Tax-Advantaged Retirement Planning Options for Veterinary Practices

Veterinarians are earning more than ever before and the only thing holding them back from more growth is recruiting and retaining good employees. As your veterinary practice grows so do the opportunities to update or even create your retirement plan, which can help with attracting quality candidates.

Options could include IRAs, a SIMPLE plan, and profit-sharing. No matter the size of your practice, some options can be customized to fit both your personal and practice goals. An integrated strategy will help you reduce taxes while saving for the future.

Why is This Important Right Now?

Implementing a retirement plan strategy for your veterinary practice needs to be a high priority in 2021 and into 2022.

All the growth and profitability veterinary practices are currently experiencing results in more taxes. If you're not working closely with your advisor right now, there's going to be a tax surprise coming when you file your taxes in 2021. The beauty of putting excess cash in a retirement plan is you will pay less tax.

Those practices that are finding it hard to attract and retain the best and the brightest in the veterinary industry might find it easier to do so with an attractive employee retirement plan. If you find the right plan, you're adding a layer of benefit for your staff that makes them more loyal to the practice. Plus it’s putting you at a competitive advantage compared to other options they may have in your area.

One further benefit of a retirement plan for your veterinary practice is the ability to retire when you want based on the lifestyle you want to live in retirement. The sooner you establish a retirement plan, the sooner you start putting as much money away as you can so it can grow and compound. Then you can get to that point where you can work less, you can sell your practice, and you can retire. So the earlier you start, the better.

What Plan Design is Right for My Practice?

Finding the right retirement plan for your veterinary practice is not one-size-fits-all. When selecting your plan, there are some initial considerations to think about.

1. Funding Costs and Flexibility

Everyone’s situation is different. Some veterinarians may have just acquired a practice so paying down debt is more important. Or others may be seasoned veterinarians so there is excess cash flow to fund a retirement plan. Whatever your situation, you need to consider the funding costs.

Related to this is the plan also needs to be flexible. In a high-profit year, you want to be able to have the flexibility to put in a big contribution, which typically you may not know until later in the year. Conversely in a low year, you want the flexibility to put in a lower contribution.

2. Age and Compensation

For various reasons, some veterinarians like to keep their W-2 salary low relative to their production. In this case, in order to maximize the benefit of the retirement plan, you may need to be willing to increase your W-2 salary.

When selecting a plan, age is a big factor – the age of the owners versus the age of the staff, the age of the highly compensated employees versus the staff. For example, in the case of a practice-changing ownership, in most cases, it’s transferring from an older seller to a younger buyer. So if the same plan is in place that the seller had and there is a sudden change in ages relative to staff with the new buyer, it may not be the best plan anymore.

3. Owner's Personal Needs and Ability to Save

This consideration stresses the importance of saving. Even if you don’t have the cash, having a retirement plan forces you to save early. By saving early, your money will grow and compound so that you can retire when you want with the lifestyle you desire.

4. Resources to Administer the Plan

Veterinary practice owners often take on the additional responsibilities of bookkeeper and HR so you have to consider the extra burden of administering a retirement plan. Determine what will fall on you or your office manager and what can be outsourced to a third-party administrator, and then also the related costs involved depending on who does what.

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Common Plan Types Used by Veterinary Practices

The common retirement plan types typically seen in veterinary practices are SIMPLE IRAs, 401(k) with profit sharing, and a cash balance defined benefit plan. It’s important to choose the plan that will best fit your practice.

SIMPLE IRA

One of the key features with a SIMPLE IRA is you can defer a maximum amount of $13,500 from your wages, similar to a 401(k) or any other type of retirement plan. These deferrals can be done at either a pre-tax or post-tax basis. Plus if you are over 50 years of age, you can also defer a $3,000 catch-up.

On the employer side of the equation, a SIMPLE IRA plan does require a match of a certain percentage up to a certain percent. A common match is 100% of the first 3% deferred by everyone in the plan including owners and employees. This can also include a profit-sharing percentage which is commonly at 2-3%. The profit-sharing percentage is calculated based on the compensation of everyone in the plan rather than the amount they defer.

There are a number of advantages with a SIMPLE IRA plan. First, the cost is very low and the plan is easy to establish. Second, the actual contribution amount required from a clinic or an employer is generally low since most of it is based on the 3% or a percentage of compensation. Next, the plan is easy to administer as there is no Form 5500 to be filed with the IRS every year, which can be huge cost savings, and there's no required testing. Lastly, these particular plans are most often self-directed, meaning that each employee or participant in the plan has direction of how they'd like their funds invested. There is also no pooling of funds so each person's fund remains a separate ledger so to speak of contributions and distributions.

Disadvantages of this type of retirement plan are there's a lower contribution threshold as part of this plan, your maximum contributions are a bit lower than what's possible with 401(k)s and profit-sharing. Also, the contributions to employees are required whether the employees actually choose to participate in the plan or not.

401(k) / Profit Sharing

With 401(k) / profit-sharing plans, there are a few layers to consider with the first layer addressing deferrals. The deferrals are made by each participant in the plan which is deducted from their wages at either a post-tax or pre-tax basis. The next layer is the actual employer matching of contributions, which at a broad level there is discretionary or safe harbor formulas. The final layer is profit-sharing which is a discretionary employer contribution that is tied to different compensation or age requirements.

401(k) plan limits that are in place for the current year are as follows:

• Maximum deferral amount = $19,500
• Age 50 or older catch-up amount = $6,500
• Maximum combined amount permitted per person (all 401(k) deferrals plus matching plus profit sharing) = $58,000 ($64,500 after factoring the over 50 catch-up amount)
• Compensation limit = $290,000
• Highly compensated employee limit = $130,000

When deciding on the type of profit-sharing plan to implement in your veterinary practice, there are a few options to consider:

• Pro-Rata: Everyone receives the same percentage of profit sharing
• Integrated: Allocated at a greater percentage to those that earn over the Social Security wage base; good for high-earning younger owners
• Cross-Tested: Allocated based on employee grouping; good for owners who are on average older than staff

Cash Balance Defined Benefit Plan

Cash balances are defined benefit plans which are an add-on to the 401(k) profit-sharing plan. It allows an additional deferment option to be able to put more away into retirement by providing funding for a future benefit at a certain age.

When implementing the cash balance plan option, all of the funds are pooled into an account. This option does tend to have higher administrative costs because, since everything is one single pooled amount, someone has to actually keep track of all individual accounts and where contributions and distributions are being posted to track over time.

Cash balance plans are a really powerful tool that can be used to put even more away for retirement and it is also a cash deductible expense to the practice. However, the one big downside to this is that with a defined benefit plan, the clinic does become responsible for any underfunding that occurs. For example, if the market takes a little bit of a dive and now there's a shortfall for the plan, the clinic would be responsible for making up that shortfall to the employees.

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Next Steps

• Determine which type of plan might be best for you
• Work with a Third-Party Administrator (TPA)
• Have the options presented to you based on your employee census
• Provide proper notification and employee education

There really is no one-size-fits-all and it truly does depend on your practice demographics. If you're considering moving to a profit-sharing plan or just re-evaluating your options, let SVA help. We can assist in determining which retirement plan might be the best fit for you and your practice.