Recent changes to the retirement plan lawsare making it easier for future retirees togain additional tax deductions while theysave for retirement, as well as benefit from thedeferred taxation on investment gains they receive.If you are a physician-investor who is not up todate on these new options, you maybe missing out on some significant taxdeduction and wealth building opportunities.So get up to date now and considerthe following new options whenplanning for your retirement:
• New deferral limits. The ruleshave changed relating to how muchyou can defer from your salary into a401(k) plan, and they will continue tochange over the next few years. Thisyear, you can defer $12,000 from yoursalary into your 401(k) plan. This limitwill increase by an additional $1000 peryear until 2006, when it reaches a maximumdeferral of $15,000. In addition,starting this year, participants age 50or older can make additional catch-upcontributions of $2000 (this limit willalso increase $1000 per year until 2006 when itreaches the maximum catch-up contribution of$5000). So in 2003, participants age 50 or oldercan make deferrals into their 401(k) of $14,000.
• New safe harbor plan. In the past, manyphysician-investors were unable to contributemaximum deferrals to their retirement plans becauseof testing rules that limited a physician'sability to defer based on how much the rest oftheir staff deferred. The new safe harbor 401(k)plan solves this problem. If the employer commitsto making a safe harbor contribution totheir plan, the testing is eliminated and thephysician can defer into the plan the maximum,regardless of their staff 's participation.
This safe harbor contribution can either be amatching contribution (based on the participant'sdeferral amount) or a profit sharingcontribution (based on all eligible participants'compensation, regardless ofwhether they defer or not). If a matchingsafe harbor contribution is elected,the employer must match at least 100%of what the employee defers up to 3% ofcompensation, and at least 50% of whatthe employee defers over 3% and up to5% of compensation. If a profit sharingsafe harbor contribution is elected, theemployer must contribute 3% of compensationfor all eligible employees.Physicians also receive thesesame safe harbor contributions.
The decision to employ a safe harborplan at your practice, and decidingwhich method to choose from (ie,matching or profit sharing) if you dochoose this plan, is an annual decision that can bechanged from year to year. If you happen to own asmall group practice, this new safe harbor plan isthe best way to make sure you receive maximumretirement contributions for the physicians whileminimizing contributions for the staff.
• Other new limits. In 2002, eligible compensationfor the purpose of calculating contributionsto a retirement plan increased $30,000 (from$170,000 to $200,000). In addition, the yearlyper-participant dollar limit on total contributionsto a retirement plan increased to $40,000 and thetax deduction limit for 401(k) plan contributionsrose. It is now 25% of eligible employees' totalcompensation, exclusive of deferrals.
As a result, physicians working in small grouppractices who are seeking to maximize theirretirement plan contributions will have to takeinto account 2 major structure changes. First,there is no longer any need for the addedexpense of maintaining 2 separate retirementplans. Often called paired plans, the old rulesrequired physicians to maintain 2 plans to makea retirement contribution at the maximum$30,000 limit. Under the new rules, you canreach the higher $40,000 maximum retirementcontribution limit within 1 401(k) plan, avoidingthe cost and aggravation of a second plan.
Second, under the old rules, physicians usuallyhad to contribute 10% to 11% of their staff'scompensation to the paired plans to put away themaximum $30,000 for themselves. This is nolonger the case. Under the new rules, with anintegrated safe harbor plan there is no increase inthe amount you have to give to staff to put awaythe higher $40,000 contribution for yourself.
If you have not revisited your plan structurerecently, now is a good time to do it. Work withan independent, objective advisor who is knowledgeableabout the recent changes. If you considerthe costs of running the plan and contributionsto staff as costs, chances are you can geta larger tax deduction at a lower cost this yearthan in previous years. So take the time and getyour retirement plan structure tailored to yourindividual situation under the new rules. You'llthank yourself later.
Thomas W. Batterman
is president of the Association
a national organization
of more than 100 chartered,
and insured members
who manage their clients'
during life and after
death. For more information,