In late 2022, the SECURE 2.0 Act was passed. This act carries a bunch of ramifications financially. However, some of the biggest impact from SECURE 2.0 may be on may be on medical practices.
I’ve asked key resource, Thomas Bodin, CFA, CFP®, a Practice Integration Advisor at Buckingham Wealth to share his thoughts!
First, some background on SECURE 2.0
In the final days of 2022, President Biden signed the Consolidated Appropriations Act of 2023. A part of this omnibus bill included the second group of provisions that fell into the Securing a Strong Retirement Act legislative agenda. This is more popularly known as the SECURE 2.0 Act. This anxiously awaited bill contains many time-sensitive opportunities that may impact small businesses, practice owners and clinicians.
Of all the provisions in SECURE 2.0, adjustments and tax credits to 401(k) and other qualified plans may impact medical practices and their owners the most.
However, these expansive changes are not universally applicable at the start of this legislation. The rolling introduction of these changes has created some powerful planning options for informed practice owners. Here is a quick yearly breakdown of important upcoming opportunities:
Starting in 2023
- You can receive a tax credit for 100% of administrative costs (up to $5,000) related to starting a 401(k) plan.
- You can receive a tax credit for up to $1,000 per employee of employer contributions. The credit is allowable for employees making less than $100,000 per year and phases out over four years.
Starting in 2024
- You can include employee student loan payments when calculating employer contributions.
- Top-heavy testing will be eased to allow excludable and non-excludable employees to be tested separately. A move to encourage employers to provide plan access to help young employees save for retirement will begin.
And Starting in 2025
- If your practice is older than three years, has more than 10 employees and is offering a new 401(k) plan, you must include both auto enrollment and auto escalation provisions.
With these above requirements from SECURE 2.0, introducing a 401(k) plan in 2023 or 2024 will allow medical practices to secure tax benefits and expand tools for retaining associate clinicians. They may benefit from a more efficient allocation of employer contributions while avoiding the administrative costs introduced in 2025.
Is a 401k Worth It Anymore for Doctors?
Real-life implications of the SECURE 2.0 provisions for medical practices
Let’s take a deeper dive into these forthcoming provisions using an example of a 30-year-old practice owner.
This young clinician recently purchased her practice after two years as an associate. She currently has 12 employees ranging in age from 22 to 53 who are earning between $20,000 to $65,000 annually.
In 2023, the owner wants to accelerate her net worth by decreasing her tax burden, increasing her savings rate and providing incentives for employees to stay with the practice by introducing a 401(k) plan.
Working with a third-party administrator (TPA) familiar with practice demographics, she is hoping to optimize owner retention with a top-heavy 401(k). This plan is designed for practice owners and other key individuals to accumulate greater than 50% of plan assets. The TPA startup fee is anticipated to be $4,500. This covers legal work, plan design, trust set-up, yearly nondiscrimination test, annual reports and more.
With a projected minimum benefit of $1,037 and a maximum of $3,769, the average employee will enjoy a profit-sharing benefit of $2,215. The total deductible employer-provided benefits in the plan forecast to be $26,583 without tax credits. The owner and her spouse will be able to defer a total of $44,000. They will receive $14,200 in safe harbor matching contributions. Lastly, they will acquire an additional $30,069 in profit sharing for a total deductible contribution of $88,270.
Before SECURE 2.0 tax credit provisions
Without the SECURE 2.0 qualified plan tax benefits, the owner’s family will receive $88,270 of the $114,852 contributed to the plan. This is approximately 77% of employer and owner-related employee contributions.
Assuming the owner will fall into the 37% marginal tax bracket, the plan will provide $42,496 in tax savings for the year. Not a bad tax outcome or allocation, but we would like to see a larger retention rate for owners.
After SECURE 2.0 tax credit provisions
Because this practice owner has fewer than 50 employees, she will receive a $1,000 tax credit for each employee contribution. This incentive phases out between 50 to 100 employees.
After incorporating the tax credit, the personnel benefits do not change. But, the employer’s net profit-sharing contribution will decrease the average employee funding to $1,215. The minimum net employer-provided funding will be $37 and maximum contribution will be $2,769. All else within the plan will remain the same. Across the owner’s employee and employer contributions, the family will continue to retain $88,270 in deductible contributions.
With the employee tax credit applied, the employer provided net employee contributions totaled $14,583. This pushes the owner’s retention of the total employer and owner employee contributions to 86% of plan funding. Since the owner cannot deduct contributions offset by a tax credit, the tax savings decreases to $38,056. However, the additional $12,000 in tax credits bumps the owner’s tax benefits to $50,056. The extra tax credit related to plan startup costs will provide a credit for $50 to $5,000. Thus, the credit negates the total $4,500 for introducing a top-heavy customized qualified plan for the owner, for a total tax-related benefit of $54,556.
It bears reiterating that the per employee tax credit phases out over the upcoming four year. And the startup tax credit is effective for a three-year period. If there are no changes to the staff demographics and the plan, the administrative fee falls to $3,500 after the initial startup year, and the tax credits will equal $41,500 to the owner.
New opportunities in 2024
Starting in 2024, two additional defined contribution 401(k) tools will be available for practice owners:
- The first is the ability to treat qualified student loan payments as a plan contribution for matching purposes.
- The second is the ability to allow excludable employees to be tested separately for nondiscrimination testing.
For many young clinicians, their student loan balance can feel prohibitive to building a retirement nest egg. One of our greatest wealth creation opportunities is time; years of compounding interest can greatly and positively impact retirement readiness. Also, talent wars are real for clinicians and support staff. The ability for an employer to consider qualified student loan payments for employer retirement matching creates a competitive tool for clinician owners looking to attract and retain talent. While this is not a mandatory provision, an owner clinician can utilize this as a competitive advantage.
The second tool provides business owners an opportunity to offer retirement accounts to younger employees. Traditionally, when designing a top-heavy plan to favor clinician owners and their families, employees under 21 years old, part-time workers or other defined employee classes are excluded. This is to improve demographics for plan-testing purposes. Allowing excludable employees to participate in a plan while excluding them from testing means the owner will be able to provide qualified retirement accounts to these categories of excluded employees without increasing employer cost in the plan. As the talent wars continue to persist, this type of benefit can be an additional competitive advantage to building and retaining the right team.
What’s on the horizon for 2025
In the following year, things become a bit more complicated. SECURE 2.0 introduces two mandatory provisions to start-up qualified plans: auto enrollment and auto escalation. From a broad perspective on retirement readiness in our country, I am a fan of these provisions. In his book “Nudge,” Noble Prize winner Richard Thaler showed these simple provisions dramatically increase retirement savings for wage earners. Additional peer-reviewed papers support these findings. However, these provisions will introduce administrative time and possibly plan-related expenses for practice owners.
Currently, most defined contribution plans, such as 401(k)s, require a participant to proactively enroll in the plan once they are eligible
For employees who are not interested in actively deferring into a plan, they are still eligible for employer contributions, such as profit sharing. But their lack of enrollment will exclude them from most matching provisions and may lessen administrative time. Auto enrollment changes this from an opt-in to an opt-out provision. With auto enrollment, an employee will automatically enroll in the plan when they are eligible. The plan sponsor must enroll participants with a uniform percentage of compensation for the employee, ranging from 3% to 10%.
The above auto enrollment provision ties to an auto escalation provision. This will require plan sponsors to automatically escalate employee deferrals on their behalf. This escalation needs to be 1% on the first day of the plan year (usually January 1) and will continue until the participant reaches at least 10% of compensation, but not more than 15%.
The auto enrollment and auto escalation provisions are subject to employers with more than 10 employees and that have been in business for three or more years. Since most clinician owners do not have full-time HR personnel or a benefits coordinator, managing and monitoring these provisions will likely fall on their shoulders. While the cost of these provisions is currently unknown, there will likely be an expense from a TPA. This passes on to business owners as well.
Other plan-related provisions
While the new SECURE 2.0 provisions provide a strategic opportunity for medical practices, clinicians and practice owners should be aware of several additional considerations in employee qualified plans:
- Roth Employer Contributions: Starting in 2023, employer matching and/or profit-sharing contributions can be made to a Roth account. The employee will be responsible for the income taxes.
- Roth Catch-Up: Starting in 2024, individuals earning $145,000 or more must make catch-up contributions as a Roth deferral in an employer-sponsored plan.
- Part-time employees: Previously, for small businesses it was standard to include the most restrictive eligibility for qualified plan provisions, requiring one year of employment with 1,000 hours or more. Beginning in 2025, employees with two or more consecutive years of 500 hours or more will also be eligible for plan participation.
- Larger Catch-Up for Some: And starting in 2025, individuals ages 60 to 63 will have an increased catch-up limit of $10,000 or an amount equal to 150% of the catch-up limit currently in effect.
Bringing it all together
As you can see, a properly designed qualified plan is an efficient and effective wealth acceleration tool for high-income clinical owners. SECURE 2.0 introduced cost savings in the form of tax credits, which will further the success of these plans. In addition, certain provisions can help you stand out in a competitive employee market without harming the efficacy of a qualified plan. Opening a defined contribution plan over the next several years will allow you to capture new tax credits and expand employee benefits before certain administrative responsibilities and expenses are mandatory.
If you do not have a plan in place and would like to explore if one would benefit your journey to financial freedom, now is the time to begin. The practice integration advisors at Buckingham would love to help. You can schedule a conversation with them today!
For more content related to optimizing your medical practice, check out these posts!
- 7 Do’s and Don’ts of Building a Successful Medical Practice
- How Can Doctors Attract Patients to Their Practice
- 5 Biggest Medical Billing Errors that Doctors Make
What do you think? Have you looked at the SECURE 2.0 provisions and their impact on medical practices? Would you implement any changes for your medical practice? Why or why not? Let us know in the comments below!
About the author
As a practice integration advisor, Thomas provides comprehensive financial advisory services to dental and medical offices. This includes tax, pension and retirement planning. He has a passion to help medical professionals connect the hard work they put into their practices with their most deeply held values and goals. All through Buckingham’s evidence-driven approach to true wealth management.
Disclaimer to be added by Compliance:
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.