Employee Benefits 101

Just as a full row of healthy teeth offers your patients the biggest bite and brightest smile, your practice thrives when your employees are a happy, highly skilled and loyal team. Among the best ways to attract and retain members of your dream team is to demonstrate how important each of them are by providing them with excellent employee benefits.

Why good benefits matter

How much are good employees worth? It’s difficult if not impossible to place a tangible value on a great staff. A professional and endearing receptionist can create an inviting environment for your patients. A proactive assistant anticipates their doctor's needs while keeping dental supply costs below five percent of revenue. Your hygienist keeps your patients coming back in a constant flow for productive, ongoing treatment.

A filling is a filling, but these are the kinds of qualities that will give your practice the edge it needs in a competitive environment. In addition, the goodwill value that a dedicated staff brings to the table can directly contribute to your bottom line and the overall value of your practice. Besides, it’s simply more enjoyable to spend your business hours around happy people.

In contrast, all too often I have seen dentists pinch pennies on staff wages and benefits with an ill-advised focus on short-term cost control for immediate profit. Such an approach breeds complacency and turnover among employees, which can severely limit the potential of a practice and its ultimate goodwill value. It also adds to your own stress, as you must spend more of your time managing business affairs and interviewing new applicants instead of treating patients.

See the “Benefits overview” sidebar for a quick list of common offerings. Most are relatively straightforward, so here, we’ll look at two of the more significant offerings in a little more detail: healthcare/cafeteria and retirement plans.

Healthcare and cafeteria plan benefits

Among the most fundamental securities is the peace of mind that comes from having health insurance. Some practices simply pay for employee health insurance, but as these costs have risen, others have asked employees to bear part of that cost. Medical benefits come in a variety of flavors and may include a nominal death benefit. There are HMOs, PPOs, Indemnity Plans and Health Savings Accounts, each with its own formula for premiums, deductibles, copayments and benefits.

Health Savings Accounts (HSAs) - We receive a lot of questions about HSAs, a relative newcomer to the industry. HSAs come with rules about annual deductibles, contributions and withdrawals but essentially, it is a vehicle owned by an individual, to which an employer or employee may contribute on a pre-tax basis. The money may be withdrawn for approved medical (or dental) expenses without limit, but non-qualified withdrawals are taxed and penalized. An HSA is like an IRA for healthcare. The account holder can use his or her HSA for immediate healthcare costs or let it grow tax-free for future healthcare needs.

Cafeteria Plans - Under Section 125 of the Internal Revenue Code, cafeteria plans offer another tax-advantaged way to pay for healthcare. With a cafeteria plan, employees may defer part of their salary into an “account” with the employer, from which insurance premiums or medical expenses may be paid.

Such expenses currently may include prescription and non-prescription medicines, co-payments, deductibles, dental or other healthcare costs not paid for by insurance. Cafeteria plans can have a contribution limit depending upon certain criteria and the entire amount must be used up annually or it is lost. Beginning in 2013 under the new healthcare legislation, there will be an annual limit of $2,500 and over-the-counter medicines are no longer eligible expenditures.

Cafeteria plans have a second, very popular feature that provides for the pre-tax payment of dependent care expenses. Employees may defer up to $5,000 of wages to pay (pre-tax) for a child’s daycare or for the care of another eligible dependent such as an elderly parent. While your own ability to use your practice’s cafeteria plan is limited, properly used cafeteria plans are still a win-win for you and your staff, because you both save on payroll taxes.

Retirement Plan Benefits: The SIMPLE IRA

Retirement plan benefits range from a relatively inexpensive SIMPLE IRA to the more complex 401(k) Plan or Profit Sharing Plan.

With a SIMPLE IRA you, the dentist, participate like an employee, with the ability to defer up to $11,500 (or $14,500 for those over 50 years of age) annually whether you are incorporated or a sole proprietor. As the employer, you contribute the lower of either three percent of the employee’s wages or the amount the employee deferred from his or her wages.

SIMPLE IRA Example #1 - Mary the hygienist earns $48,000 and defers the maximum $11,500 into her SIMPLE IRA this year. You contribute $1,600, or three percent of her wages, to Mary’s account.

SIMPLE IRA Example #2 - Suzy the assistant earns $40,000 and defers only $1,000 into her SIMPLE IRA for the year. Your contribution is $1,000, because the amount she contributed is lower than three percent of her wages ($1,200).

For a conservative evaluation of whether a SIMPLE IRA makes sense for your practice, look at gross wages paid to staff and assume that every employee is going to defer three percent of his or her pay, to receive the maximum employer match of three percent. That will tell you the maximum you may need to deposit to the plan.

SIMPLE IRA Example #3 - Say your total staff wages are $200,000 for the year. If your entire staff defers three percent, you match that for a deposit of $6,000. If your own earnings are $250,000 you may deposit approximately $18,000 for yourself (combined deferral of $11,500 and three percent match). The total of the amount you match for staff and deposit for yourself is $24,000. If you are in a 40 percent tax bracket, your tax savings is in the neighborhood of $9,600. Subtract the expense of matching for your staff and you have an after-tax benefit of $3,600. If your own earnings are less, the tax savings will be less, but this is pretty compelling if you also consider that a SIMPLE IRA does not require the services of a pension plan administration firm.

Retirement Plan Benefits: 401(k) Plans

If your retirement saving needs require larger dollar amounts than the amounts a SIMPLE IRA allows for, you may decide to take it to the next level of a more formal retirement plan. To ensure proper design, set-up and ongoing management, we recommend turning to a pension plan administrator to assist.

As an illustration, assume you’ve met with your wealth advisor, who has helped you realize you need to save significantly more than your SIMPLE IRA plan allows for if you expect to retire according to your desired schedule. Your advisor suggests a 401(k) profit sharing plan as the solution. You and your staff may deposit up to $16,500 each into the 401(k) plan via salary deferrals - or up to $22,000 for those over 50 years old.

In addition to these deferrals, you may deposit funds into a profit sharing plan on behalf of your staff. These calculations are made by the pension plan administrator and are quite complicated, but in this example you’d be able to save the maximum of $32,500 plus the salary deferral for a total of $49,000 (or $54,500 for those over 50). Allowable staff contributions will vary widely, depending on how long they have been employed with the practice; their age; their total salary; and whether or not they use the 401(k) or (to complicate things further) if they use some sort of 401(k) matching formula.

Your own and your employees’ 401(k) deferrals can be treated as Roth or traditional, and there are no income restrictions on the Roth 401(k) option as there are for Roth IRAs. With the Roth 401(k) option, the salary deferral is after-tax, meaning it is not deducted for tax purposes but it grows tax-free versus tax-deferred.

The benefit of benefits

Perhaps among the biggest benefits of employee benefits is that, when properly implemented, they pay for themselves. Even if it can be a challenge to precisely measure that in dollars and cents, you can sense it as your patients and their many referrals return time and again, eagerly greeting the members of your team on a first-name basis. Offering fair compensation with competitive benefits - including a robust retirement savings plan - is good for your employees. It will also enhance your own pay day, now and in the future when it comes time to retire.