Does a Simple IRA Make Sense for Your Medical Practice?

The 401K plan is the overwhelmingly popular choice of retirement plans for most medical practices.  It allows a salary deferral of $18,000 or $24,000 in 2015. However, in most practices and other businesses, a 3 percent of compensation employer contribution is required to allow a full salary deferral. 

As the ratio of employees to practice owners goes up, the percentage of plan contributions that is for the benefit of the owners keeps dropping.  Perhaps recruitment and retention issues are important enough to rationalize the plan costs, but in some cases they are not.

I work with a few practices that have one provider with more than five employees.  In this situation, it becomes an option to consider the Simple (savings incentive match plan for employees of small employers) IRA as an alternative plan.   With the Simple IRA, the owner is allowed a salary deferral of $12,500 in 2015 (with a catch up of $3,000 if the owner is age 50 or older). 

The owner opens a Simple IRA account for the funding.  Any employees that wish to participate also get their own IRA accounts that they can make the same deferral to.  The plan also has a match, which in most cases is 3 percent of compensation (with no limit to how much compensation counts, as exists in other retirement plans). 

So, if an owner age 50 or older makes $300,000, he can add a $9,000 match to his $15,500 salary deferral for a total annual contribution of $24,500.  Often employees choose to defer nothing or very little to their accounts, so the employer match is very minimal ($30 per $1,000 deferred per employee).

These Simple IRA plans can be set up at no initial cost, and there is no reporting for the employer to do to the IRS.

The disadvantage of the Simple IRA is the limited amount of contributions. 

With a 401K, the 51-year-old physician making $300,000 could contribute up to $59,000 in 2015, albeit with employee costs and significant plan reporting.  With the Simple IRA, he would be limited to $24,500. 

The other problem with the Simple IRA is the fact that employees will perceive little benefit from the plan unless they make large deferrals (which is unusual).

If a Simple IRA sounds interesting, discuss it with your financial adviser.  As the plans are available at either no or very low cost for the set up and management, it is not so easy to get advice on them. 

Do be careful with brokerage sponsored simple IRA plans, which often only allow very expensive funds as investment choices.  I'd suggest a low cost brokerage house such as Fidelity or Vanguard.