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Issue #15 - 3.13.07
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Employee Retirement Plans Offer Big Benefit to Dentists
Too costly? Too cumbersome? Too big to manage? That pretty much sums up how many dentists view employee retirement plans. The idea is often relegated to the “sure it would be nice” pile of benefits that dentists would like to offer but seldom do for fear of the perceived costs and complexities that have been associated with employee retirement plans.
However, Tom Burns, a senior consultant at San Diego Pension Consultants, says that over the last five to 10 years, the expense associated with these plans has decreased significantly while administration and tax benefits have improved considerably, making it a welcome tax savings for the dentist as well as a valuable team recruitment and retention tool that also provides.
While doctors should start planning for their own retirements as soon as they begin practicing and may save sporadically, the reality is that many dentists are in their 40s before they begin to think seriously about retirement. They reach a point in their careers in which they need to accelerate their personal retirement savings as well as ease the tax pressures on the practice. Employee retirement plans can address both issues.
Mr. Burns notes that there are a number of plans available. “When we work with clients to determine that best type of retirement plan, we analyze options available to come up with an overall plan that provides substantial tax deduction and retirement savings for the doctor, as well as offers a nice benefit to the employees who are loyal and remain with the practice over time.”
In addition, the tax savings should be high enough to offset the cost of implementing the plan itself. “If it costs $2,000 a year to establish and run an employee retirement plan in the practice, but we can save the dentist $20,000 a year in taxes, that’s a good business decision and that’s the goal of these plans.”
Mr. Burns recommends that doctors work with their CPA or financial advisor and explore qualified retirement plans, including profit sharing and 401k plans. Dentists haven’t given serious consideration to these retirement plan options because of the longstanding perception that they carry high costs and numerous administrative headaches.
Consequently, few practices offer the benefit. In reality, the cost of running such plans has come down substantially in recent years largely because of the advances in the use of technology and online transactions. “You can set up a plan for a small five-person practice that offers a very good retirement benefit and tax deduction and is very reasonable to implement and maintain,” emphasizes Mr. Burns.
Currently, a combined profit sharing 401k plan allows each person in the practice to contribute up to $45,000 per year. Those age 50 or over can contribute up to $50,000. “The 401k limit alone is $15,500 per person and $20,500 for those 50 or over. Above that, the practice has the option to make a profit sharing contribution, which would allow the plan to go to the higher limit of $45-$50,000.” explains Mr. Burns.
Additionally, dental practices that offer profit sharing are allowed to set classifications of employees and provide different levels of profit sharing among the classifications. “That allows dentists to optimize their contribution and keep employee costs to a minimum.”
Mr. Burns notes that profit sharing plans typically are on a vesting schedule, which is normally 20% a year for six years after the employee’s second year with the practice. Therefore, if a dentist makes a profit sharing contribution to a staff member’s plan for three years and the employee leaves, they take 60% or only what they have vested. “The idea with profit sharing is retention. It’s the golden handcuff. Plans that have a vesting schedule enable the practices to attract and retain the better employees.”
The cost of establishing employee retirement plans typically involves two fees, a set-up fee and an ongoing administrative fee. “Depending on where a practice is located, to set up the plan for a five-to10 person practice will cost about $1,000-$1500. Depending on the type of plan, ongoing fees for administration would be in the $1,000-$2,000 range annually for the entire group,” explains Mr. Burns. However, the cost of administering the plan is tax deductible and the Internal Revenue Service provides a tax credit of $500 each year for the first three years. “When you look at it, the costs are minimal compared to the potential for significant return for both the dentist and the employees,” notes Mr. Burns.
For further information, contact Mr. Burns at tomburns@sdpension.com
Sally McKenzie is CEO of The McKenzie Company, Inc. a nationwide dental management, practice development and educational consulting firm. Working “on-site” with dentists since 1980, McKenzie Management provides knowledge, guidance and personalized systems that have propelled thousands of general and specialty practices to realize their potential. Sally can be reached directly at 1.877.777.6151
Interested in speaking to Sally McKenzie about your management concerns? Email her at Sally@thedentistsnetwork.net
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