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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com, or through www.Bryen-BryenLLP.com.
The employer-sponsored qualified retirement plan is a great seducer for owners of dental practices and their employees. It is something that offers an additional point of consistency with personnel and quality of skill set that the employees possess since the good and passionate employees want to remain with the dental practice to learn and earn.
The many types of retirement plans that a dentist can offer his or her employees gives them a sense of being part of the organization and that portends loyalty to the owner and the practice. It also is something that builds wealth for the participants in the practice retirement plan as well as for the dentist. The sense of belonging and having your employer adding to any amounts saved by the employee quickens the pace of that accumulation of assets that couldn’t be possible on one’s own without the retirement plan.
The following paragraphs will provide an understanding of the various types of retirement plans. They will show how these retirement plans may seduce the owner and the employees to use them for their benefit. They reflect how the employer’s adoption of a retirement plan tends to keep the employment stable with less turn over than if the practice did not have one. They’ll be able to feel the enjoyment of the rise in their allocation of value to them as they stay with the dental practice and not vacillate between jobs at other dental practices. They will earn additional educations by remaining at one practice so their skill sets increase by learning from their employer as they remain at the office. Their worth to the dental practice increases as well as their value to themselves and the equity in the retirement plan account that is allocated to them. Once a certain number of years expire with the employee remaining with the dental practice, the retirement plan account balance vests so that the participant then owns it all.
Employer sponsored retirement plans/their cost/value/and employee participation:
There are two basic types of retirement plans. One is known as the defined benefit plan. The other is the defined contribution plan. A short description of each follows: The defined benefit plan is one in which the benefit to the employee or payout to the participants at retirement is readily defined. An employee knows how much he or she will receive if that participant remains with the dental practice until the normal retirement age.
The defined contribution plan defines the contribution to the retirement plan and not the benefit that is paid out at retirement. An example with the defined benefit plan would be based on the participant’s age, compensation, job description and other areas determined in the design of the retirement plan. It is submitted to the Internal Revenue Service for approval of those formulas included in it. If a person is earning a certain salary and things remain fairly constant for the years leading to retirement, that employee receives a specific sum each month or a total in a lump sum. That amount is guaranteed by the plan sponsor which is the employer. Any shortfalls must be contributed to the retirement plan by the employer so the participant receives what was promised. This type of plan is sophisticated and fairly expensive to design and implement each year. The defined contribution plan allows an employee to personally contribute a certain sum, defined by congress, each year.
That amount is contributed by the participant into his or her own account. For 2019, the amount was up to $19,000 and if the employee was 50 or older, an additional amount up to $6,000 was allowed to be contributed. The investments are not guaranteed. Each participant is allowed his or her own investment advisor. The employer then contributes to the plan as well. The benefit or amount to be distributed at retirement is based on the amount that is in each person’s account balance in the retirement plan. This amount can fluctuate from year to year based upon earnings or losses in the account so nothing is guaranteed. The cost to begin this type of plan is much less expensive than the defined benefit plan and much easier and cheaper to maintain on an annual basis.
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Some specific examples to more easily understand the ramifications of the retirement plan:
Each of the kinds of retirement plans is a real bonus for the employee since the dental practice pays for the implementation and annual maintenance of both. Since the defined benefit plan is the more sophisticated, we will describe some of the attributes it has first. This type of plan is not adopted by many dental practices at this time because of the guarantee previously described and the amount of the annual contribution, which is all employer funded. It is a terrific plan, however, under the right conditions for the owner.
An example of the dental practice for which it is ideal and the conditions that make it so has the following composition of employees and owner: The owner is well past 50 years old and the staff is on the young side. The plan design hypothetically would have a normal retirement age of 65. If the owner is 55, that gives him or he 10 years to be able to fund the pot that is used for the benefit to be paid at age 65. If the earnings are substantial for the dental practice and the owner reports somewhere above $250,000, his or her annual contribution can be over $125,000 per year. Of course the other employees can’t be discriminated against so they get contributions as well. If they are younger, as an example, let’s say 30 years old, that means that they have 35 years to reach their defined amount compared to the 10 years of the owner. Their contributions will be much lower each year because in general, the amount needed to be contributed for them would be divided by the 35 years for an annual contribution. The owner’s defined amount would be divided by 10 since he or she only has that number of years to accumulate the desired retirement defined amount. There are other factors such as the earnings or losses in the retirement plan’s investment activity which contribute to the pot at the retirement date but in general, the concept is that the amount per year is based in large part on age.
The defined contribution plan has no guarantee, as previously stated, and the amounts to be contributed are governed by law. The same dentist who earns above $250,000, with a 401k and profit sharing plan would get a maximum in 2019 of deferring $19,000 plus an additional $6,000 for being 50 years old or older. The dental practice would have a contribution on the owner’s behalf as well but the total for 2019 of the personal deferral and the practice contribution could not exceed $56,000. The employees, even at 30 years old, still have the right to defer $19,000 and to receive a dental practice contribution as well. That additional contribution is based on compensation and is determined by the plan formulas. A reasonable amount to anticipate from the 30-year-old would be somewhere around $6,000 from the practice so the 30-year-old has $25,000 in a given year contributed on his or her behalf with the defined contribution plan.
That is quite a nice feeling and a seducer for the employee to remain at the dental practice to quickly increase the value of his or her retirement plan value. In 10 years, not counting the earnings, the 30-year-old who is now 40, has $250,000 plus the earnings accumulated in the retirement plan. Why would the employee leave the practice?