If you start your own practice, one of the business tasks you’ll need to complete is setting up a retirement plan for you and your staff. If you know what to look for, this task can be surprisingly simple with only minimal costs to you.
Retirement Plan Types
There are three common small business retirement plans that dental offices can use.
- 401(k)s: You can contribute up to 25 percent of each employee’s compensation, and they can contribute up to $18,000 of their own salary up to a combined total of $54,000. Your contributions can be a match of employee contributions, variable based on profits, a set percentage or some combination of those options.
- SEP IRAs: You can contribute up to 25 percent of each employee’s compensation, but there are no employee contributions. Your contribution percentage must be a fixed percent for all employees. The advantage over a 401(k) is reduced recordkeeping and administrative requirements.
- SIMPLE IRAs: These plans follow a fixed template to reduce your administrative burden even further. You can either choose to match three percent of each employee’s compensation or contribute a fixed two percent with no matching requirement. The first option has a $12,500 limit, and the second option has a $5,400 limit.
Retirement Plan Providers
Almost all dental offices will qualify for small business plans. These plans are available for free or at low cost from most major discount brokers. However, they are often limited in whether they will calculate contributions for you and in the extent of their recordkeeping for tax purposes.
Payroll providers and small business banks often take care of the calculations and recordkeeping for you but with higher maintenance fees. Unfortunately, they may have limited investment choices with higher expense ratios that can dramatically reduce your employees’ return on investment.
Tax Benefits
All contributions that you make are tax deductible as compensation expense. Plan maintenance and setup fees are also deductible expenses.
For your employees, most contributions are taxed deferred meaning that they are not taxed until retirement instead of in the year earned. This lowers their current tax bill and delays the taxes until a time when they will likely be in a lower tax bracket. The only exception is if employees choose to make Roth 401(k) contributions which are taxed immediately but have the benefit that their investment gains will never be taxed.
Nondiscrimination Rule
The nondiscrimination rule says that you can’t have different types of plans for different classes of employees. For example, if the dentists receive an automatic contribution of ten percent of their compensation, the office staff must receive the same ten percent contribution.
Depending on the plan type, there may be exceptions for employees below a certain age or time in service. You can also impose a minimum vesting period for employer contributions as long as it applies to all new hires regardless of job type.
Nuts and Bolts of Contributions
Your contributions will become part of your regular payroll process. If you use direct deposit, you’ll set it up to send the appropriate amount to your employees’ investment accounts rather than their checking accounts. If you use checks, you’ll need to make the deposits manually.
Exception: A sole practitioner with no employees or an independent contractor takes their full draw into their personal checking account and then transfers the money to their retirement account (similarly to making personal IRA contributions).
Getting Started
While most plan information is online and some plans can even be opened online, you’ll want to talk to your CPA before getting started. This will help you maximize your tax benefits and get a neutral point of view on which options are right for your practice and your employees.
