Dentist Group Practice Planning: Increased Profit Sharing Contributions

Dentist Group Practice Planning: Increased Profit Sharing Contributions

Executive Summary

A multi-partner dentist group practice in suburban Chicago faced challenges in designing a profit-sharing plan that effectively balanced the needs of senior partners nearing retirement with attracting and retaining younger associates. Golden Door Asset partner, Patricia Brennan, conducted a comprehensive financial analysis and designed a customized profit-sharing plan that maximized contributions for all partners, improved employee retention by 10%, and positioned the practice for long-term financial stability. This strategic overhaul empowered the practice to attract top-tier dental talent and secure a more comfortable retirement for senior partners.

The Challenge

Dr. Miller, the senior partner at "Smile Solutions Group," contacted Golden Door Asset with growing concerns about their existing profit-sharing and 401(k) plan. The plan, while functional, was failing to adequately incentivize younger associates and provide sufficient retirement contributions for the senior partners. Specific challenges included:

• High Turnover Among Associates: The practice experienced a 15% turnover rate among associate dentists within their first two years. Exit interviews consistently pointed to perceived inadequacies in the retirement plan as a contributing factor. Associates felt the contribution matching was insufficient and the vesting schedule too long. This cost the practice approximately $75,000 annually in recruiting and training expenses.

• Suboptimal Contributions for Senior Partners: Dr. Miller and the other senior partners (ages 55-65) felt they were not maximizing their tax-advantaged retirement savings. They were consistently contributing the maximum elective deferral ($22,500 in 2023, plus an additional $7,500 catch-up contribution), but the profit-sharing component wasn't structured to allow for larger contributions that would align with their retirement goals. Projections showed they would fall short of their desired retirement income by approximately $300,000 - $500,000 each.

• Complex Partnership Dynamics: The partnership structure involved tiered ownership percentages, varying levels of patient responsibility, and diverse compensation models. This complexity made it difficult to design a single profit-sharing formula that was perceived as fair and equitable by all partners. Some partners felt the existing formula disproportionately benefited those with smaller patient loads.

• Administrative Burden: The practice's HR manager spent considerable time managing the retirement plan, dealing with employee questions, and ensuring compliance with evolving regulations. They needed a solution that would simplify administration and free up their time for other critical HR functions. It was estimated that the HR Manager was spending at least 8-10 hours per month on managing the retirement plan.

• Lack of Differentiation: In a competitive market for dental talent, Smile Solutions Group needed a compensation and benefits package that stood out from other practices. The existing retirement plan was viewed as average, not as a compelling reason for top dentists to choose their practice.

The Approach

Patricia Brennan adopted a phased approach to address Smile Solutions Group's challenges:

1. In-Depth Financial Analysis: Patricia began by conducting a comprehensive review of the practice's financial statements, including revenue, expenses, partner compensation, and existing retirement plan documents. This analysis provided a clear understanding of the practice's cash flow, profitability, and ability to support increased retirement contributions. This review also included benchmarking their current contributions against similar dental practices.

2. Partner Interviews and Needs Assessment: Patricia interviewed each partner individually to understand their individual financial goals, retirement timelines, and concerns about the existing plan. This ensured that the redesigned plan addressed the specific needs of all stakeholders. These interviews uncovered that junior partners were more focused on debt repayment, while the senior partners were looking to maximize late-career savings.

3. Profit-Sharing Plan Design: Based on the financial analysis and partner interviews, Patricia designed a customized profit-sharing plan that incorporated the following key features:

   • Tiered Contribution Formula: Patricia recommended a tiered contribution formula that allocated profit-sharing contributions based on a combination of factors, including seniority, patient volume, and ownership percentage. This allowed the practice to reward top performers while ensuring that all partners received a meaningful contribution.
   • Safe Harbor 401(k) Provision: To attract and retain associates, Patricia suggested implementing a Safe Harbor 401(k) provision. This ensured that all employees received a guaranteed contribution, regardless of whether they elected to contribute themselves. This drastically improved the perceived value of the retirement plan for the associate dentists.
   • Targeted Contribution for Senior Partners: To help senior partners maximize their retirement savings, Patricia recommended a strategy that involved maximizing profit-sharing contributions for this group while remaining within IRS guidelines. This allowed them to significantly increase their contributions without negatively impacting the younger partners.
   • Vesting Schedule Optimization: The vesting schedule was modified to provide faster vesting for associate dentists, making the plan more attractive and increasing retention. The new schedule vested 50% after 2 years of service and 100% after 4 years.

4. Implementation Support: Patricia worked closely with a third-party administrator (TPA) to implement the redesigned profit-sharing plan and provide ongoing support to the practice's HR team. This included creating employee communication materials, conducting educational workshops, and answering employee questions.

5. Ongoing Monitoring and Adjustments: Patricia and the team created ongoing reports and annual plan reviews to monitor the plan's effectiveness and make adjustments as needed. This ensures the plan continues to meet the practice's evolving needs and remain compliant with all regulations.

Technical Implementation

The technical implementation involved several key calculations and considerations:

• Contribution Limits: Patricia carefully considered IRS contribution limits for both elective deferrals and profit-sharing contributions. The plan was structured to maximize contributions within these limits, while also ensuring compliance with nondiscrimination rules.

• Nondiscrimination Testing: The designed plan was subjected to rigorous nondiscrimination testing to ensure that it did not disproportionately benefit highly compensated employees (HCEs). Patricia used software to run these tests and make adjustments as needed.

• ADP/ACP Testing: Patricia also ensured that the plan passed ADP/ACP testing, which compares the deferral rates of HCEs to those of non-HCEs. This prevented the plan from being deemed discriminatory.

• Top-Heavy Testing: Because of the high concentration of ownership in the senior partners, top-heavy testing was performed to ensure that sufficient contributions were being made for non-key employees.

• Integration with Payroll System: The redesigned plan was seamlessly integrated with the practice's existing payroll system to automate contribution calculations and reporting. This reduced the administrative burden on the HR team.

• Plan Document Amendments: Patricia drafted the necessary plan document amendments to reflect the changes to the profit-sharing formula and vesting schedule. These amendments were reviewed by legal counsel to ensure compliance with all applicable laws and regulations.

The TPA utilized industry-standard software to manage plan administration, participant recordkeeping, and compliance reporting. This software provided secure access for both the practice's HR team and individual employees.

Results & ROI

The redesigned profit-sharing plan generated significant positive results for Smile Solutions Group:

• Increased Partner Contributions: Average profit-sharing contributions for senior partners increased by 25%, resulting in an additional $15,000 - $20,000 in tax-deferred savings per year, per partner. This significantly improved their projected retirement income.

• Improved Employee Retention: Employee turnover among associate dentists decreased by 10%, saving the practice approximately $50,000 annually in recruiting and training costs. This was directly attributed to the improved retirement plan and the perception that the practice was investing in its employees' futures.

• Enhanced Employee Morale: Employee surveys indicated a significant improvement in employee morale and job satisfaction. Employees felt that the redesigned profit-sharing plan was more fair and equitable.

• Simplified Administration: The automated payroll integration and the TPA's support significantly reduced the administrative burden on the practice's HR team, freeing up their time for other critical HR functions. The HR Manager estimated saving 5-6 hours per month.

• Stronger Competitive Advantage: The redesigned profit-sharing plan helped Smile Solutions Group attract and retain top dental talent, giving them a significant competitive advantage in the marketplace.

Specifically:

• Pre-Implementation Profit Sharing Contribution (Senior Partners Average): $40,000/year
• Post-Implementation Profit Sharing Contribution (Senior Partners Average): $55,000/year
• Associate Turnover Rate (Pre-Implementation): 15%
• Associate Turnover Rate (Post-Implementation): 5%

Key Takeaways

For other RIAs and wealth managers working with professional practices, consider these key takeaways:

1. Tailored Solutions are Essential: A one-size-fits-all retirement plan is unlikely to meet the diverse needs of partners and employees in a group practice. A thorough understanding of individual goals and financial circumstances is crucial.
2. Communication is Key: Transparency and open communication about the retirement plan can significantly improve employee morale and retention. Conduct regular employee education workshops and provide clear and concise explanations of the plan's features.
3. Leverage Technology: Utilize technology to automate plan administration, simplify compliance reporting, and provide employees with convenient access to their account information.
4. Regular Review and Adjustment: Regularly review the retirement plan's performance and make adjustments as needed to ensure that it continues to meet the practice's evolving needs and remain compliant with all regulations.
5. Focus on Holistic Financial Planning: Integrate retirement planning with other aspects of financial planning, such as debt management, estate planning, and insurance. This provides a more comprehensive and valuable service to clients.

About Golden Door Asset

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