Health professionals are typically high-income earners. But mostly, they have a steady income. Because of that, defined benefit plans for Defined Benefit Plans for Doctors, Physicians, and Dentists can make a lot of sense.
Defined benefit pensions are a class of IRS-approved pensions that maximize contributions. Not surprisingly, this is a preferred source of tax savings and retirement planning for physicians. Our research shows that medical practices are the primary sponsors for small pensions in the United States.
Doctors that can benefit from a defined benefit plan
- Doctors with a small practice that has a few employees
- Doctors who are solo practitioners without any employees
- Doctors who are employed with a major hospital, but also have a side income as an independent practitioner
- Doctors who serve as locum tenens
If you need any specific advice or want to set up a pension plan, please email us at info@pensiondeductions.com
Which type of business entity can sponsor a defined benefit plan for doctors?
Business entities that can sponsor a DB plan include:
- Sole-proprietorships
- S-Corporations
- C-Corporations
- Partnerships
In summary, any type of commercial entity can sponsor a DB plan. The only difference is how tax deductibility is claimed on tax returns.
If the doctor receives, 1099 income from a hospital, they would normally declare that income as a sole proprietor and file a Schedule C. The Schedule C income can be used to fund the defined benefit plan as well as be considered as compensation for the defined benefit plan. However, the DB deduction would normally be deducted from 1040.
If the doctor has registered the business as an S-Corp, the compensation for the defined benefit plan would be gross compensation (typically Box 5 of the W-2) and the deduction would be taken on the Form the 1120S filed for the S-Corp
Examples of defined benefit plans for doctors:
A defined benefit program for self-employed doctors with no employees.
Let’s assume the doctor is 45 years old and has not incorporated the practice and files their taxes as a sole proprietor.
Suppose also that Schedule C for the last three years was at least $200,000 and no contributions were made to a pension fund.
Use our DB calculator to determine how much you can contribute based on your age and income.
Defined benefit plan for physicians with a small practice and some employees.
Let’s assume our doctor in this case is 50 years old and has incorporated the business as an S-Corp. The business’s W-2 income is $280,000 and three other full-time employees are helping the doctor in his office.
A member with the above parameters can accrue $2,621,923.68 until they reach the assumed retirement age of 62. In the first year, up to $166,267 can be paid into the plan.
A defined benefit program for doctors whose practice is growing and whose owners will be available to new doctors over time.
This is a typical situation for a practice that is started by a doctor who hires another doctor who will slowly buy into the practice while growing it. This team could further keep expanding and the defined benefit plan could act as a great incentive to hire entrepreneurial doctors while offering significant remuneration in a tax-deferred way.
In such a situation, the DB plan could have different categories with different levels of DB contributions:
- Class 1: Owner Doctor
- Class 2: Non Owner Doctor
- Class 3: Doctors who are highly compensated employees (as per the definition of the IRS)
Doctors with a small practice, but employee retention is essential
In such a situation, the doctor may include key employees in the defined benefit plan where the benefits increase with years of service. The plan can also implement a vesting schedule, making the employees earn vesting through years of service.
Retired doctor, but still earn a lot of income from other sources.
Benefits of the defined benefit program for doctors.
Tax cuts: Doctors are almost always in the top tax brackets, regardless of age. In these circumstances, tax planning is a key objective of long-term financial well-being. Defined benefit pensions provide significant tax deductions and help reduce your taxable income.
Liability Protection: Money held in a defined benefit plan is protected from prosecution which is always a major threat to healthcare professionals.
Saving for Retirement: Based on current IRS maximums, a defined benefit plan allows a doctor to save as much as $2.8 million in the plan in a tax-deferred manner. The spouse can also be employed in the firm and this can increase the total lump sum amount that can be accumulated in the plan.
Employee retention strategy: As outlined above, this plan can be used to promote employee retention, which has many unquantifiable benefits.
How to decide if a plan is right for you?
5 steps to deciding if a plan is right for you:
- Physicians looking for large contributions
- Reliable income stream
- Consistent contributions
- Catch up-up on retirement
- Combo plans benefits
However, if you are still curious about the process, please read below!
Once you have a final estimate from the contributions, you will need to collaborate with your CPA to ensure that you have sufficient cash flow to contribute to the defined benefit plan. Once the amount has been decided between you and your CPA, the actuary will need to draft the plan document for you.
For example, your actuary may calculate that you can contribute $200,000 to the defined benefit plan in the first year. However, you might want a lower contribution amount and your actuary needs to be informed of that. Once you, the actuary, and your CPA agree on a contribution amount, you are all set to go ahead with the next steps.
Every defined benefit plan requires a plan document that will list all assumptions of the pension plan and ensure compliance with all IRS rules and regulations. This document has to be drafted by an actuary before you can set up the investment accounts for the plan. A new TIN also needs to be registered for the pension plan as it is a distinct legal entity. The actuary will customize a plan document based on the contributions you need. Make sure your actuary provides you with a plan document that is pre-approved by the IRS so you don’t need to go through the hassle yourself. You can read more about a pension plan document here.
After the plan document has been drafted, you are all set to open the investment account for the plan. You should reach out to your financial advisor or a broker to set up the accounts. Make sure you tell them to open a ‘qualified account’ so that the investment gains are not taxed at the source.
You can start making contributions to the plan as and when free cash flow is available once the investment accounts are open. For the first year, the contribution will be what was decided between you and the actuary. The actuary will calculate a range for each subsequent year, along with a recommended contribution amount. You are required to contribute within the range to avoid overfunding or underfunding the plan. The deposits can be made until you file the tax returns for your business.
All qualified plans are required to file annual returns with the IRS. Note that these returns are different from the company tax returns and your tax returns. Also, note that the CPA or financial advisor cannot file these returns since these are required to be certified by an actuary.
The actuary will prepare a form called the Form 5500 SF and certify another form called the Schedule SB. You will need to sign the form as the plan sponsor and the actuary will file it electronically. The penalties for not filing these forms run into hundreds of dollars and the pension plan could end up getting disqualified.
If you are a self-employed individual and interested in exploring the idea of a defined benefit plan for yourself please email us at info@pensiondeductions.com. We specialize in this area and can provide you with valuable advice and services that could end up saving thousands of dollars and giving a boost to your retirement planning.
However, if you are still curious about the process, please read below!aWhat is the deadline to contribute to a defined benefit plan for doctors?
We specialize in setting up defined benefit plans for doctors and a significant amount of our clientele is medical professionals. We know exactly how busy you are and what your goals are. Feel free to email us at info@pensiondeductions.com or Schedule a consultancy and we can provide you with a free estimate of your defined benefit plan contributions based on your exact situation.
