In addition to providing for your own retirement needs, a qualified retirement plan also offers valuable tax savings for the dental practice, and can help attract and retain quality employees. The good news is that you don’t need to invest in a complicated plan. There are several retirement plans that actually look, act and feel like a traditional 401(k) plan —without the cost and complexity. This is not an all-inclusive list, but is intended to discuss a couple of the more popular plans for dental practices. 
 

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good start-up plan for small dental practices that do not currently sponsor a retirement plan. You agree to match up to 3 percent of an employee’s salary dollar-for-dollar or make a 2 percent non-elective contribution for each eligible employee. If the employee contributes 2 percent of salary, the practice matches that 2 percent. If an employee contributes 10 percent, the practice is only on the hook for the 3 percent match. 
 
Pros: 
 
Affordable to set up and maintain — Just use the forms provided by the IRS, set up the plan and notify your employees. You may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting the plan.  Administrative costs are minimal, and no annual IRS reporting is required. 
 
Matching contributions are deductible — Money you put in for employees is deductible as a business expense. 
 
Employees have control of their retirement savings — Employees can terminate their salary reduction contributions, and may roll over their funds to a traditional IRA or another employer’s retirement plan at any time. 
 
Cons:
 
Contributions are mandatory — As the employer, you are required to make contributions to your employee’s accounts each year — even if the practice is having a lean year. You can choose whether to make a matching contribution up to 3 percent of salary or a 2 percent non-elective contribution for each eligible employee. You must give written notice of the funding percentage annually to each participant no later than 120 days after the plan year ends. You can also reduce the matching percentage, but not below 1 percent, and not for greater than 2 out of every 5 years. 
 
Employer contribution limits  could be lower — The maximum contribution amount for an employee is $12,500 for 2016  — quite a bit lower than other retirement plans. Employees older than 50, can make an additional $3,000 catch-up contribution each year Employers are limited to the amount of contributions discussed above. 
 
There is a deadline for opening — SIMPLE IRA accounts must be opened by October 1 in order to make contributions for that tax year.
 

SEP IRA

A Simplified Employee Pension (SEP) IRA is a good choice for solo practitioners or those with just a few employees. Contributions are paid directly into an IRA created for each employee, and the same investment, distribution and rollover rules as a traditional IRA apply. Contributions to a SEP are tax deductible, and the practice pays no taxes on the earnings on the investments. The employee is also free to supplement the SEP-IRA with another retirement plan. 
 
Pros:
 
Easy set-up and maintenance — Just like a SIMPLE IRA, set up is simple and fees are minimal. In addition, there are no annual filing requirements with the IRS.
 
Larger employer contributions are possible — The practice may contribute up to the lesser of $53,000 (2015-2016) or 25 percent of compensation for each  participant. 
 
You don’t have to contribute every year — You are not locked into making annual contributions. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs. 
 
Cons:
 
The employer makes all of the contributions — Unlike a SIMPLE IRA, where part of the contribution can be taken out of employees’ salary, a SEP IRA requires the employer to make 100 percent of the contributions.
 
Contribution percentage must be the same for everyone — You cannot pay yourself a higher contribution percentage than your employees.
 
All employees must be included if they meet minimum requirements — This can be expensive as the practice grows and you start adding employees. 
 
 
Dental professionals often neglect retirement savings while building their practice. Yet, building a nest egg for yourself and your employees doesn’t have to be complicated or expensive. 
 
We can help recommend, based on your retirement goals and other factors, what type of plan would be best suited for your practice.

It’s a fact of life that physicians and dental professionals operate under an increased level of scrutiny. Increasingly, compliance checks are digging in to more than charts and coding. The IRS is paying particular attention to these hot-button compliance areas: 

Worker misclassification 

Is your practice classifying hired physicians as independent contractors? The IRS may come knocking for a look at your payroll records. Violations can result in practice owners and officers being held individually liable for back payroll taxes (including withholding taxes) plus penalties and interest. 

Generally, for professionals, the IRS looks at three important factors to make the legal distinction between the employee vs. contractor status of a physician/dentist:

Experts in employment law say that, against this backdrop, most hired physicians/dentists legally fall under the category of employee. Obvious exceptions include physicians and dentists who do locum tenens or who have their own professional medical entities and bring their own ancillary personnel to the job.

Action:  To avoid sending up an audit red flag, don’t convert an existing physician employee to contractor status unless he or she has a significant change in job duties. And if you have workers doing the same job, don’t classify some as employees and others as contractors. Consult your attorney regarding appropriate classification and contracts.

Read More: To learn more about this important issue, see our January, 2016, article here.

Medical buildings

Physicians who own their medical building are facing increased IRS scrutiny. In particular, auditors are looking for the cozy transactions that can occur when the medical practice is both the tenant and the landlord. 

Action: Experts say the best approach is to treat it as if you were renting office space from someone you didn't know. Have a formal lease in place and make payments by physically writing a check or transferring money from your practice account into a separate medical building account. 

Sales and use tax

Most states impose a “use tax” on certain personal property that was purchased from a seller outside of the state for use in that state. Essentially, it taxes the use of goods on which no sales tax has been paid. Unlike sales taxes, which are charged and collected by the vendor, the use tax is self-reported by the purchaser. 

Action: If you purchase supplies or equipment from out-of-state vendors, determine whether state and local sales tax applies to these items. Then report any taxable sales on your monthly or quarterly sales tax report. Ask your CPA for guidance in this critical area.

Retirement plan audits

Managing the typical 401(k) plan can be incredibly challenging, and the IRS (and Department of Labor) cuts offenders no slack. Penalties for noncompliance — even unintentional errors — may be severe, and can even result in the loss of a plan’s tax-deferred status. 

One of the most common compliance errors involves failing to follow the terms of your original plan document — either taking actions that aren’t covered or allowed, or making changes to the plan document and then not following them in day-to-day practice. For example, maybe you’ve begun allowing participants to take out loans and hardship distributions, even though these weren’t included in your original written plan. 

Action: Make sure you understand how to detect — and correct — errors in plan administration. Start by downloading the IRS’ comprehensive 401(k) Fix-It Guide at http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

 

Head off an audit before it occurs by taking steps now to identify potential compliance problem areas. Contact our office for guidance in ensuring that your practice remains compliant in all areas of operation.

Reviewing end-of-quarter financials is one thing, but there are certain financial reports that practice owners should be reviewing at least on a monthly basis. These include: 

#1 Profit & Loss

Your P&L includes a treasure trove of core financial indicators. A monthly review can help you spot any troubling trends in revenue, overhead and net profit.

Action: Create a Profit & Loss statement that displays each revenue and expense line item in dollar amounts as well as percentages. Provide comparisons to previous periods and budget amounts. As an added step, use data from your state medical society or organizations such as the Medical Group Management Association to benchmark your revenue and expenses against similar practices.

#2 Receivables

Monitor how well you are turning cash over and getting it into the practice each month by reviewing an Aging Report, which measures the percent of your accounts receivable in each “aging bucket.” In an ideal AR scenario, your receivables would fall roughly into the following buckets: 0-30 days = 60 percent, 31-60 days = 20 percent, 61-90 days = 5 percent, 91-120 days = 5 percent, and over 120 days = 10 percent. 

Action: If the indicators signal a problem, you’ll want to dig deeper. For instance, if you’re seeing a steady increase in receivables over 90 days, review A/R by individual payer. Try to identify the reasons for the delay by analyzing EOBs for denial patterns. 

 #3 Adjustments

Write-offs can run the gamut from denials and contractual adjustments to discounts for multiple procedures. Substantial variations to your normal adjustment rate can be a sign of anything from a change in billing patterns to embezzlement.

Action: Depending on your billing cycles and productivity, adjustments can follow charges by two to eight weeks. To accommodate for this, compare the current month’s adjustments to charges and collections from the prior month or even the month before. 

#4 Patient Balances

Just as important as what insurance companies owe you is what patients owe you. This has taken on added significance as patients foot more of their healthcare bills. 

Action: Skip the alphabetic listing and generate a report by patient account in descending balance order — so that the largest balances will be front and center. Ask for an update from your billing department and/or practice manager on the status of the top 10 or so accounts. Next, review the payment status of patients who are on payment plans. Finally, determine which patient accounts should be sent to collections or written off as bad debt.

Get Out Your Stethoscope

Just as you monitor the vital signs of your patients, you will also need to monitor the signs that reveal your practice's financial health. Have your practice administrator, physician manager or independent advisor conduct monthly monitoring of these key reports. Then, schedule a regular monthly meeting to review and discuss the information with all stakeholders in the practice.  

Contact our office to learn more about monitoring your practice’s financial indicators —or for help in understanding what your current indicators are saying.

One of the main reasons cited by dentists and dental students for pursuing a career in dentistry is the potential to be their own boss. For many, that starts with the purchase of a dental practice.

Yet, many new dentists get so focused on clinical care that they ignore the business complexities of running a practice. To ensure that you are purchasing a practice that makes financial sense, consider these key areas of due diligence:

Market area — Who will be your competition within 1 mile, 5 miles and 10 miles of the practice? Just as important, are the demographics of the area appropriate for the type of dentistry you wish to practice? For example, if you are interested in emphasizing aesthetic and complex restorative dentistry, you’ll want to practice in a community where the demographics will support it. 

Patient characteristics — Are most of the patients returning patients or are there a lot of “one-offs” on the books? How about the ratio of patients with dental insurance to fee-for-service patients?

Growth potential — Assume you analyzed several years of a potential practice’s production reports and saw that the majority of perio and endo services have been referred out. Depending on your personal skill set and comfort level, offering these services in-house might create excellent growth opportunities.

Equipment — If not already in place, it could cost tens of thousands of dollars to upgrade a low-tech practice with technology such as digital radiography, a high-end intraoral camera system and a robust Electronic Dental Records System. On the other hand, if the technology is already in place, how much will it cost to maintain the equipment annually?

Current financials — Have you been able to obtain at least three years of prior tax returns and financial statements? Is the revenue and net profit trending upward or do you see a drop off? Be wary if the seller has not been completely transparent and answered all of your questions in a satisfactory manner.

Financing — In addition to borrowing for the purchase price, you might need to borrow additional funds to support cash flow needs as collections ramp up (it may take time to get revenue flowing, but expenses start immediately).

Cash flow —Your lender will want to see a forecast of cash flow for at least five years. If you can, break the numbers out on a monthly basis for at least the first two years, and then on an annual basis for years 3 – 5. Of course, one of the benefits of purchasing an established practice is that you are purchasing an established income stream.

Structure of the purchase agreement — What exactly are you buying? With an asset sale, you are purchasing the agreed-upon assets of the practice. With a  business sale, you are purchasing the owner’s equity in the practice and are, essentially, stepping into the ownership shoes of the seller — liabilities and all.  

Allocation of purchase price — Will you and the seller be able to reach an agreement on how to allocate the purchase price between goodwill and assets eligible for accelerated depreciation? This will require some negotiating between both parties.

This Won’t Hurt a Bit

Acquiring a dental practice is a major step — one that requires some guidance. Our firm can help you with the financial aspects and planning you need to start out on solid footing. We have the experience to help set up new business ventures as well as structuring the purchase of an existing business.