Demystifying Retirement Plans for Your Business
Weigh the options and costs for your laboratory’s needs
Bruce Bryen, CPA, CVA
Many laboratory owners have resisted implementing a retirement plan when they hear about the cost of its design and the fact that all employees must be treated in a similar manner. They are concerned that they can't afford to make the payments that are necessary over the long term to keep the retirement plan in compliance with all of the laws that the government has instituted to allow it to continue. A CPA with experience in these types of matters will be able to explain in plain language what the benefits are to the owner. He or she will be able to show how the cost of adopting a qualified employer retirement plan, its design, annual maintenance, and ability to legally discriminate among employees will yield a tremendous immediate and long-term benefit to the owner. This can become a model for employee morale, offer stability, and benefit the long-term growth of the value of the laboratory. Certainly one of the ultimate goals of the laboratory owner is to create wealth for a better life for themselves and their family.
Cost of Implementation for a Qualified Employer-Sponsored Retirement Plan
There are many types of plan designs even though there are only two types of retirement plan. One is the defined benefit plan, and the other is the defined contribution plan. The defined benefit plan offers a specific benefit when retirement is reached. The business sponsor must pay into that kind of plan all amounts needed to reach the benefit to be paid upon death or retirement of its participant. That means that any losses must be guaranteed to be paid by the business that is the contributor to this plan. This plan has tremendous benefits to the older, higher-paid employees of the business. The design is complex, and of course that makes the cost of adoption probably the most expensive of the plans available.
The defined contribution plan is the other type. This one defines the contribution to be made to the account. There are no guarantees for the benefit. Typically the amount to be contributed by the laboratory is flexible and in many cases can be zero. This style of plan is commonly known as a 401(k) whereby the employees are allowed to contribute their own funds from their payroll on a tax-deferred basis. A profit-sharing plan is allowed as well, where the employer can contribute up to an actuarially calculated amount or zero, as the employer desires. The design and annual upkeep costs of these plans are much less than for the defined benefit plan.
Allocations and Costs for Employees Compared to the Owner
Besides the administrative costs to the owner of the laboratory for the design and annual administration, the costs per employee per year probably are the most critical consideration that the laboratory owner has when deciding whether or not to implement a retirement plan. With a qualified actuary who knows dental practice machinations and a good CPA who understands the laboratory and the costs associated with it, a qualified employer-sponsored retirement plan or plans can be established where the cost per employee per year is much lower than the laboratory owner may realize. The establishment of these deferred compensation models should not be taken lightly and should be addressed to qualified actuaries and the CPA who understands the benefits that the owner of the laboratory will enjoy.
Examples of Contribution Levels for an Employee and an Owner
Based on the kind of plan initiated by the laboratory owner, the principals of the laboratory can get enormous amounts of contributions each year. The amounts may boggle the mind but a high end of over $150,000 is possible with costs for employees not exceeding $20,000 per year. This represents close to 90% of the annual contribution amount going to the owner's account in the retirement plan. Many think that the maximum is the $24,500 when age 50 or over, plus a profit-sharing contribution based on the actuary's calculation. What a difference!
The employees must get something, and "similar" does not have the meaning of "the same." These technical differences can mean the difference between implementing a retirement plan and not having one. To give an employee nothing will result in the potential disqualification of the retirement plan. If the laboratory owner can think long term and understands the compound value of an annual contribution even at $100,000 per year with a modest income factor, the sum at the end of a 10-year period is incredibly high. The kind of plan described is a defined benefit pension plan with some modifications and adjustments to compensate for older employees.
Positives and Negatives
Using the defined benefit pension plan as a first example, a positive is the amount of money that can be contributed on an annual basis. A negative is that the guarantee of the benefit at retirement must be available, so the employer sponsor may have to contribute additional funds to catch up for any losses incurred by the investments. The pension creates a liability almost every year to the company paying into it and the amount must be paid. The positives are the tax deductions each year and what can be done with those savings.
A positive to a defined contribution plan is its flexibility; there's no need to pay into the plan if there is a bad year at the business. There is no guarantee on the employer's part and nothing to pay if there is a bad year economically. A negative is that the tax deductions and the amount of the pot at the end of employment will not be as high as the funds accumulated in the defined benefit plan. The above points are just some of the pros and cons for the laboratory owner to consider when deciding to implement an employer-sponsored qualified retirement plan.
About the Author
Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.