Physiatry Practice Management Resources

Question Our practice is considering establishing a 401(k) or SIMPLE plan. We have been practicing for many years but have never offered retirement benefits to our doctors and employees. When we considered the administrative costs and hassles of a retirement plan, our doctors always shied away from it.

We have heard that the recently enacted tax laws have changed the retirement plan arena and created additional benefits for the employer and employees. We have three doctors and 18 staff members who would be very pleased if we adopted a 401(k) plan. What are the changes and how would it affect our practice?

Answer One of the many goals of Congress when it passed the Economic Growth and Tax Relief Reconciliation Act of 2001 was to make saving for retirement more attractive, cheaper and substantial for the taxpayers. There are many provisions included in the new tax law that execute this directive and may convince you that now is a good time to set up a retirement plan.

First, a new nonrefundable credit is available for expenses your practice incurs in establishing a new qualified retirement plan.

This credit applies to plans established after 2001 and is equal to 50% of the first $1,000 in administrative and retirement/education expenses incurred by you for each of the first three years, with a maximum credit of $500 per year.

The credit is available to your practice because you did not employ more than 100 employees last year.

A nonrefundable credit is also available to your employees for their contributions to a 401(k) or SIMPLE plan, to encourage their participation in a tax-favored retirement savings account.

The maximum annual contribution eligible for the credit is $2,000 and the credit rate depends on their income level. The credit is eliminated for higher income earners, such as the doctors of your practice.

Be sure to consider not only a 401(k) plan but also a SIMPLE plan. Although the tax deferrals are less with a SIMPLE plan, the administration costs and simplicity make them an attractive retirement vehicle.

Both types of plans allow for employee elective deferrals and have been changed significantly by the new tax law.

The old and new law limits what your employees can contribute, but the new law gradually raises these limits. For 2001, the most they can contribute to a 401(k) and SIMPLE plan is $10,500 and $6,500, respectively. The new law gradually raises these limits beginning in 2002, to eventually allow an employee to defer $15,000 for a 401(k) plan and $10,000 for a SIMPLE plan by 2006.

Furthermore, if you have employees 50 or older, after 2001 they may contribute even more than these limit amounts.

Under a 401(k), in addition to an employee elective deferral of a portion of their salaries, the practice may match the deferral and contribute up to $40,000 per year. The old law allowed $35,000.

However, under the old and new law, your employees' elective deferral must be included in these contribution limits.

Under the old law, qualified plans can take into account no more than $170,000 of your employees' compensation at 15% for purposes of calculating maximum employer contribution deductions and nondiscrimination tests. This increases to $200,000 after 2001, and the 15% of total compensation contribution limitation becomes 25% of compensation.

The new tax law allows more of your practice funds to be deferred for your doctors' retirement and provides additional incentives for retaining employees.

Whether you choose a 401(k) ora SIMPLE plan, the new tax laws should help you in creating a more attractive package to your doctors and employees.

Question We are an ob-gyn practice, and the doctors in our practice use their vehicles to travel between our offices and hospitals throughout the day. Do you think there are more tax benefits for our practice to own or lease a vehicle for our doctors?

Answer Whether your practice leases or owns the vehicles, you may deduct the operating costs of gasoline, repairs, insurance, parking and car washes. However, generally the tax laws are more generous with the auto-lease deduction than the auto-owned depreciation deduction.

If your practice leases a "business luxury automobile," which is defined to be in excess of a $15,500 fair market value, the deduction for the lease payments requires an income inclusion. You may find this income inclusion in a published IRS table, but generally the income inclusion amount is small. If your practice owns the vehicle and it is considered a "luxury" automobile, the tax write-off or depreciation is limited to a "luxury auto dollar cap."

It is necessary to perform the computational exercise but usually the depreciation deduction attributable to company-owned vehicles is less than lease-payment deduction, net of the income inclusion, attributable to company-leased vehicles.

You should also consider the economics of buying versus leasing your vehicle before making your decision; tax considerations should only be part of the analysis process.

By Cathy B. Goldsticker