Taking care of retirement
By Mark E. Battersby

Tucked away among the provisions of the recently enacted Pension Protection Act of 2006, which strengthens traditional pension plans, are new rules that just might make it possible for you to establish and benefit from a 401(k) plan.

Although not quite as popular — or as rewarding — as they once were, 401(k) plans remain a sought-after fringe benefit. Best of all, they are not only for businesses with large numbers of employees; 401(k) plans can benefit everyone in many chiropractic practices.

Workers often benefit from non-taxable contributions made by their employer. And since many partners, shareholders, and principals are often "employees" of their chiropractic practices, they benefit too.

Employer contributions to a 401(k) plan are not included in the income of the participant. Contributions to a 401(k) plan, as well as earnings, are taxed only when withdrawn. Annual contributions are limited to $15,000 (in 2006).

Generally, matching contributions made to a 401(k) plan by an employer are not treated as elective contributions and, therefore, are not subject to the annual limit. Matching contributions made to a 401(k) plan for self-employed chiropractors are not treated as part of that individual's elective contribution.

PRICED RIGHT

Unfortunately, few chiropractic practices can offer employees a 401(k) plan without bankrupting the operation. In addition to their complexity, 401(k) plans are usually far too expensive for even an extremely profitable practice or business.

If you can find someone to administer your practice's 401(k) plan (a bank, insurance company, or mutual fund, for example) — and it is a big "if" since many of those providers are usually not interested in employers with fewer than 100 employees — it is often expensive.

To illustrate those costs for creating and maintaining a 401(k) plan, consider a basic plan offered by one of the few providers who is actually seeking plans involving fewer than 50 employees.

This basic, bare-bones plan requires a startup fee of $1,700 and an annual record-keeping fee of $1,600. In return for those fees, the employer can offer its employees services such as daily valuations, daily fund transfers, and even a toll-free telephone number for basic participation information. As for investment choices, one mutual fund's basic plan offers selections from 43 mutual funds.

A SIMPLE ALTERNATIVE

Fortunately, alternatives are available. Under our tax rules, another type of plan called a "Savings Incentive Match Plan for Employees" (SIMPLE) may be of interest to you.

A so-called SIMPLE plan may be structured as an IRA or as a 401(k) plan. Any employer with 100 or fewer employees who received at least $5,000 in compensation during the preceding year can adopt such a SIMPLE plan.

If a SIMPLE plan is established, it must be the only retirement plan for the chiropractic practice.

A SIMPLE plan allows employees to make elective contributions of up to $10,000 per year (indexed for inflation in 2006). The SIMPLE plan requires employers to make matching contributions, up to 3 percent of each employee's pay.

Alternatively, you can choose to make a blanket contribution of 2 percent of each participating employee's pay, regardless of whether they make any elective contributions or not.

These are the only contributions permitted. You cannot opt to contribute more for older employees, managers, or yourself.

Keep in mind also that contributions to an employee's SIMPLE account must be non-forfeitable.

As already mentioned, a SIMPLE plan may take the form of an IRA established for each participant, and it is tax-exempt like any other IRA.

If your practice adopts a SIMPLE plan, it must be open to every employee who is reasonably expected to receive at least $5,000 in compensation during the current year and who received at least $5,000 in compensation from the employer during any two preceding years. Self-employed chiropractors are also eligible to establish a SIMPLE plan.

SIMPLE 401(K) PLANS

Another variety of SIMPLE plans — a SIMPLE 401(k) plan — more closely resembles, and must generally satisfy the requirements that apply to other 401(k) plans.

Rather than attempting to prove that the plan does not discriminate in favor of the practice's principal or a small group of "highly compensated" employees, a SIMPLE plan may qualify by satisfying the following requirements:

• Each employee eligible to participate in the qualified plan must have the right to make annual elective contributions, expressed as a percentage of compensation and not to exceed $10,000, adjusted for inflation after 2005;

• Unless the employer exercises the "non-elective contribution" option, the chiropractic practice must match the annual elective contribution of the employee up to 3 percent of the employee's compensation;

• An employer's matching contribution requirement may be satisfied if the employer chooses to make non-elective contributions of 2 percent of compensation for each employee who is eligible to participate;

• All contributions must be fully vested (owned by the employee) when made and the plan may impose no restrictions on withdrawals;

• The employer may maintain no other plan; and

• A SIMPLE 401(k) is a qualified plan under our tax law. Therefore, the rules governing the deduction of contributions and the tax treatment of distributions are generally the same rules that apply to any other qualified plan.

When a worker takes money from any SIMPLE plan, those distributions are taxed like distributions from an IRA. Participants may roll over distributions from one SIMPLE account to another free of tax. A participant who has participated in the SIMPLE plan for at least two years may roll over a distribution from a SIMPLE account to an IRA without penalty.

THE BOSS'S FINE PRINT

The tax rules make no distinction between pension, profit-sharing, and other retirement plans (including SIMPLE accounts) that are established by corporations and those established by practices of self-employed chiropractors and partnerships.

Under our tax rules, the term "employee," unless otherwise indicated, includes a participant in a plan of an unincorporated enterprise who is a partner, principal, or a sole proprietor.

References to "compensation," in the case of a self-employed chiropractor or partner, refers to the "earned income" of that person from the practice for which the plan is established. Basically, "earned income" is the individual's net earnings from self-employment for purposes of the tax on self-employment income — less:

• The allowable deductions for contributions to the retirement plan on behalf of that individual, or

• The individual's income tax deduction for 50 percent of self-employment tax.

When references are made to the "employer," a sole proprietor is treated as his or her own employer, while a partnership is considered to be the employer of each partner.

Retirement plans established by S-corporations are governed by the same rules that apply to plans established by other corporations.

The Internal Revenue Service recently issued a model amendment to be used by employers wanting to adopt a SIMPLE 401(k) plan. The model amendment sets forth the requirements for such things as employee contributions, employer options concerning its contributions, and notification to employees. Or, as mentioned, small employers can take advantage of plans offered and administered by a variety of financial institutions and firms.

Although the new pension legislation devotes more than half of its pages to defined benefit plans, the new law also addresses retirement savings held in IRAs, 401(k) plans, and other defined contribution plans. It will now be easier to make transfers from pension plans to 401(k) plans and IRA-type arrangements under the new rules. The new law also makes it easier for you to automatically enroll your employees into your practice's 401(k) plan.

Although the new law permits 401(k), IRA, and similar providers to offer personalized investment advice to accountholders, they cannot advise employers about which funds and investments to include in their plans.

Alternatives such as a SIMPLE plan, whether structured similarly to an IRA or as a SIMPLE 401(k), are both affordable and attractive to employees. And, best of all, these alternatives can benefit you, the chiropractic practice's partner, shareholder or principal, by providing tax deductions for the chiropractic practice and tax-free contributions and earnings for you.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.