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Money Matters By John S. Grande, CFP, Traudy F. Grande, CFP, and John J. Grande, CFP
Many retirement plan alternatives are available to help physicians and their eligible employees save for retirement.
For most business owners, a Simplified Employee Pension Individual Retirement Account (SEP IRA) was once the most cost-effective choice. Then, the Savings Incentive Match Plan for Employees (SIMPLE IRA) became a viable alternative.
Today, physicians may find that a defined benefit or 401(k) plan best suits their needs. To make an informed decision on which plan is right for a physician’s practice and employees, review the differences carefully before choosing.
This plan is flexible, easy to set up, and has low administrative costs. An employer signs a plan adoption agreement, and IRAs are set up for each eligible employee. When choosing this plan, physicians should know that it does not allow employees to save through payroll deductions, and contributions are immediately 100% vested.
The maximum an employer can contribute each year is 25% of an employee’s eligible compensation, up to a maximum of $265,000 for 2016. However, the contribution for any individual cannot exceed $53,000 in 2016.
Employer contributions are discretionary and may vary from year to year. With this plan, the same formula must be used to calculate the contribution amount for all eligible employees, including any owners. Eligible employees include those who are age 21 and older and those employed (both part time and full time) for three of the past 5 years.
If a physician wants a plan that encourages employees to save for retirement, a SIMPLE IRA might be appropriate. To be eligible for this plan, physicians must have 100 or fewer eligible employees who earned $5,000 or more in compensation in the preceding year and have no other employer-sponsored retirement plans to which contributions were made or accrued during that calendar year.
There are no annual IRS fillings or complex paperwork, and employer contributions are tax deductible for the practice. The plan encourages employees to save for retirement through payroll deductions and contributions are immediately 100% vested.
The maximum salary deferral limit to a SIMPLE IRA plan cannot exceed $12,500 for 2016. If an employee is age 50 or older before Dec. 31, then an additional catch-up contribution of $3,000 is permitted.
Each year the physician must decide to do either a matching contribution (the lesser of the employee’s salary deferral or 3% of the employee’s compensation) or non-matching contribution of 2% of an employee’s compensation (limited to $265,000 for 2016). All participants in the plan must be notified of the physician’s decision.
Defined benefit pension plan
This plan helps build savings quickly. It produces a much larger tax-deductible contribution for the practice than a defined contribution plan. However, annual employer contributions are mandatory since each participant is promised a monthly benefit at retirement age.
Since this plan is more complex to administer, the services of an enrolled actuary are required. All plan assets must be held in a pooled account, and the employees cannot direct their investments.
Certain factors affect a physician’s contribution for a plan, such as current value of the plan assets, the ages of employees, date of hire, and compensation. A participating employee–with a large projected benefit and a few years until retirement age–generates a large contribution because there is little time to accumulate the necessary value to produce the stated benefit at retirement.
The maximum annual benefit at retirement is the lesser of 100% of the employee’s compensation or $210,000 per year in 2016 (indexed for inflation).
This plan may be right for a practice if a physician wants to motivate employees to save towards retirement and give them a way to share in the firm’s profitability. 401(k) plans are best suited for practices seeking flexible contribution methods.
When choosing this plan type, physicians show know that the employee and employer have the ability to make contributions. The maximum salary deferral limit for a 401(k) plan is $18,000 for 2016.
If an employee is age 50 or older before Dec. 31, then an additional catch-up contribution of $6,000 is permitted. The maximum amount a physician can contribute is 25% of the eligible employee’s total compensation (capped at $265,000 for 2016).
Individual allocations for each employee cannot exceed the lesser of 100% of compensation or $53,000 in 2016. The allocation of employer profit-sharing contributions can be skewed to favor older employees, if using age-weighted and new comparability features. Generally, IRS Forms 5500 and 5500-EZ (along with applicable schedules) must be filed each year.
This article was written by Wells Fargo Advisors and provided courtesy of John J., John S, and Traudy F. Grande, CFPs, editors of the Money Matters column. They are owners and principals of Grande Financial Services Inc., Oakhurst, NJ, (www.grandefs.com) and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise doctors across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at firstname.lastname@example.org or call 800/722-1258.
The views expressed in the Money Matters column are the views of Grande Financial Services, and should not be considered as investment advice. Grande Financial Services does not provide tax or legal advice. All information is believed to be from reliable sources; however, Grande Financial Services make no representation as to its completeness or accuracy. Past performance does not guarantee future results. Investing involves risk including the potential loss of principal.
Wells Fargo Advisors and its Financial Advisors provide non-fiduciary services only. They do not provide investment advice [as defined under the Employee Retirement Income Security Act of 1974 as amended (“ERISA”)], have any discretionary authority with respect to the plan, make any investment or other decisions on behalf of the plan, or otherwise take any action that would make them fiduciaries to the plan under ERISA.
Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.
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