Evaluating retirement plans post-COVID-19

July 21, 2020

Dentists need to understand finances, safety and the future during these pandemic times.

The coronavirus has just devastated the dental world with problems involving personnel, patients and finances. Because of the virus there has been a scarcity of patients. That situation has caused a dramatic trickle down effect that has caused layoffs of staff, the cut back of ordering supplies and lastly the cash flow vital for the success of the dental practice. 

As with all businesses, once the dental office stopped ordering supplies, the dental supply houses suffered and they in turn had layoffs of personnel and a decrease in their manufacturing orders. Cash flow practically ceased. The government produced various loans and grants to dentists and other businesses to support payroll and overhead items. These efforts assisted in letting dental offices continue on a much reduced scale.

The dentists’ gross revenue and net earnings were substantially lessened. The payments due on equipment loans, rent and other items remained. It was time for the dentists to meet with their dental CPAs, financial advisors and other consultants to work on concepts to overcome the terrible cash flow shortages so that their offices would not permanently close. Some of the dentists and their advisors responded quickly and developed plans for future success, even though the thought was that it would not be on the previous scale achieved before the pandemic. 

Different classifications of dentists

Based on the age and the specialty of the dentist, varying degrees of approach were taken. The younger dentists and the general dentists had more time on their side to reckon with the virus. The lower charges per patient were an asset on their side to slowly recover from the pandemic’s results compared to the specialists who charged much more. Their concept was a gradual one where their prior reputation and relationships with patients were part of their plan to overcome the problems with the virus. Continued communication with the patients was critical to letting them know that they cared and would be there in the event of emergencies as well as when they were allowed to reopen. Most specialists have great reputations and rapport with their patients as well. Having higher fees and with referrals mostly from the general dentists, their approach to the future is different than that of the general dentist.

The financial situation was bleak for the patients as well with many losing their jobs or having their income substantially reduced. The problems were many and the solutions were few. The dentists still had bills to pay and equipment loans were due. Due to the lack of cash flow to the dental practice, many dentists also were feeling the effect on a personal level as well. Meetings with the dental CPA, financial advisor and other consultants were necessary.

Ideas from the dental CPAs, financial advisors and other trustworthy consultants

Government loans and grants were available to the dentists and this was one of the first things the advisors suggested to assist with the short-term economic fallout of the pandemic. Some of the dentists’ lenders were also offering restructuring of loans and the extension of new loans to those who had the good credit history with their own banks. The concept of overhead reduction was always advised. The dentists had to be careful to make sure their patients didn’t think that they were closing for good with the images of their reduced overhead.

Another important item offered by sophisticated advisors and dental CPAs was the implementation or expansion of existing qualified employer sponsored retirement plans. These types of plans allow large deductible contributions from the employer as well as an important item that is usually not discussed in detail. That is the fact of law that these qualified employer sponsored retirement plans’ assets are immune from creditors’ grasps. The funds that are contributed by the employer dental practice also grow without tax, until those assets are withdrawn from the retirement plan. That means that lenders who have advanced money for equipment acquisitions and have the personal guarantee of the dentist can not invade the retirement plan for recovery of those funds. For those who think this is a waste of time since there is no income in sight, they are certainly not thinking of the future when things become better. Those dentists who have planned for the future at least have the hope of experiencing one that is bright. 

Qualified employer sponsored retirement plans and some of their attributes 

Conceptually, most professional dentists have at least a limited knowledge of retirement plans and the lure of the deductible contributions. They may or may not know that there are only two types of plans. One is the defined contribution plan where the amount allowed to be contributed is set by law. These are commonly known as the 401k plan, the profit sharing plan and almost all others.

The only different type of plan is the defined benefit plan or the cash balance plan. These plans have a contribution level set by design of the dental CPA and the actuary. The defined benefit plan allows in excess of $150,000 per year, under certain conditions, to be contributed and deducted from the profit of the dental practice. It is a sophisticated plan and allows the asset value to grow quickly since the contribution levels are so high.

Think of the personal guarantee on the CEREC machine in the range of $150,000 that will be due from the dentist personally if the dental practice can’t pay it. If these funds were in the qualified employer sponsored retirement plan, the lender could not take those funds from it. Of course, the main idea behind the adoption of a defined benefit plan or a defined contribution plan is to prepare for a successful retirement. The coronavirus has made dentists and their sophisticated advisors think of the protection from creditors that these plans also offer.

If not already accomplished, it is certainly time for the dental profession to think about the future and to arrange a meeting with their dental CPA or other trusted financial consultant.