If you own a small business (such as a medical practice), many retirement plan alternatives are available to assist you and your eligible employees with retirement planning. To make an informed decision on which plan is right for your practice, review the differences carefully before choosing.
Take-home message: When choosing a retirement plan that is right for your practice, conduct a thorough review of available options.
Money Matters By John J., John S., Traudy F. Grande, CFPs and the Wells Fargo Advisors
If you own a small business (such as a medical practice), many retirement plan alternatives are available to assist you and your eligible employees with retirement planning.
For most closely held 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.
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Today, you may find that a defined benefit or 401(k) plan best suits most needs. To make an informed decision on which plan is right for your practice, review the differences carefully before choosing.
Simplified Employee Pension Individual Retirement Account (SEP IRA)
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, keep in mind 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 2015. However, the contribution for any individual cannot exceed $53,000 in 2015.
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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 owners. Eligible employees include those who are age 21 and older and those employed (both part time and full time) for 3 of the past 5 years.
The SIMPLE plan
Savings Incentive Match Plan for Employees (SIMPLE)
If you want a plan that encourages employees to save for retirement, a SIMPLE IRA might be the appropriate option. In order to select this plan, a practice 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 your practice. The plan encourages employees to save for retirement through payroll deductions; contributions are immediately 100% vested.
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The maximum salary deferral limit to a SIMPLE IRA plan cannot exceed $12,500 for 2015. 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 employer 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 2015). All participants in the plan must be notified of the employer’s decision.
Defined benefit pension plan
This type of 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 pool, and employees cannot direct their investments.
Certain factors affect an employer’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 only a few years until normal retirement age generates a large contribution because there is little time to accumulate the necessary value. The maximum annual benefit at retirement is the lesser of 100% of the employee’s compensation or $210,000 per year in 2015 (indexed for inflation).
This plan may be right for your practice if you want to motivate your employees to save toward retirement and give them a way to share in the practice’s profitability. 401(k) plans are best suited for companies seeking flexible contribution methods.
When choosing this plan type, keep in mind 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 2015. If an employee is age 50 or older before Dec. 31, then an additional catch-up contribution of $6,000 is permitted.
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The maximum amount the employer can contribute is 25% of the eligible employee’s total compensation (capped at $265,000 for 2015). Individual allocations for each employee cannot exceed the lesser of 100% of compensation or $53,000 in 2015.
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.
Once you have reviewed the goals and objectives of the practice, physicians should check with their financial advisors to evaluate the best retirement plan option for their financial situation.
John J., John S., and Traudy F. Grande, CFPs, are the editors of the Money Matters column. They are owners and principals of Grande Financial Services Inc. and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise physicians across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at 800/722-1258, online at www.grandefs.com or by e-mail at email@example.com.
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.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE.
Wells Fargo Advisors Financial Network, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company Investment products and services are offered through Wells Fargo Advisors Financial Network.