Dentists, physicians, and other small business owners share similar concerns when setting up a 401(k) plan. They want to provide an attractive workplace and rewarding benefit package for their employees which includes a 401(k) plan, but they may not have a dedicated human resources manager to assist with the details. This article will lay the foundation for dentists seeking to set up a 401(k) plan for their employees.
Why set up a 401(k) plan?
Dentists might set up a 401(k) plan for themselves and their employees for a variety of reasons:
- Attract and retain solid employees.
- Provide employees and themselves with a tax-advantaged way to save for retirement.
- Gives employers tax benefits when they contribute to their employee’s accounts.
- The money in the 401(k) plan grows tax deferred and isn’t taxed until withdrawn.
- Help solve America’s retirement crisis.
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What exactly is a 401(k) plan?
A 401(k) refers to a type of account with tax-benefit properties. First, the employer sets up a 401(k) plan with a third party administrator, such asHuman Interest, who will automate the plan set up and administration as well as provide employee investment advising. Next, the employee contributes a portion of their salary into the account and selects various investments. The employer may also choose to match a portion of the employee’s contribution. The money remains in the account, grows and compounds tax-deferred until transferred to another account or withdrawn in retirement.
Dentists have several types of 401(k) plans from which to choose:
Standard 401(k) Plan: Under this option, employers may elect to match the employee’s contribution, up to a certain percentage, contribute a certain percent of their salary to the account (nonelective contribution) or both. You may change the amount of employer contributions annually, depending upon your business circumstances.
Safe Harbor 401(k) Plan: This type of 401(k) match requires employers to make one of the specific types of annual contributions each year listed below. The benefit of this plan is that it help you easily pass IRS compliance testing for your 401(k):
- Match each employee’s contribution up to 3% and match 50% of contributions above 3%.
- Make a nonelective contribution equal to 3% of compensation to each employee’s account.
Remember, contribution limits for dentists who offer 401(k) plans are in accordance with federal law:
- Employees may contribute up to $18,500 per year with $6,000 additional for those over age 50.
- Employers may contribute up to 100% of their salary with the total combined contributions not to exceed $53,000 or $59,000 for employers over age 50.
What are the benefits of a 401(k) plan for dentists?
The personal tax benefits include the opportunity to defer taxes on up to $53,000 or $59,000 of the dentist’s income. This could save him or her thousands of dollars annually in personal income tax liability. Of course, this assumes that the dentist will be in a lower tax bracket during the withdrawal period than at present.
Similarly, the employees’ benefit by reducing their taxable income. For some dental workers, this may be an opportunity to grow their retirement income easily and without the effort of setting up their own Roth or Traditional IRA account.
An additional benefit to the dentist is the possibility of attracting and retaining qualified workers. According to a recent survey of U.S. small business owners, the majority of those surveyed believe that we are in a retirement crisis. The survey found that only 34% of small business owners offer retirement benefits to their employees. Thus, offering your dental assistants, hygienists and billing clerks access to a retirement plan and employer contributions may be viewed by workers as a key employee benefit.
The company 401(k) match is a deductible expense and will decrease your company’s taxable income. In some cases, you may be eligible for a tax credit for setting up a 401(k) plan, as well. The Credit for Small Employer Pension Plan Startup Costs is also available to employers with less than 100 employees without a previous retirement plan.
What are the drawbacks of a 401(k) plan for dentists?
This might seem obvious, but there are costs associated with setting up a 401(k) plan for dentists. Even if you keep administration fees rock bottom, you still may have the matching contribution costs.
A more ambiguous disadvantage might be within the practice’s demographics. If an office has a younger owner and older employees or an older owner and younger employees, the various parties within the office might benefit from different types of retirement plans. Having several dentists, dental hygienists, administrative staff, etc. in a practice might lead to differences in opinions if one partner or group of employees wishes to refrain from participating, while still remaining liable for the plan costs. Human Interest offers both Roth and traditional 401(k)s, which will help both older and younger employees pick the option that’s best suited for their respective financial situations and future plans.
Student loans are often a significant consideration for many practicing dentists and staff in dental offices — we recommend reading this article to help your employees make financially wise decisions for both the short and long term: Paying Off Debt vs. Saving: How to Prioritize
The final takeaway
As with any business decision, there are advantages and disadvantages for each dental practice in setting up a 401(k) plan. Take time to survey current employees and business partners to get their opinions on the value of the plan. Attempt to maximize the advantages of enacting a 401(k) plan in your office by choosing a reasonably priced 401(k) provider who also offers low fee index funds with reasonably priced management fees for your employees as well.
To learn more:
- 401(k) Basics for Employers
- Outsourced 401(k) Administration
- Why Small Business Owners Don’t Offer a 401(k) (But Why They Should!)
- How Much Does a 401(k) Cost Employers?
If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.
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