401(k) Case Study #2: A Dermatology Practice Helps Employees Build Their Nest Eggs
“In Your Own Skin” is a dermatologist’s office located in Atlanta, Georgia. Dr. Elder, the original founder of the practice, started the company in 2005 when he was 34 years old.
In the early days, he had three employees – an office manager and two part time physician assistants. In the first ten years of the practice, he added one more part-time support position for his office manager and two nurses. He also made the two PA’s full-time rather than part-time. His clientele grew and grew and he and his team developed a stellar reputation in the Atlanta area.
In 2015, the demand for services was so strong he decided to bring on another dermatologist to his practice, Dr. Younger. Dr. Younger also had two nurses and a PA she would bring with her from her current practice (all full-time).
Dr. Younger was 42 years old at the time and had just finished paying off her student loans. She was single with no children and loved to travel when she was not in the office. She was savvy enough to ask about “In Your Own Skin” benefits, including a 401(k) plan. While the company had health insurance offered, she learned they did not have a 401(k) plan currently. As part of her offer, she negotiated with Dr. Elder and they decided to start a 401(k) plan.
Once Dr. Younger and her team joined In Your Own Skin, there would be 11 total staff: two doctors, three full-time PAs, four nurses, and two office staff (the office staff would also be full-time once Dr. Younger’s team joined). They also hoped to add one more doctor and his or her team in the next several years.
Here are a few of “In Your Own Skin” experiences with retirement savings:
- Only two of the current employees, including Dr. Elder, had set up a personal IRA. The rest did not have a retirement savings. Dr. Younger and her team each had 401(k)s at their old practice, but obviously would not be eligible to continue contributing once they moved practices.
- They knew they could get a reduction of businesses taxes by setting up a 401(k), but weren’t sure how to do it (or how much they could save).
- The company was cash flowing enough to be able to offer some sort of employer contribution to the plan, but they weren’t sure how much they could offer.
The new office manager reached out to Investors Asset Management (IAM) to see if they could help meet the new needs of the growing company. After an initial 30-minute consultation, here are the recommendations for In Your Own Skin from IAM:
- After running an analysis with the company’s census, IAM determined In Your Own Skin could offer an employer match on the 401(k) of up to 4% for all employees working over 20 hours per week. This would be a “safe harbor” match, which would help reduce compliance hiccups.
- They explained In Your Own Skin could also set up a profit-sharing arrangement. In a profit-sharing plan, an employee receives a percentage of the company’s profits based upon its annual earnings (it’s up to Dr. Elder and Dr. Younger as to how much of the profits they would like to share). This is a tax-deductible expense and could help reduce their business tax liability.
- As an eligible small business, the SECURE Act increased their potential tax credits – for each participating nurse, PA, and office manager, they would receive $250 annually for up to three years (a maximum of $2,250 a year). They are also eligible for an additional $500 dollar tax credit by adding automatic enrollment to the plan (the credit is available for three years for a total of $1500).
- IAM would provide customized employee onboarding specific to In Your Own Skin, as well as one-on-one support for those who have additional questions.
- IAM provides an investment line-up consisting exclusively of low-cost index funds and ETFs, with access to Target Risk model portfolios (hint: about 95% of participants opt into the Target Risk model portfolios rather than selecting individual funds from the line-up).
In the conversation, IAM also let the doctor’s and office manager know IAM would take on the 3(38) liability for In Your Own Skin (which they didn’t even realize was on their plate, but were glad not to have to deal with).
After a year, all 11 eligible employees participated in the plan. Dr. Younger and Dr. Elder had fully executed the profit-sharing component of the plan (They each had started socking away $57,000 each for their future retirement!). They were also thrilled to find a reduction in their business taxes. In retrospect, Dr. Elder wished he had started this plan when he first started his practice, but he is glad to have it in place now.