By Andrew E. Roth, Esq.
Danziger & Markhoff LLP
The vast majority of owners of dental
practices who already have or who are
thinking of setting up a tax-qualified
retirement plan, such as a profit-sharing
plan, have one major goal in mind. They want
to make significant tax-deductible contributions for their own
benefit, which will reduce their current income tax bill and
serve as a nest egg for their future. At the same time, they are
not interested in maintaining a plan if the staff costs are too
great. This goal of making significant contributions for owners
and other key employees, while keeping staff costs under
control, is not easily achieved under the Internal Revenue Code.
The Code generally requires that a tax-qualified retirement plan
not discriminate in favor of highly compensated employees.
This article discusses how the dental practice owner’s goal can
often be achieved, in whole or in part, through the creative use
of a “new comparability” profit-sharing plan that satisfies the
Code’s requirements.
Traditional profit-sharing plans and Simplified Employee
Pension Plans (SEPs) require that a level percentage of
compensation be contributed on behalf of all plan participants.
As a result, in a traditional arrangement, if the owners of dental
practices want to increase contributions on their own behalf,
they need to also increase the contributions for their staff.
In a new comparability plan, actuaries use certain IRS-blessed
“cross-testing” rules, and demonstrate compliance with the
non-discrimination requirements by converting the
contributions that are made under the plan to their equivalent
benefits under a defined benefit pension plan. All of this is
done “behind the scenes” so that the plan is easily
understandable by dentists and their employees. Although
these tests are sensitive to demographics and do not always
yield favorable results, in many situations-particularly, if the
group that the owner wants to favor is predominantly older
All of this is done “behind the scenes”
so that the plan is easily understandable by dentists and their employees.
than the rest of the employees-they allow higher contribution
rates for the owner and other key employees than for the rank
and file staff. In addition, new comparability often provides a
plan with flexibility and allows different groups of owners and
highly compensated employees to have different
contribution rates.
To demonstrate this, assume that there are two dental practice
owners and four employees for a total of six plan participants.
One of the employees is the wife of one of the owners.
The compensation and contributions under a new
comparability plan are set forth on the following chart:
NEED CHART
The owner who is 46 is older than each of his employees by six
years or more. That “age spread” is one of the key components
to successfully maximizing the contributions for the owners
while minimizing staff contributions.
In our example, a new comparability formula has been devised
that gives the owners the maximum allowable contribution
under the Code. For 2009, that means a contribution per
owner of $49,000. Under the facts in the example, the
contribution rate for the owners is 20% of compensation.
Applying actuarial cross-testing, contributions for the other
employees are set at 5% of compensation. This results in the
owners and the wife receiving 94% of the total contribution
that is made to the plan and the staff employees receiving only
6% of the total contribution.
Compare this to a traditional profit-sharing or SEP: In order
for the owners to receive $49,000, each staff member would
have to receive a contribution of 20% of compensation. The
staff cost for a traditional plan utilizing the demographics in
the case study would be approximately $25,500 versus
approximately $6,300 in the new comparability plan. In this
example, the new comparability plan design results in a staff
cost savings of over $19,000 per year!
Thus, an owner of a successful dental practice who does not yet
have a qualified plan should consider establishing one,
utilizing a new comparability design. In addition, owners of
dental practices who already have a plan should review their
existing retirement plan arrangement to see if they are really
maximizing their own benefits.
If you do not yet have a profit-sharing plan, or if you have a
profit-sharing plan or SEP that uses a formula other than new
comparability and you would like to see what new
comparability can do for you, kindly contact Andrew E. Roth,
Esq. at (914) 948-1556 or at aroth@dmlawyers.com.
Andrew E. Roth, Esq. is a partner at the White Plains, New York
firm of Danziger & Markhoff LLP.
All tax information and financial case studies apply
to U.S. practitioners only.
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