Retirement for Locum Tenens Workers. What Is the Right Vehicle?

This article has been updated for 2024.

Background: Locum Tenens Retirement

Are you a locum tenens worker? If so, planning for your retirement is critical.

For example, you likely are not enrolled in an employer-sponsored retirement plan. In other words, saving for retirement is your responsibility. However, being self-employed provides a broader range of options when selecting your retirement vehicle. This flexibility may allow you to save substantially more in a shorter period of time than a full-time employee.

Specifically, by employing your spouse in your business to assist you (e.g., manage your scheduling, deal with logistical issues, and do your bookkeeping), you substantially increase your retirement contribution limit and tax deduction. What’s more, you are not limited by your employer’s retirement plan. Instead, you can use a vehicle such as a Defined Benefit Plan to accumulate up to $3.5 million per person in only 10 years!

Regardless of the vehicle you select, you need to plan for income volatility, resulting from a changing compensation rate and the proportion of the year you work.

To help you understand your options, we will discuss retirement plans available to you as a locum tenens worker.

Types of Retirement Plans for Locum Tenens Workers

For the purpose of this article, we will focus on employer-sponsored retirement plans. These types of plans only may be set up by someone who is self-employed (e.g., independent contractor) or runs a business.

Within these types of plans, there are two broad categories: Defined Contribution Plans and Defined Benefit Plans. Defined Contribution Plans include both SEP and 401(k) Plans. Defined Benefit Plans include Traditional Defined Benefit and Cash Balance Plans.

Permissible Contribution Limits

In general, Defined Contribution Plans limit the annual contribution to a fixed amount. For example, annual contributions are limited to $69,000 per person in a SEP or 401(k) Plan ($76,500 if a “catch up” contribution is permitted). Additionally, annual employer contributions cannot exceed a certain percentage of Plan compensation. As a result, a Sole Proprietor would need compensation of at least $345,000 to maximize their SEP or an S Corporation owner would need a salary of $184,000 to maximize their 401(k) Plan.

On the other hand, Defined Benefit Plan rules do not impose a fixed annual, per-person limit. Rather, Defined Benefit regulations simply limit the final payout, which may be as high as $3.5 million per person at age 62. To determine the maximum annual contributions for a given Plan, the Plan’s actuary “backs into” the permissible annual maximum based on the participants’ ages and compensations, as well as the assets in the Plan and interest rates. As a result, the contribution limit may be significantly higher in a Defined Benefit Plan. In many cases, the annual maximum is $100,000 to $250,000 per year per person! What’s more, the annual maximum contribution is not limited to a certain percentage of compensation like SEP or 401(k) Plans.

Get a Defined Benefit Plan Illustration

Contribution Requirements

In addition to having different rules for determining annual contribution limits, Defined Benefit and Defined Contributions Plans have different rules for contribution requirements.

Specifically, contributions in Defined Contribution Plans are generally discretionary. For a business with only owner-employees, this is especially true. As a result, each year, the business owner may decide whether or not they would like to contribute to the SEP or 401(k) Plan.

Conversely, Defined Benefit Plans generally have annual contribution requirements. The employer must fund the amount, as determined by the Plan’s actuary, to adequately fund the benefits defined at Plan inception. However, if the Plan is significantly overfunded, the requirement for a given year may be zero. Additionally, the Plan benefits may be amended on a prospective basis if the requirement is no longer affordable.

Managing Minimum Contributions in a Defined Benefit Plan

As mentioned, in the above section Defined Benefit Plans generally require annual contributions. However, you can manage contribution requirements. In fact, if the SEP or 401(k) Plan contribution limits do not allow you to reach your retirement goals, and often the limits are inadequate for locum tenens workers, then adopting a Defined Benefit Plan, while managing its contribution requirements, may be essential.

In general, you can best manage Defined Benefit Plan minimums by taking the steps below.

• Designing a Plan that has an affordable contribution range (i.e., not being too optimistic about the amount you can contribute; you always can amend the Plan to increase contributions)
• Overfunding the Plan when possible (i.e., creating a cushion)
• Holding Plan assets in more stable investments (in general, the more stable the assets, the more stable the contribution requirements; conversely, the more volatile the assets, the more volatile the contribution requirements)
• Adopting and funding the Plan several months before the deadline (provides more flexibility to amend the Plan for the coming year; also, provides an option to delay the contribution to the deadline if needed)
• Having access to a reserve to make required contributions (setting aside money in good years)
• Amending the Plan to reduce benefits on a prospective basis, as needed

By implementing these suggestions, you significantly reduce the risk of missing Defined Benefit Plan requirements.

Administrative Costs for Retirement Plans

Now that we have discussed the annual contribution limits and contribution requirements for various retirement plans, let’s discuss the administration costs.

In general, Defined Contribution Plans for locum tenens workers will not have any administration costs. For example, you can open a SEP or Solo 401(k) Plan very easily at most online brokers, who often are only compensated through the investments you purchase. However, if you have any employees (other than your spouse), there will be administration fees. In that case, it is important to contact a retirement third-party administrator. Often off-the-shelf Plans may have a low administration cost but require that you provide higher benefits to your employees. Thus, the “cheapest” option could be the most expensive.

Unlike Defined Contribution Plans, Defined Benefit Plans require an actuary to calculate and certify the annual contribution requirement and the maximum deductible contribution. As a result, they are more expensive than Defined Contribution Plans (Defined Benefit Plans generally cost around $2,000 per year for a small Plan). Of course, if you are able to deduct $100,000 to $250,000+ per year, these higher fees may be worth the cost.

Summary of Pros and Cons for Retirement Plans

In summary, here are the key factors to consider when selecting the retirement vehicle for yourself as a locum tenens worker.

2024 contribution limit

• SEP: $69,000
• 401(k) Plan: $76,500
• Defined Benefit: $100,000 to $250,000+

Contribution requirement

• SEP: No annual requirement
• 401(k) Plan: No annual requirement unless specified in Plan
• Defined Benefit: Generally an annual requirement

Administrative cost

• SEP: No cost or low cost for owner-only Plan
• 401(k) Plan: No cost or low cost for owner-only Plan
• Defined Benefit: Moderate cost

Conclusion

As a locum tenens worker, planning for retirement is essential. Importantly, as a self-employed worker, you have a number of options from which to choose.

If you only want to contribute around $80,000 per person, a SEP or 401(k) Plan may meet your needs. However, if you would like to contribute a higher amount or would like to contribute more than 20% to 25% of your income, a Defined Benefit Plan may allow a much higher deduction and help you more quickly save for retirement.