Allowing more employees to participate in your retirement plan may benefit you
By John K. McGill, CPA, JD, MBA, and Jason Arnold, QKA
One of the most common questions asked by doctors is, “How can I increase my retirement plan contributions without significantly increasing staff costs?” Although it may sound counterintuitive, at times the answer may be to expand retirement benefits to employees who are ineligible to participate, due to minimum service or age requirements defined in the retirement plan document.
Allowing ineligible employees to participate in the retirement plan can be accomplished by amending the retirement plan document with a provision to “waive” the eligibility requirements for any employees who are employed on a specific date, or by altering the eligibility requirements for employees in future years. If ineligible employees are younger than the owners, the younger employees may have a very positive impact on the nondiscrimination testing of the retirement plan.
The tables illustrate how allowing more employees to participate in the plan can provide an opportunity for doctors to dramatically increase their annual retirement plan contribution with minimal increases to staff costs. Table 1 is based on a doctor with traditional eligibility requirements of 12 months, 1,000 hours, and a minimum age of 21. Under this scenario, only the doctor, spouse, and four employees are eligible for retirement plan benefits. Based on these eligible participants and the nondiscrimination testing, the owners receive a total contribution allocation of $152,500, or 91.2% of the total contribution of $167,178. The staff would receive the remaining contribution allocation of $14,678, or 8.8% of the total contribution.