Case Studies

Case Study Profile

Business Type:

"Hospital-based Physician" as an "Independent Contractor"

Business Entity:

Professional Corporation (P.C., Subchapter "C" Corporation)

Owner's Income:

$200,000 earned income reportable on W-2 earned income prior to bonus

Projected Profit

$150,000 prior to plan contribution

Owner's Age:

Marital Status:

Married; Spouse is Age 50

Employees:

None

Plan Objective:

Maximize tax deductible contribution to provide maximum retirement benefit

Comments:

Prior to 2002, the spouse was not compensated due to the 15.3% cost associated with the Social Security and Medicare taxes (FICA), and a previously repealed pension law that limited plan contributions if a spouse was included in the plan.

The physician typically receives a bonus at year-end ("zeroing out the P.C.") to yield no corporate profit or tax. However, starting in 2002 the physician's spouse receives $41,000 ($49,000 in 2006) of W-2 earned income as the practice office manager and bookkeeper.

The spouse income and the additional pension expense mitigate the need for a taxable bonus and dramatically increases the retirement benefit for the physician's family. Learn more about why you should consider adding your spouse to your plan

Outside tax counsel affirmed the physician's status as an independent contractor of the hospital. Learn more about Hospital-based Physicians" as "independent contractors"

$41,750 more with the Mini(k) in 2005!

Plan Design Analysis

Prior to 2002, the employer Profit Sharing Plan contribution deduction limit was 15% of eligible compensation, the individual plan contribution allocation limit was the lesser of 25% of compensation or $35,000 and the compensation limit considered in determining the employer maximum deduction and the individual contribution allocation was $170,000. Spouses working for family owned businesses were oftentimes not compensated due to the 15.3% cost associated with the Social Security and Medicare taxes (FICA), and a previously repealed pension law that limited plan contributions if a spouse was included in the plan.

Starting in 2002, the revised pension law provides the following:

An employer has the discretion to contribute and deduct from 0-25% of eligible employee compensation to a Profit Sharing Plan.

The individual compensation limit increases to $200,000 ($220,000 in 2006).

The individual contribution allocation limit increases to the lesser of 100% of compensation or $40,000 ($44,000 in 2006).

The 100% of compensation or $15,000 (2006 limit) individual 401(k) contribution limit is not considered in determining the employer 25% deduction limit.
The $5,000 (2006 limit) 401(k) "Catch-up" contribution for the physician and spouse is not considered in applying the $44,000 (2006 limit) individual allocation limit or the 25% employer deduction limit.

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What's the catch? Just one, in reality the Mini(k)Plan is a Profit Sharing Plan with a 401(k) feature. This means that the Mini(k) is a qualified retirement plan subject to numerous government compliance requirements. If you don't comply with these requirements, you can lose the benefits gained by choosing this plan type over a SEP or a SIMPLE. Here's a chart that illustrates just some of the compliance requirements and features for these different plan types.

Compliance Requirements and Plan Features	SEP	SIMPLE	Mini(k)Plan
Formal Plan Document	No	No	Yes
Trust Reconciliation	No	No for SIMPLE IRA Yes for SIMPLE 401(k)	Yes
Annual Filing	No	No for SIMPLE IRA Yes for SIMPLE 401(k)	Yes¹
Rollovers from other Plans and IRAs	Yes	Other SIMPLE only	Yes
Loans Permitted	No	No	Yes
Advantage to add Spouse	No	Yes	Yes
Updates Required by Law	No	No	Yes
Establish New Plan By	Due date of return or any extension	October 1 unless new employer	December 31
Must fund Employee Contribution by	Not Applicable	Corporation: Earliest date employer can transmit contributions. Sole Prop/Partner: by due date or extension.	Corporation: Earliest date employer can transmit contributions. Sole Prop/Partner: by due date or extension.
Must fund Employer Contribution by	Due date of return or any extension	Corporation: by due date of return or extension. Sole Prop/Partner: by due date or extension.	Corporation: by due date of return or extension. Sole Prop/Partner: by due date or extension.
¹ Recommended but not required until assets exceed $100,000
This chart illustrates basic requirements only. All plans shown may be selected for audit by the government; all require timely and accurate completion of forms and other related documents when established and ongoing. Chart is intended as a resource only; consult a professional before implementing any plan.

View comprehensive chart for these plan types: "Compliance Requirements and Limits"

View comprehensive chart for these plan types: "Available Benefits and Features"

Closing Comments

A SEP or SIMPLE plan is traditionally the appropriate plan type for an independent contractor (self-employed individual). While these plan types typically do not permit the business owner to contribute the law's maximum deductible contribution, they do not require formal plan documents, governmental reporting and disclosure and the additional cost for professional services typically associated with these requirements.

The Mini(k)Plan is a qualified retirement plan (Profit Sharing Plan with a 401(k) feature) requiring a formal plan document and governmental reporting and disclosure. However, in addition to a higher tax-deductible contribution for the physician, the Mini(k) also permits a contribution for the spouse equal to 100% of compensation up to $49,000.

In addition, since the physician and spouse are age 50, the "catch-up" contribution feature permits each of them to contribute an additional $5,000 in 2006. This means that the physician and spouse can contribute a total of $98,000 to the Min(k) in 2006!

The physician can actually contribute more to a qualified retirement plan program without adding his spouse to payroll (even though the spouse actually works for the practice). A higher deductible contribution is achieved by establishing a combination Defined Benefit Pension and Mini(k)Plans.

However, the defined benefit plan is far more complex than the defined contribution plan described in this case study (Profit Sharing Plan with a 401(k) feature). Specifically, the defined benefit plan is a pension plan which therefore requires annual contributions, the annual required contribution to fund the defined benefit fluctuates based on the investment return of the plan assets (higher required contribution in years subsequent to low returns; lower required contribution in years subsequent to high returns), and the cost associated with plan establishment and annual compliance services are significantly higher than a stand alone Mini(k)Plan.

View Case Study: "Combination Defined Benefit Pension and Mini(k)Plan"

Bottom Line: The associated cost to establish and maintain the Mini(k)Plan is justified based on the additional taxes you save and the dramatic increase in benefits at retirement.

Learn more about how the interrelationship of the individual contribution and employer deduction limits permit this dynamic plan design.

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The information provided is intended as a general resource, not as investment or retirement planning, or legal plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a qualified planning, tax or ERISA professional. ERISA Expertise LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update. Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.