Tax Law Offers Reasons to Save
Benefits encompass retirement and education plans.
BY MARK E. KROPIEWNICKI, J.D., LL.M.
The Tax Relief
Reconciliation Act of 2001, adopted by Congress at the end of May, includes several provisions that can positively affect the finances of your practice and its physicians. It includes features such as the repeal of the estate tax, a mid-year rate reduction credit, a significant decline in income tax rates over a 6-year period, and new tax advantages for the funding of retirement, profit-sharing and education savings plans.
In this month's column, I'd like to highlight the new provisions affecting retirement plans, 401(k) plans, profit- sharing plans and IRAs.
You can now increase the funding of retirement plans sponsored by your practice to generate higher benefits. Under the new law, a practice's "defined contribution" plan can be funded up to $40,000 per year, beginning with the 2002 plan year. The maximum annual contribution is currently $35,000. The limit for an annual "defined benefit" also increases in 2002, from $140,000 to $160,000.
401(k) plans. For a practice-sponsored 401(k) plan, a participant's maximum annual elective contribution will increase, starting in 2002. The contribution limit, currently $10,500, will rise to $11,000 next year and increase by $1,000 a year until it peaks at $15,000 in 2006.
In addition, participants who are age 50 and older will be permitted to make extra "catch-up" contributions in excess of the amounts described above. In 2002, the catch-up contribution will be $1,000. The catch-up figure increases by $1,000 each year until it reaches $5,000 in 2006.
Profit-sharing plans. The new legislation will also permit your practice to increase its deductible contribution to a profit-sharing plan. This contribution rate can be as high as 25% of participant compensation, compared to the 15% rate that had previously been in effect. Because of this increase in the deduction limit, a practice will now be able to fully fund a physician's account for each year by using a single profit-sharing plan. Under the old law, a practice needed both a profit-sharing plan and a money-purchase pension plan to fully fund its high-paid participants.
Your practice can now reduce administrative costs by eliminating the money-purchase plan and the annual accounting and IRS filings related to it. Retirement plan advisers generally favor the profit-sharing plan's discretionary funding nature, as the owners can determine the level of funding from year to year. The money-purchase pension plan has a fixed contribution rate.
IRAs. In general, practice staff members can take advantage of an IRA fund. However, deductible IRA funding isn't available for high earners.
The current annual limit for a deductible IRA fund is $2,000, but that will increase in yearly increments to $5,000 per year between between 2002 and 2008. After 2008, this limit will be adjusted in $500 increments to account for inflation. Individuals who reach age 50 will be eligible for a catch-up contribution of an extra $500 per year for the years 2002 through 2005, and $1,000 per year beginning in 2006.
Your practice can now contribute to your children's education IRAs.
Your education IRA deduction can be as much as $2,000 per year. In addition, distributions from an education IRA can be excluded from your own income. Qualified higher education expenses, including fees and tuition paid to eligible educational institutions, can also be deducted from your gross income, up to $3,000. However, 2005 is the cut-off year for this deduction.
Ask your accountant, retirement plan consultant, or lawyer to verify exactly how you can best use these provisions as part of your individual financial plan. Planning will need to be accomplished over several years, as a number of the changes imposed by the new legislation will be phased in gradually.
Mark E. Kropiewnicki, J.D., LL.M., is a principal consultant with The Health Care Group, Inc., and a principal and president of Health Care Law Associates, P.C., in Plymouth Meeting, Pa. He regularly advises physicians and practices on their contracting matters and business law obligations. He can be reached at (800)
Ophthamology Management, Issue: September 2001