Celebrating National Small Business Week: A Look at the Medical Industry
posted by Fisher 401(k) May 2, 2017
This week is National Small Business Week, a time to reflect on the importance of small businesses to the American economy, and to our culture. We’re celebrating this year by taking a look at small businesses in a few industries we specialize in, including the construction industry and, in this article, the healthcare industry. What challenges do small practices face when it comes to employer-sponsored retirement plans?
The Smaller Side of Healthcare
Each day in the U.S., 10,000 Baby Boomers retire. As the Boomer generation ages, their demand for specialized healthcare continues to grow. This presents a tremendous opportunity for small, private practice medical offices offering in-demand services like audiology, ENT, gerontology, and even specialized dentistry. In fact, as large hospital networks expand in size and influence, these small specialty practices continue to play an integral role in the industry with $252 billion in annual revenue.1
Retirement Opportunities and Challenges for Small Medical Practices
This success among private, specialized medical practices brings with it a unique set of retirement savings opportunities, especially for owners. Increased profits mean increased tax liabilities, which can cut into owners’ ability to save and contribute to retirement accounts. Practices which already offer retirement benefits like 401(k) plans with Profit Sharing will know the tax benefits for employer and employee, but those benefits can have an upper limit; annual contribution limits for individuals 50 years and older are capped at $59,000.
This continued success for small medical practices brings with it a unique set of retirement savings opportunities, especially for owners.
One challenge facing established practices may be found in retaining the skilled and experienced talent that keeps everything running efficiently. 401(k) plans can help businesses in any industry retain employees, but medical employers can offer additional benefits, including profit sharing and cash balance plans, for added incentives and tax benefits.
The Key to Retirement Success: Diverse Tax Strategies and Increased Employee Benefits
The starting point for many employers is often to offer a traditional 401(k) plan, perhaps including a Safe Harbor or Profit Sharing option. Safe Harbor Plans are often used so owners and other highly compensated employees can contribute the maximum to their 401(k) accounts, and employees also benefit from the guaranteed employer contributions they receive. Under a Profit Sharing Plan, employees receive a defined percentage of the practice’s profits as pre-tax retirement savings. This works for both owner and employee, offering additional awards for employees’ hard work that are tied to the practice’s profits.
If your practice already offers a Safe Harbor or Profit Sharing 401(k) plan, adding a Cash Balance Plan could significantly increase the savings rates of owners, while also providing an added benefit for the broader employee base. Where contributions under a traditional 401(k) with Profit Sharing are limited to $59,000 even for owners, the annual contribution limits under a Cash Balance Plan could be as high as $303,000.2 Combined with the maximum 401(k) contribution,3 owners of practices with steady profits might find that converting a portion of their annual salary into employer contributions to a Cash Balance Plan could result in tax savings of up to $144,000 per year.
Because a Cash Balance Plan is ultimately a Defined Benefit Plan, it also functions as a major reward for employees as a guaranteed payout—and a huge benefit of working for you. Unlike Safe Harbor or Profit Sharing Plans, the employer takes responsibility for funding a certain dollar amount for employees come retirement based on annual contributions. Because of this, employees know exactly how much their benefit will grow year-to-year as they get closer to retirement, which makes the benefit a unique draw to working for your practice, rather than one down the street.
As healthcare demands increase in the coming years, smaller medical practices have a real opportunity to grow, and to make the most of their growth with smart retirement planning strategies.
1IBISWorld Industry Report.
2Actual contribution limit is dependent on the age of the owners.
3Assuming a tax bracket of 40%