Defined benefit plans for clinical practice groups

The problem a 401(k) cannot solve. A physician earning $700,000 a year can put roughly $70,000 into a 401(k) with profit sharing, and the rest of the income is taxed at the top federal bracket plus state. For a partner in their late 40s or 50s who started saving late, that limit is the ceiling on the single most reliable deduction available to a high earner. A defined benefit plan, usually designed as a cash balance plan, raises that ceiling by a multiple. Contributions are set by actuarial formula rather than a flat cap, and for older, higher-paid partners they routinely run well into six figures a year, every dollar deductible to the practice.

How the layered structure works. The plan that works for a clinical group is rarely a defined benefit plan on its own. It is a cash balance plan layered on top of the existing 401(k) and profit sharing plan. The 401(k) keeps the flexible, familiar piece; the cash balance plan adds a large, age-weighted contribution for the partners who want it. Because the two plans are tested together, the design can give each partner a different contribution while keeping the staff cost predictable. A group of six partners in their 40s and 50s with twelve staff will typically see a combined deduction several times the size of what the 401(k) alone allowed.

Getting partner consensus. The plan fails politically before it fails actuarially. Younger partners see a large staff contribution and a benefit formula that favors the older partners and ask why they should fund it. The answer is in the design: cash balance plans can use different contribution credits by partner class, and a partner who wants the minimum can take the minimum. The conversation goes better when each partner sees their own projected contribution, their own tax saving at their own marginal rate, and the staff cost allocated the way the group already splits overhead. We build that schedule before anyone votes.

The actuarial trade-offs. A defined benefit plan is a promise, and the practice is responsible for funding it. The three variables that matter are the interest crediting rate (a conservative fixed rate or a market-based rate reduces the risk of over- or under-funding), the years to retirement for the oldest partners (which drives how large the annual contributions can be), and the funding range the actuary gives you each year. A plan designed with a wide funding range gives the group room to contribute less in a weak collections year without a compliance problem. A plan designed to the maximum every year does not.

Staff, testing and the numbers behind the promise. The plan must pass nondiscrimination testing, which is where the staff contribution comes from. For most clinical groups the required staff allocation runs between 5% and 7.5% of pay across both plans, and it is a real cost. It is also deductible, it improves retention in a market where medical assistants and front-office staff are hard to keep, and it is usually a fraction of the tax saved by the partners. When the arithmetic does not work, it is because the group is very young or has an unusually large staff relative to owners, and we will tell you that before anything is adopted.

Exit and flexibility. A cash balance plan is not a life sentence. Plans can be amended, frozen or terminated with proper notice, and a partner who retires or leaves rolls their hypothetical account balance into an IRA. The practical constraint is that the IRS expects a plan to be permanent when adopted, so the design should assume at least a three- to five-year horizon. For a group that is planning a sale to a hospital system or private equity, the plan becomes a negotiating point in the transaction and should be modeled into the deal, not discovered by the buyer's diligence team.

Timing. A new plan can be adopted as late as the practice's tax filing deadline, including extensions, and still count for the prior year, which makes this one of the few strategies that can still be put in place after December 31. The census data, compensation history and a first actuarial illustration take about three weeks. If the partners agree, the plan document and the first contribution follow.

What to do next. If your group has partners over 45 who are maxing out the 401(k) and paying top-bracket tax on the rest, have the illustration run. Apply for tax planning and we will model the layered plan against your census, or bring the question to a Strategy Session and get a straight answer on whether it fits.