How Dental Practice Owners Can Get the Most Out of Employer Contributions to Retirement PlansSubmitted by Mission Financial Planning on February 7th, 2020
If you’re a practice owner with a 401k, Cash Value, or Profit Sharing Plan, now is the time to look at your employer contributions to the plan. Defined benefit, discretionary matches, and profit sharing contributions are based on last year’s compensation numbers.
You can share a good year with employees, and/or seize the opportunity to put extra money away as the owner of the practice. These plans allow you some flexibility to invest additional savings on a year-to-year basis, and can provide significant tax benefits.
Your plan will have an Administrator (TPA) that calculates the most advantageous way to allocate these additional contributions. At Mission Financial Planning, we often coordinate with your TPA. To get to the best contribution allocation design, provide your TPA with the following information as quickly as possible after year-end:
- Estimate of the additional contributions the practice has the capacity to make.
- Employee “census” form. Reporting on employees’: compensation, hours worked, years with the company, age, and turnover.
- Notes on particular employees you would like to reward with higher contributions if possible.
With this information the Administrator will run multiple calculations and provide various ways to structure contributions. You want to choose the structure that is most advantageous to you, as the owner and, to the extent possible, your employees. Cross-testing (also called new comparability) and age-weighted testing may allow a larger share of company contributions on behalf of those employees to whom you wish to provide more significant benefits, including yourself—this assumes non-discrimination requirements are met.
For you to qualify for extra contributions beyond your deferrals and Safe Harbor, you must make similar (prorated) contributions for your employees. There are a number of benefits to making staff contributions, like providing incentives to employees and reducing the company’s tax liability. But at the end of the day, the reason most small business owners make these discretionary contributions is to increase the amount they can add to their own 401(k), DB or profit sharing accounts.
Contributing year-end profits to a 401(k) plan is tax efficient for both you and your practice. The associated staff expense is likely to be less expensive than taxes would have been if profits were taken outright.
A longer-term ‘benefit’ to discretionary contributions is they are subject to a vesting schedule, which rewards longer term employees and you as the owner.
If you are interested in maximizing the savings capability of your practice retirement plan, contact Sharon, Jared or your Administrator today to make sure you’re using the plan to its fullest potential.
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