Should dentists use a cash balance plan?

A cash balance plan can fit a dental practice well, and your own census decides it. The plan tends to fit an owner with high, steady income who is older and better paid than most of the staff and can fund the plan every year for several years. An enrolled actuary’s tests on your staff settle the rest.

A cash balance plan is a kind of defined benefit plan, so the rules in this answer apply to it.

An older owner can contribute more each year, because fewer years remain to fund the same capped benefit, which is why age matters as much as income.

A defined benefit plan defers tax. Contributions are deducted now and taxed as ordinary income when paid out.

The full answer: How much can I put away?

Nobody can give you that number until an enrolled actuary runs the tests on your practice’s census. The law requires the plan to cover enough of your staff, and when the plan is tested together with a 401(k) or profit sharing plan, each employee who is not highly compensated must receive at least a minimum allocation, called the gateway.

The gateway is at least one third of the allocation rate of the highly compensated employee with the highest rate, or 5 percent of pay if that is less, while that highest rate is 25 percent of pay or under. A plan that gives each of those employees 7½ percent of pay is treated as passing.

A cash balance plan must fully vest each employee’s benefit after no more than 3 years of service.

The full answer: What do my employees get?

The law does not ask about practice debt, but the plan’s yearly minimum contribution is mandatory once the plan exists. A dentist still paying off a practice loan should be sure the practice can meet that minimum in a weak year as well as a good one, after the loan payments are made.

An unpaid minimum is taxed at 10 percent, and at 100 percent if it stays unpaid. A plan is also meant to last. A Treasury regulation says that abandoning a plan within a few years, for any reason other than business necessity, is evidence that the plan was never a genuine program for employees.

Waiting until the practice’s cash flow is steady is a reasonable answer, and so is starting with a design whose minimum the practice can carry. Your CPA and the actuary can model both before you sign anything.

The full answer: What are the risks?

Not if the plan has always been small. The PBGC, the federal agency that insures most private defined benefit plans, does not cover a plan of a professional service employer, such as a dental practice, that has never had more than 25 active participants at any time after September 2, 1974.

Dentists are on the statute’s list of professional individuals. A plan maintained only for substantial owners, meaning owners of more than 10 percent of the business, is not covered either. Paying PBGC premiums does not make an excluded plan covered.

For a covered plan ending in 2026, the PBGC’s maximum guarantee at age 65 is $7,789.77 a month as a straight-life annuity. Ask the actuary whether your plan is covered before anyone tells you it is insured.

The full answer: Who holds my money?

Most of them. The Census Bureau’s Statistics of U.S. Businesses counted 120,488 dental firms with employees in 2022. Of those, 113,495 had fewer than 20 employees and another 2,785 had 20 to 24. The counts are of employer firms, not of offices or of dentists.

Employees and plan participants are not the same count. The PBGC’s line is drawn on active participants in the plan, which depends on who the plan covers, so the actuary, not the Census table, tells you which side of that line your plan sits on.

The IRS lists the defined benefit plan as the most costly and the most administratively complex type of plan. The contribution is mandatory each year within the actuary’s range, and an unpaid minimum is taxed at 10 percent, then 100 percent. The practice bears the investment risk, so a shortfall raises future contributions.

Benefits do not depend on how the plan’s investments do. The money is locked until age 59½, separation or plan termination, with a 10 percent additional tax on early distributions. Staff must be covered and credited under federal tests. Fees for the actuary, the administrator and the filings are due every year.

The full answer: What are the risks?