Highly paid business owners, including physicians who own their practices, soon may be able to boost company contributions to their own retirement plans without breaking the bank on retirement benefits for employees.
The Internal Revenue Service is finalizing a rule that will allow closely held companies to contribute up to $35,000 a year to the principals' tax-deferred retirement accounts while offering employees just 3% of their salaries--increasing to 5% in 2002--in retirement benefits. Previously, employer-paid contributions had to be at an equal rate for all beneficiaries.
In a preliminary rule issued last October, the IRS gave its blessing to new comparability plans. The agency made the change only after deciding to set minimum contribution levels for younger, lower-paid employees.
Though the IRS has not issued the final rule, "They've indicated that little will change and if anything does change, it will be for the better of taxpayers," says tax attorney Joseph Nicola, of Pittsburgh-based Alpern, Rosenthal & Co.
The plans are flexible, as contribution rates can be changed each year, but privately owned medical practices will have to requalify each year.