What is the best retirement plan option for a physician with her own practice, employees and a desire to fund her retirement without making things complicated? She'd like to avoid plans that rely on a stringent income test or require all employees to part

By Denise Appleby AAA
A:

It is very unlikely that you will find a qualified plan or an IRA-based plan that will allow the employer to exclude other employees, as all employees must be allowed to participate in the plan when they meet the eligibility requirements.

An alternative is to include strict eligibility requirements in the plan. For instance, many employers choose to adopt a plan with eligibility requirements that would allow only certain employees to participate in the plan and/or receive plan benefits; they include the following:

  • A plan may require an employee to complete an annual 1,000 hours of service for up to two years in order to become eligible to participate in the plan. If an employee works fewer than 1,000 hours each year, they may be excluded if your client chooses to adopt this 1,000-hours requirement. Of course, this may not be possible with full-time employees.
  • A plan may also implement a vesting schedule. For instance, the plan may require the employee to work for at least five years in order to become entitled to the contributions made to the plan on his/her behalf. For employees who leave before the five-year period, their contributions would revert back to the plan or, in other words, be forfeited. For plans that adopt a two-year service requirement in order to become eligible to participate, contributions are immediately 100% vested.

Alternatively, the employer may choose to adopt a non-qualified plan, such as an excess-benefit plan or a top-hat plan. For non-qualified plans, employers may limit participation to business owners or highly compensated employees.

For further reading, see 401(k) Plans for the Small Business Owner, Plans the Small Employer Can Establish and Establishing an SEP IRA.


This question was answered by Denise Appleby
(Contact Denise)

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