Is Your Company-Sponsored Retirement Plan the Right Plan - Right Now?
There are three factors at play this year for veterinary practice ownership:
Most practice owners continue to experience significant revenue growth as we approach the end of 2021. This growth is leading to record levels of profitability and taxable income. Unfortunately, there are only so many strategies that allow practice owners to reduce their related increase in federal and state tax liability.
Many practices are struggling to attract and retain top talent in the current labor market.
Many practice owners look forward to the day they can slow down and eventually transition out of their practice into retirement. In order to do this, they are looking for ways to defer more of their income into a retirement plan that will allow them to live the lifestyle they desire.
If these factors apply to you, it may be a great time to revisit whether your company-sponsored retirement plan is the right plan for you right now.
Let’s look at some of the most common plans currently available.
SIMPLE IRA or SIMPLE 401(k) Plan – Both plans are very similar in structure. Under these types of plans, employees can defer a portion of their salary up to the annual limit. For 2021, the limit is $13,500. Employees age 50 or older by the end of the year can defer an additional “catch-up” contribution of $3,000 for a total contribution of $16,500. In addition, employers can either choose to make a matching contribution or make non-elective contributions on behalf of all staff. Under a matching contribution, employers contribute up to 3 percent of the employee’s compensation. For the non-elective contributions, employers must contribute 2 percent of the employee’s compensation regardless of whether or not they participate in the 401(k) component.
Traditional or Safe Harbor 401(k) / Profit-sharing Plan – There are three main components to a more robust traditional or safe harbor 401(k) / profit-sharing plan:
401(k) contribution: Each employee can make a deferral of up to $19,500 for 2021. In addition, those 50 or older can make a “catch-up” contribution of $6,500 for a total contribution of $26,000.
Safe harbor match or non-elective contribution: This again is typically either a 100% employer match of the first 3-4% of the employee’s deferral or a non-elective contribution of 3% (or more) of compensation, regardless of employee deferrals.
Discretionary profit sharing: This component is an employer contribution that can be adjusted each year based on profitability and the related desire to contribute more or less on behalf of the staff. While there is an increased staff cost, there is the potential for the owners to put away a significant amount of money for themselves depending on salary level. When factoring in the 401(k) portion, safe harbor portion, and profit-sharing portion, the annual contribution limit is $58,000 ($64,500 if 50 or over) for 2021.
These are the most popular retirement plans for small businesses. However, it is not an exhaustive list. You should consult with your trusted financial advisors to see which plan is best for you. In addition, there are additional factors that should be considered. They include:
Administrative burden and related costs
Staff eligibility requirements
Vesting schedule and requirements
Whether or not loans will be allowed
Deadlines for establishing each plan
With some proactive planning, you can reduce your tax liability for 2021, potentially attract/retain more of your top talent, and build up that “nest egg” for retirement. Reach out to an SVA professional to start the conversation today.
Andy is a Principal with SVA Certified Public Accountants and focuses on the dental, veterinary and healthcare industries. He works with practices to manage their financial matters and set short and long-term goals.