Most ophthalmology practices provide one or more re-tirement plans that benefit the practice's ophthalmologists as well as its other em-ployees. The goal has always been to achieve the highest possible contribution level for the ophthalmologists and the lowest contribution costs for the rest of the staff.

Of course, this needs to be done in compliance with non-discrimination and eligibility rules.

Balancing the benefits of employer-sponsored retirement plans with the costs of providing those benefits is difficult for any ophthalmology practice. Every practice is unique, but many haven't retooled their retirement plans, which most likely can be made more beneficial to the practice and ultimately to its ophthalmologist owners.

Newer plan design features and law changes, as well as some rethinking of older types of retirement plans and features, now make it worthwhile to reconsider your retirement plans to maximize the benefits for your ophthalmologists and minimize your costs.

Traditional retirement plans

In a common type of traditional arrangement, the practice has a defined contribution pension plan and a profit-sharing plan. These plans take advantage of permitted discrimination by integrating them with Social Security. The ophthalmologists are each allowed the maximum legal contribution of $30,000 at a cost of approximately 14% of total eligible staff compensation.

How would you like to reduce your staff plan contributions by 6% of their compensation while maintaining the maximum legal $30,000 contribution for you and the other ophthalmologists in your practice? Well, a 401(k) retirement plan can do that -- and possibly more -- if you combine it properly with other plans and certain features.

Where the 401(k) comes in

The 401(k) retirement plan is growing fast in its popularity among ophthalmology practices because it can have a positive effect on the practice's bottom line and on compensation for its owners.

Employees can make contributions to their own 401(k) accounts by direct payroll deduction. This makes it easy and painless to save for retirement. Matching practice contributions to employees' 401(k) accounts, although not required, can make the 401(k) plan even more attractive to your employees.

Until recently, 401(k) plans required significant participation from non-highly compensated participants (i.e., staff) to remain qualified and to allow the highly paid members of the practice (i.e., ophthalmologists) to put away the maximum annual salary deferral. This year, the annual "elective deferral" amount has been increased to $10,500.

For most ophthalmology practices, indeed most medical practices, 401(k) plans were rarely appropriate because the elective deferrals of the lower paid group of employees usually weren't sufficient to support the larger elective deferrals desired by the physicians. In other words, the physicians were always willing to reduce their salaries by the maximum elective deferral amount (e.g., $10,500), but the employees usually weren't willing to reduce their salaries sufficiently, if at all, to allow the 401(k) plan to meet the complex non-discrimination testing rules.

As a result, few practices were able to effectively use a 401(k) plan, and therefore relatively few 401(k) plans were adopted by physician practices.

New safe harbor contributions made within a 401(k) plan now eliminate the need for performing and meeting the complicated, restrictive annual non-discrimination tests.

Without those restrictive non-discrimination tests, you can now defer as much of the $10,500 annual 401(k) elective deferral amount as you desire without worrying about failing to pass the non-discrimination tests. There is, however, a price to pay for using this new safe harbor.

The basic and most easily understandable way to satisfy the 401(k) safe harbor is to use a nonelective contribution formula. This requires your practice to make a contribution of at least 3% of compensation on behalf of each eligible participant, whether or not he or she is actually making 401(k) contributions.

In addition, the contribution must be fully vested immediately and it must be subject to certain distribution restrictions. Furthermore, the contribution may not be restricted to participants who are employed on the last day of the plan year and it may not be contingent upon hours worked during the year.

As an alternative to using the nonelective contribution formula to satisfy the 401(k) safe harbor, you can use other, more complicated matching contribution formulas that are available.

Because most practices already make at least a 3% contribution for eligible plan participants, there would be an increased 3% cost only for the employees who aren't already eligible for contributions in your retirement plan.

And you can look at it this way, too: That increased 3% contribution cost is usually more than offset by the reduction to the 3% level of the contribution you would have to make for your already eligible plan participants.

Your plan advisor can help you to decide whether the cost of providing the safe harbor contribution is worthwhile, as well as which safe harbor formula would be best for your practice.

New comparability option

The "new comparability" allocation testing option for retirement plans has had IRS approval for some time now but isn't used yet by most practices.

This option allows the practice to use the age of its employees (age-weighting) and job classification methodologies to determine how much it is required to contribute to employee retirement plans. More traditional retirement plans prohibit a practice from considering how long the contributions in employee retirement plans will be allowed to gather interest as part of the retirement funding calculations.

This option favors your practice if your employees are younger. For example, if the plan's retirement age is 65, and all your employees are in the 20 to 30 age range, you can project accrued interest over 35 to 45 years, and thus make smaller contributions for them. If, however, your staff is older, you can project accrued interest for no more than perhaps 15 to 20 years, and your practice will be obliged to make larger contributions for your staff.

In some cases, contributions made to ophthalmologist accounts can be significantly higher than those made to other employee accounts. Generally, to maximize contributions to ophthalmologist accounts, your practice must make sure non-ophthalmologist accounts are also significantly funded at rates of 5% to 7% of their eligible pay.

At those funding levels, it's highly possible to achieve contributions for your practice's ophthalmologists in the range of 15% to 18% of their pay.

The new comparability type of plan is a bit more expensive to establish and maintain than more traditional types of plans, primarily because of its increased complexity and need for annual testing of the contribution rates. But if your practice has an age mix that provides favorable age-weighting of contributions, it could be an excellent option.

Defined benefit plans

You have two main points to consider in this category.

�        Are your doctors overfunded? In the past, older ophthalmologists may have had a traditional employer-funded defined benefit plan. As a result of prior tax law changes, many older defined benefit plans were terminated because the highly compensated ophthalmologists were "overfunded."
In fact, many physicians were so overfunded that they haven't been able to receive any contributions in a retirement plan since then. Now, as a result of further tax law changes, those older ophthalmologists may be eligible for contributions to a practice's retirement plan(s). But the only way to find out is to check with your plan advisor or actuary.

�        New and old plans are no longer linked. This is a good reason to give defined benefit plans a second look. Until recently, the tax laws linked newly created defined benefit plans to prior contributions made under traditional defined contribution plans (such as profit-sharing plans), thereby severely restricting, in many cases, the amounts that could be contributed into a new defined benefit plan. That linkage is no longer required under the law.
Although defined benefit plans have some troublesome aspects (e.g., the need for regular actuarial calculations and administrative and regulatory complexity), they've made a great deal of sense in the past, and are becoming useful again.
The best candidates for a defined benefit plan are successful ophthalmologists who have little in retirement savings, approximately 15 years or less until retirement and the ability to begin contributing substantial amounts.

A good time to review

Although retirement plans are complex and not your favorite topic of conversation, they're almost always one of the most valuable assets you own.

And, as you're keenly aware, the cost of maintaining retirement plans is significant. Therefore, you should review your plans periodically to ensure that you're achieving an appropriate contribution for yourself while not contributing more than you legally have to for your staff -- unless you want to.

Again, a knowledgeable retirement plan advisor or actuary can help you to review your plan provisions and possibly find a better way to do things.

Mark E. Kropiewnicki, JD, L.L.M. and Joseph W. Gallagher, J.D., L.L.M. are principal consultants with The Health Care Group, Inc. and principals of Health Care Law Associates, P.C. in Plymouth Meeting, Pa. They have advised numerous ophthalmology and medical practices in all phases of legal matters, practice management and retirement planning. Mr. Kropiewnicki and Mr. Gallagher write and lecture extensively on a variety of retirement plan, practice management and health law topics. They can be reached at (800) 473-0032.