Finding More Money

Grab new pension plan breaks

Almost every doctor can take advantage of the new rules. But you need to act fast.

By Brad Burg

The holidays are still more than a month away, but Santa has already arrived. He brought with him shiny new pension goodies, thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001. Whether you've been bad or good, and regardless of your age, he's likely to have something for you. Check these possibilities:

• If you're young, don't have high earnings, and maybe don't have a pension plan, you might be able to make more use of the best retirement-plan deal of all—absolutely tax-free savings—thanks to new higher limits on Roth IRA contributions.

• If you're in midcareer, you can now put away more tax-deferred savings for yourself, reduce the retirement plan contributions you have to make for staff, or both.

• If you're nearing retirement, you now have more ways to stockpile as much as possible in a hurry.

Some of these options require action by Dec. 1 if you're to take advantage of them for next year, however, so you'll have to move fast. Here's a look at the new opportunities—and at what you need to do now to grab them.

Make the most of new limits on an old reliable

Whether you own a practice or are an employee, higher allowable contributions can make your 401(k) a better deal for you. Both the individual and corporate contribution limits have climbed, which means you can put aside more for yourself and pay out less for staff.

For 2002, your allowable individual contribution rises to $11,000, and together you and the corporation can contribute $40,000 annually for you, up from $35,000. "If you contribute the $11,000 maximum individually, your corporation could contribute the remaining $29,000 for you to reach the limit," says attorney David J. Schiller, of Norristown, PA.

With the most common type of plan—defined contribution—the more you put in for doctors, the more you have to put in for staff. If the corporation's contributing a lower percentage of the maximum for you, it can also do the same for your staffers.

Coordinating doctor and employee contributions used to create a problem: To prevent discrimination, the government required complex tests comparing contributions for doctors with those for staffers. The upshot was that low figures for staffers could hold back large contributions by doctors. True, a practice could encourage staffers to contribute more by offering to match portions of contributions, but that was costly and complex.

However, a couple of years ago, the government introduced a "safe harbor" provision that made things easier: Just put in 3 percent of compensation for everyone.* "You can also run a 'safe harbor' with matching dollars rather than using a percentage, although it's a bit more complicated," says Thomas Koch, a plan administrator with Clayton L. Scroggins Associates in Cincinnati. It requires the employer to match 100 percent of the first 3 percent of pay saved, plus 50 percent of the next 2 percent.

With the safe-harbor provision and those new limits of $11,000 and $40,000, the 401(k) is more appropriate for more practices, say many advisers. But if you want to set up a safe-harbor 401(k), you've got to give notice to employees by Dec. 1 of the year before, so check with a retirement plan consultant right away.

It's also wise to move quickly if you're planning to start an ordinary 401(k) for next year. If employees are going to contribute their pay into the plan, you have to make sure their contributions get deposited soon after each payday—generally by the 15th business day after the end of the pay period. So the operation must be coordinated with your office manager early in the year.

Boost your contributions more easily than ever

If you're a high earner and don't mind doing a little math, you can reduce some expenses. The compensation limit on which you base your contribution to defined-contribution plans has increased from $160,000 in 2000 to $170,000 in 2001, and it will rise to $200,000 next year.

Since the maximum has jumped, if you continue to defer the same amount for yourself, your percentage contribution is smaller than it was when the limit was lower. And if your contribution's a smaller percentage, you can decrease the percentage you put away for staffers.

"Suppose you put aside $34,000 for yourself in 2001, which is 20 percent of the $170,000 limit," Schiller explains. "That percentage would determine what percentage of compensation you had to put aside for staffers."

Due to plan technicalities, the percentage wouldn't typically be the same—indeed, various plan formulations would already let you put away less for staffers—but the two numbers are linked. Let's say contributing 20 percent for yourself meant giving staffers 10 percent. "If you continue putting aside $34,000, your percentage will drop to 17 of the maximum in 2002, because you can consider $200,000 of earnings now. So staff contributions might drop to 6 or 7 percent," Schiller says.

However, calculating the percentages so that you don't violate any plan mandates can be tricky. You might want to have a professional do the job.

Of course, if you're feeling generous, you could instead increase the contribution for you to $40,000 and boost the dollars for staffers. "You have two favorable options, or you might choose a compromise," says Schiller. "You could raise your own contribution and escalate those for staffers by a more modest degree."

Consider dropping that second plan

If yours is one of the many practices with two defined-contribution retirement plans, you can now get all the benefits you need from just one. By ditching the less useful plan, you can save money and simplify your situation.

"The total that a practice can contribute to tax-deferred retirement plans equals 25 percent of compensation," explains plan consultant Howard M. Phillips of Wayne, NJ. "A fixed-percentage plan requires that doctors commit to the same percentage every year, but doctors often don't want to lock in a percentage. A profit-sharing plan allows you to change your percentage each year, or even not contribute at all. But until now, you could contribute only up to 15 percent of compensation." Many doctors compromised by using a 10 percent fixed-percentage plan and the more flexible profit-sharing plan. That way, they could contribute 10 to 25 percent annually, changing their contribution according to each year's financial circumstances.

Now, though, you can put the full 25 percent of compensation into a profit-sharing plan. "You can have total flexibility with just one plan, from zero to 25 percent," says Schiller. "It's simpler, and you'll save in plan costs. A practice might spend $1,500 on annual administration fees instead of $2,500 or more."

Add or make greater use of a defined-benefit plan

Are you near retirement, and need to catch up fast on savings?

Until recently, if you had both a defined-contribution plan—such as a profit-sharing or fixed-percentage plan—and a defined-benefit plan, which lets you fund the amount needed to get a specific payout in retirement (currently $140,000 maximum payout per year), you couldn't take full advantage of the two plan types.

These days, you can. Doctors who want to boost their stash quickly can put more into the defined-benefit type, which allows hefty contributions. If you have both types of plans, you can use the defined-benefit plan to the max. And if you have a defined-contribution plan, you might want to also set up a defined-benefit plan to help you save faster.

Whether or not the defined-benefit plan is appropriate for your office depends on how your age compares with those of your staffers. Such plans work best if you're much older than all your employees. "Though a defined-benefit plan can be a very good deal, it can require big staff contributions if staffers are older," says plan administrator Judy Soled of Liden, Morton, Nestle & Soled in Westlake Village, CA. "And since you need actuarial assumptions to determine the amounts set aside for each person, it's also complex and expensive." Still, if your problem is "so many dollars, so little time," you should consider such a plan.

Another alternative is a hybrid plan, called "cash balance." It's a defined-benefit plan and allows large contributions, but it's simpler to operate. "Often, I'll use one as a supplement to the other plan, when doctors want high contributions," Howard Phillips says.

As with other defined-benefit plans, a cash-balance plan's value depends on how your age compares with the ages of your staff. Have your accountant, financial planner, or retirement plan administrator do the necessary calculations to see which plan best suits your goals.

Take advantage of increased IRA and SIMPLE limits

Perhaps you can't afford to make fat retirement-plan contributions right now. If you're paying off medical school debts and writing checks for college tuition, you may be more concerned about making ends meet. So you've temporarily bowed out of your employer's retirement plan, or maybe you've postponed setting up a plan for your own practice.

In either case, if your joint adjusted gross income is less than $150,000 ($95,000 for singles), here's some consolation: If you manage to set aside a small sum for savings, it's eligible for VIP tax treatment in a Roth IRA. There your savings growth won't merely be tax-deferred—it will be tax-free. "You should do everything possible to take advantage of this great deal," says Soled.

Starting in 2002, you can put away more in a Roth: up to $3,000 per person ($3,500 for those over 50), a possible $6,000 per family if your spouse also qualifies. That's not an insignificant amount to save, especially considering that all the growth on it is yours to keep.

If you want to put aside more than an IRA allows, but don't want the expense of a full-blown qualified plan, consider a SIMPLE plan, which combines some features of an IRA and a 401(k). The limit for individual contributions to a SIMPLE plan has been raised from $6,500 to $7,000, so you and your spouse could put away $14,000 annually. "The name's pretty accurate," says Koch. "The rules and options are much less complex than with most plans."

One caution: If you're considering any retirement plan changes, make sure you get an expert to calculate your alternatives. Switching plans or changing plan companies may involve costs, and you need to weigh those against the benefits.

"An adviser who supplies you with the right plan might help you put away an additional $10,000 to $50,000 a year," says Phillips. "So it's wise to get someone who knows all the ins and outs, and how to customize plans. Even if you wind up going with a generic 401(k), you'll sleep better knowing you made the right choice."

The author is a former senior editor of Medical Economics.

*See "A big new break for pension plans. But act fast!" Sept. 4, 2000.

 

Brad Burg. Grab new pension plan breaks. Medical Economics 2001;21:40.