Avoid Common Pitfalls with Your Employee Benefits: Pitfall No. Two -Retirement Plans
This is the second in a weekly series of four articles by financial expert Mackenzie Martin. The first article focused on pitfalls in employee insurance benefits. Articles 3 and 4 will focus on pitfalls in other types of employee benefits, and pitfalls in paystubs.
Pitfall #1: Not Understanding How Employer Contributions Works
Example from a small, privately owned, animal hospital: The practice has a SIMPLE IRA which means there are two options (per the IRS) for matching contributions. The first option is a 1-3% match. The “fine print” to this option states that the match cannot be lower than 3% for any two out of five years. Alternately, the employer can choose to make a 2% non-elective contribution for all employees. We rarely see employers using option 2, and option 1 implementation is frequently riddled with mistakes and inaccuracies. Many small employers don’t understand the IRS rules, and employees don’t either, and money is left on the table. If you have a SIMPLE IRA, every Nov. 1st your employer should provide written documentation of the match for the coming year. The critical takeaway when you review your documents is to remember that the match cannot be less than 3% for more than two in five years.
Example from corporate hospital A: Requires a 6% employee deferral before contributing the maximum 3.5% match. If you only contribute 2%, they only match 1.5%, if you only contribute 4%, they only match 2.5%. You need to contribute at least 6% of your wages to get the maximum 3.5% match.
Example from corporate hospital B: This employer “may make a discretionary company match to your 401(k) account after the end of the plan year. To qualify for the company match, you must still be an eligible participant in the Plan on December 31st of the plan year. The company match may vary from year to year.” We have seen variable employer contributions from this corporate employer, while other corporates have a fixed and predictable matching plan.
Pitfall #2: Understanding “Highly Compensated Employee Limits” and a 401(k) plan
Some clinics, primarily larger corporate hospitals, limit the dollar amount a highly compensated employee—usually earning over $100K-$120K—can defer to the 401(k) plan. We normally see around $10,000/year, even though the IRS limit is $19,000/year. This limitation is called the “HCE Cap” and can vary from year to year. To help remedy this problem, some hospitals also provide a deferred compensation plan for retirement. Deferred compensation plans are often not included in general benefits guides, as they do not apply to all employees, just the highly compensated ones. There is significant nuance to these plans and they must be carefully reviewed before use.
Pitfall #3: Is There a ROTH 401(k) Option?
For 2019, the maximum annual income limit for a ROTH IRA is $137,000 for single filers and $203,000 for married filing jointly. If you make too much money to contribute to a ROTH IRA directly, you may be able to contribute to a ROTH 401(k). Many 401(k)s have a ROTH option, but it’s not well publicized, so you may not even know you have the option without asking.
Pitfall #4: Defining “Full Time” vs. “Part Time” and How it Applies to Plan Eligibility
Most employers group benefits into the full time and part time categories. In many cases, especially in small employer settings, these categories are not sufficient to categorize or apply within the context of a retirement plan. Here’s a common example we see: SIMPLE IRAs are set up to require “an employee earn $5,000 in the prior plan year, and be expected to earn $5,000 in the coming plan year to be eligible.” Let’s say you were hired in Nov. 2018 and made $5,000 by the end of 2018. As a part-time doctor, you would definitely make at least $5,000 in 2019 to be eligible to participate as of Jan. 2019. Even though you’ve only been employed 2 months, and you only work part time, in this specific instance you would be eligible. Your benefits package may specifically state “all benefits require XXX amount of waiting period” when that doesn’t actually apply.
Pitfall #5: Understand What Vesting Means
Vesting is a legal term that means to give or earn a right to a present or future payment, asset or benefit. It is most commonly used in reference to retirement plan benefits when an employee accrues non-forfeitable rights. Simply put, it is how long you have to work before you can walk away and still keep the matching or profit sharing contributions in your retirement account.
Example from corporate hospital A: Has a 2 year period for “full vesting “of their matching contributions, which means the employee keeps 100% of the matching contributions after two years.
Example from corporate hospital B: Has a 5 year vesting schedule for their discretionary profit sharing. This is not guaranteed, contributions can be $0 and can change every year.
To read the first article, visit the WSVMA website.
From general, solo and specialty practices to multiple partner practices, our in-depth experience encompasses a broad range of corporate entities and unique business structures within the veterinary field. For a consultation, please contact: Mackenzie Martin at (503) 697-0817 or [email protected]
Registered Representative offering securities through Independent Financial Group, LLC (IFG). Member FINRA/SIPC. Medical Professionals Financial Group is not affiliated with IFG. Registered Representative offering securities and advisory services through Independent Financial Group, Inc. (IFG) member FINRA/SIPC. Medical Professionals Financial Group and IFG are not affiliated entities. Office of Supervisory Jurisdiction 310 N. State St. Suite 206 Lake Oswego OR 97034. OR Insurance License #708320. Consult your legal or tax advisor for your specific situation.
Posted June 14, 2019