Picking the Right Retirement Plan for Your Medical Practice

Picking the Right Retirement Plan for Your Medical Practice

Not all retirement plans are created equal. Understanding the differences will help you identify the right retirement plan for your practice.

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Here are the two types of retirement plans:

Defined contribution plans. This type of plan includes the 401K and profit-sharing plan, which are the most commonly used today.

Defined contribution simply means you put a defined or set amount or percentage into the plan and the benefit will vary depending on the rate of return.

The maximum annual contribution an employee can receive is the lesser of 100 percent of salary or $52,000 for 2014. An additional $5,500 can be contributed by the participant as a catch-up contribution if they are age 50 or older.

The maximum deductible employer contribution is 25 percent of compensation. These plans are usually invested in market-based assets and life insurance can be made part of them as well.

• Profit-sharing plans allow employer contributions to be discretionary and have relatively low administrative costs. There is a predetermined formula that allocates the contribution among participants. Profit-sharing plans are good for new companies or companies that have revenues that fluctuate from year to year.

• The other most common defined contribution plan is the 401K plan. These plans can allow for salary deferrals from employees, employer matching contributions, and employee profit-sharing contributions. In addition, many special rules apply to these plans that usually require a third-party administrator to make sure the plan meets certain criteria and provisions developed by the IRS. Good candidates for these plans are employers that want to give their employees the opportunity to save and provide employer contributions only for those employees electing to contribute. These plans are also good for owners that want more of the contributions to go towards the owner or other higher compensated employees.

Defined benefit plans. These plans specify or define the benefits each employee receives at retirement. The two most common are the defined-benefit pension plan and the cash-balance pension plan. Most plans state the benefit as a percentage of preretirement salary, and the benefits are payable for life. The contributions required are determined by the plan’s actuary each year and vary depending on what is needed to pay promised benefits. The limits for 2014 are based on a maximum annual benefit which is the lesser of 100 percent of the highest three consecutive year average compensation or $210,000 per year for life. These plans are often invested in a combination of market-based assets, life insurance contracts, and annuities.

• Defined benefit pension plans have become less popular in recent decades. The employer provides contributions each year to all eligible employees, may experience lower returns causing plans to be underfunded, and adequate retirement income is placed solely on the employer. These plans are good for  older physician business owners who need to save larger amounts than can be contributed to a defined-contribution plan.

• A cash-balance plan looks similar to the defined contribution plan and costs less than the defined benefit pension plan. Even though the contributions are mandatory they allow for a higher contribution than the 401K or profit-sharing plan. These plans can be stacked on top of 401K and profit sharing plans to allow a higher deduction. Good candidates for these plans are smaller practices (fewer than 20 employees) with high, stable profits; and an older owner(s) with younger employees who desires a larger tax deduction than a defined contribution plan.

Summary. There are many types of plans that physician owners can choose from so it is important to discuss which plan is most suitable to you. The number and age of owners and employees in your practice, the amount of tax deduction desired, the costs of the plan, the flexibility of contributions, and employees' ability to contribute to the plan all play a role.

Speaking with a qualified plan specialist and a CPA can help you design a plan or combination of plans to give you the maximum or desired contribution you are looking for.


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