the average age between owners and no owners.

	Just like a SEP, the PS alone does not allow for staff contributions. By adding a 401(k) feature, however, an eligible employee can redirect a portion of his or her wages into the retirement plan through payroll deductions. Each participant decides how much to defer from his or her salary up to a maximum amount established by the IRS each year.  (The 2013 limits are $17,500 or $23,000 for those age 50 or older.) The 401(k) feature can be designed to allow participants to defer on either a pre-tax basis for a traditional 401(k) or on an after-tax basis for a Roth 401[k].

	Owners and/or other highly paid employees may be limited in their 401(k) deferral opportunities, because the amount the owner may defer depends on the amount that employees defer.

	It is possible to avoid this testing limitation, but doing so requires an annual funding commitment very similar to the SIMPLE IRA: match or employer contribution. These options are referred to as a safe harbor 401(k). Many practices have used the safe harbor 401(k) to allow for maximum funding by the doctor.  An owner looking to maximize his or her annual contributions may establish a PS with a 401(k) feature and fund up to the maximum set by the IRS each year ($51,000 or $56,600 for those age 50 or older for 2013).

	Higher-earning practitioners may want to consider a Defined Benefit Plan (DB).  A DB sets a pension level at retirement age and then requires an actuary to calculate what you must put in today to have enough in the future to pay out the promised pension.  In essence it starts at the finish line and works backward to determine today’s annual required contribution.

	The DB plan allows substantially higher annual contributions than the current $51,000 maximum permitted under a PS 401(k) plan.  This plan design typically works best if you are 45 or older and your staff is further from retirement than you.  The IRS sets an annual compensation limit, which for 2013 is $255,000.  Anything above this threshold is ignored for retirement plan testing purposes.  Staff costs can vary but typically range from 7.5% to 10% of wages in an optimum situation.

	Unlike the SEP and SIMPLE, qualified plans have certain accounting, regulatory and third-party oversight requirements that must be satisfied. However, the benefits may far outweigh these costs. It’s important to understand the level of responsibility you assume as the plan sponsor and/or plan trustee.

	Saving for your future is an important decision. Finding the vehicle that best serves your needs is critical, but you must first perform due diligence to make sure the plan fits your needs. The best retirement program will offer attractive features, prudent investments and overall cost-efficient administration.  Most importantly it will help secure your financial future. 

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A carefully selected retirement plan can provide financial security for owners and employees while lowering a practice’s tax burdens

Which retirement plan is right for your practice?

Q: I plan to add some bonds or other fixed-income assets to my personal investment portfolio. Would municipal bonds be a good idea?

 Municipal bonds can be issued in any of the 50 states by a number of entities, including territories, subdivisions, counties, cities, towns, school districts, and certain federally sponsored agencies, such as local housing authorities. Historically, the interest paid on these bonds has been exempt from federal income taxes and is generally exempt from state and local taxes in the state of issuance. Because municipal bonds are tax-exempt, investors should only hold them in taxable accounts. Income level and tax bracket are the primary factors to consider when deciding whether taxable securities or tax-exempt municipal bonds will be suitable for your portfolio. If you are in a high tax bracket, municipal bonds might fit well into your portfolio because the interest paid on most municipal bonds is tax exempt. Municipal bonds are priced daily on the open market, so yields change daily. When considering purchasing municipal bonds, you will need to know your marginal federal income tax bracket, so you can determine the after-tax yield for both taxable and non-taxable bond purchases. 

I plan to add some bonds or other fixed-income assets to my personal investment portfolio. Would municipal bonds be a good idea?

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Q: A colleague told me I can give a certain amount of money, tax-free, to my kids each year. Is that true? Will it lower my taxes?

The annual federal gift tax exclusion allows you to give $13,000 in 2009 (up from $12,000 in 2008) per recipient to an unlimited number of recipients-including children-without incurring the federal gift tax. This exclusion allows you to distribute your property tax-free and potentially put your estate into a lower tax bracket. The exclusion applies only to gifts of a present interest in property. For example, giving your daughter cash today would qualify, but giving her the right to have your house in three years would not. If you're married, gift-splitting can double the annual gift tax exclusion: You and your spouse can each give $13,000 to a child. To qualify, both you and your spouse must be U.S. citizens making the gift jointly. There is no income tax deduction for gifts made, and no income is recognized by the recipient. Because the income tax rate schedules are graduated, your total family federal and state income tax burden may be reduced if income-producing assets are distributed among several family members, rather than being held in your hands only. A word of caution: Your potential federal income tax savings from transferring income-producing property to your children may be reduced by the so-called "kiddie" tax. For 2009 taxpayers, unearned income (like interest and dividends) above $1,900 may be taxed at the parents' income tax rate. The "kiddie" tax rules apply to those under age 18, those age 18 whose earned income doesn't exceed one-half of their support, and those ages 19 to 23 who are full-time students and whose earned income doesn't exceed one-half of their support. 

A colleague told me I can give a certain amount of money, tax-free, to my kids each year. Is that true? Will it lower my taxes?

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Q: Our group practice has a 401(k) plan. I plan to defer the maximum $16,500 to the plan from my salary. I also do some medical-legal consulting on the side. Can I also establish a 401(k) plan for that business and fund another $16,500?

 No. Deferrals into a 401(k) plan are restricted to the annual limit ($16,500 for 2009, with an additional $5,500 if you are 50 years or older) per individual. Remember that a 401(k) is only a feature of a profit-sharing plan. For most doctors, contributions to a profit-sharing plan consist of two parts-the 401(k) deferral and the profit-sharing amount. Unlike the 401(k) deferral, there is no such restriction for the profit-sharing portion from more than one business. In your case, as long as you are not a 50 percent or greater owner of your group practice, you can fund a profit-sharing plan for your medical-legal consulting business up to the legal amount allowed, in addition to your group 401(k) plan. To keep things simple, you might want to establish a Simplified Employee Pension IRA, which will allow for the same retirement plan contribution. Both the SEP–IRA and the profit-sharing plan allow for discretionary funding ranging from 0 to 25 percent of salary or net consulting income, up to a maximum of $49,000. 

Our group practice has a 401(k) plan. I plan to defer the maximum $16,500 to the plan from my salary. I also do some medical-legal consulting on the side. Can I also establish a 401(k) plan for that business and fund another $16,500?

Author | Barry Oliver, CPA, PFS

Articles

Which retirement plan is right for your practice?

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