401(k) Plan – Is it a Good Deal for Dental Office?

I’d like to be able to save a lot each year on a pre-tax basis, but the plan I’m looking at right now doesn’t seem like a very good deal. Can you guys tell me what you think about this?

In order for me to contribute the maximum $49,000, these will be my costs:

  • Employee safe harbor match: $4,400
  • Employee profit sharing: $13,475
  • 3rd party administration fees: $2,000
  • Plus 1% of assets commission

So, I’m looking at annual costs of close to 20k. The tax deferral may be close to that amount, but the taxes will have to be paid eventually when the money is withdrawn.

It seems to me that this plan would be fairly revenue neutral for me. The main benefactors would be my employees, but they are already compensated well.

The other option I’m considering is a SIMPLE IRA. I can put in $11,500 and then a 3% match which would bring the total to close to 20k. My employee costs would only be around 4k IF I’m matching them all at 3%. With this option I would save less on a pre-tax basis, but I could still save just as much each year. The remaining money would just have to be saved post-tax.

Any thoughts?

I listed some of my thoughts below. Overall, I think at this point going with the SIMPLE IRA seems to make the most sense, and then I will need to invest the difference in a post-tax account. Do you disagree?

I’d forget the 1% commission in the equation. It seems to me no matter which investment you choose, someone or some company is getting paid the commission andor management fees.

With a SIMPLE IRA, I could set it up through Vanguard and pay much lower fees. Certainly much less than 1% of assets and I’m comfortable enough with investing that I don’t really need someone to hold my hand too much.

The $2k admin fee is reasonable is it’s in the $1,500-$3,000 range I typically see.

On the rest you should break it down for analysis in my opinion:

1. For you to max the deferral of $16,500 you say the ee match is $4,400 and I assume that doesn’t include your match as that equates to approximately $150k in wages which doesn’t include you. I’ll guess that your match is approximately $7,500 as well. Therefore, for you to defer $24k, the cost is $6,400. That’s approximately 80% going to you, which is a decent result. It could be even better if you consider the “match” as part of their compensation when determining raises, etc. If you do, then theoretically the $4,400 isn’t an additional cost. It’s part of their compensation.

It is part of their comp, but I don’t intend to give them a raise of that magnitude any time soon. They are already well compensated and I do not need to provide this in order to retain them or keep them happy. I couldn’t reduce their current pay in substitute for this extra 401k payment, so overall it would be an extra staff expense especially when you consider the extra 13k profit sharing component.

2. To get an extra 25k, the employees will get $13k. Again, that’s about 70% going to you and that’s on the borderline of being acceptable; however, if you could factor in a portion of the $13k as part of their overall compbonuses, etc., then the entire $13k may not be considered an additional cost. The $13k is MUCH harder to handle as part of their comp compared to the $4,400. So the additional PS contribution is much less attractive.

Good point. The profit share component is very costly on the employee side.

So the simple gets you about $5k less in a deferral; however, you save $2k in 401k/ PS fees which is probably the tax deferral. If there are other benefits to the 401k/ PS plan, like the ability to borrow, it may be worth spending the $2k in administration fees.

I don’t really see myself borrowing from the 401k. You never know, but if I just saved that 2k each year that adds up over time.

Does your spouse work in the practice and if so, could she defer? If so, the 401k/ PS deferral between the 2 of you could be at least $10k, but probably more since she’ll also receive a match.

No, my wife doesn’t work in the practice. And she already works 60 hours a week elsewhere, so it’s not a good option to have her do any admin work so that I can put her on the payroll.

The last question I have is whether or not this is just a plain vanilla 401kPS plan proposal OR has a pension admin firm reviewed the total team demographics to see if there’s a way to design the plan to minimize the EE cost even further?

A pension firm uses an employee census to give me the estimate. They said that because I’m 31 and my employees are 30, 38 and 56 that the rules do not work very well in my favor in terms of lowering employee contributions.

Tim, what do you think about my PEO, Odyssey Once Source, and it’s non-qualified deferred compensation plans that allow me to make my own decision on how much to put away and a non-match 401(k) plan for my employees?

So far, I love it!

LOL…, I have NO idea as I’ve not seen your PEO plan and how it operates and what your flexibilitiesrestraints are. If you have a link with specific information, I can take a peek at it in January.

I do recall checking out an odyssey link  & it certainly seemed interesting. I’d love to know all the details though: what they offer and what the associated costs are. I don’t recall seeing cost information on that link. Maybe I didn’t spend enough time cruising it.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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