Increase your retirement savings while reducing your taxes

November 5, 2010

A cash balance pension plan and other forms of defined benefit pension plans can be great ways for practices that can afford them to dramatically increase retirement savings while reducing taxes.

PENSION ACT INCREASES PLAN POPULARITY

Although still rarely used by physicians, defined benefit plans slowly have become more popular since the enactment of the Pension Protection Act (PPA) of 2006. The PPA permits small businesses to have cash balance plans and allows medical practices to sponsor both 401(k) profit-sharing and defined benefit plans to take advantage of the unique characteristics of each and benefit from the combination of the 2. The PPA explained how to cross-test the benefits of both types of plans and weight the contributions more heavily toward the doctor-owners if the demographics are suitable for this plan design.

IMPORTANT CONSIDERATIONS

One thing to know when deciding whether to pursue a defined benefit plan for your practice is that such plans work best when the average age of physicians in the practice is at least 10 years more than the average age of staff members in the practice. This is because an actuary determines contributions based on the age and compensation of each plan participant. The law permits greater contributions for older workers because fewer years exist for their plan funds to grow and fewer contributions are anticipated until they reach retirement age. When the doctors are older than the staff members, the lion's share of each contribution dollar funded benefits the physicians.

Another consideration is that defined benefit plans require the services of an actuary in addition to a plan administrator. Instead of paying $2,000 to $5,000 for annual plan administration, you likely will spend $5,000 to $6,000 to operate the plan. These higher costs must be factored into your decision but usually are minimal relative to the benefits achieved. If you believe you are able to contribute at least $100,000 per year for yourself, then have an actuarial study performed to compare the defined benefit plan structure with that of your current plan to help you assess whether a change is warranted.