W2 to S corp, 401k questions and more

[Dreamgiver]

I am making some changes this year and I appreciate some feedback on the transition. I am  going from an academic W2 position to a private practice position with a K-1 payment structure. I am setting up an LLC with S Corp tax treatment. My wife and I will be the 2 members. My wife works for another company and is a W2 employee at the moment with her own retirement plans (401a, 403b, 457b). In the future she is thinking of starting her own gig and that income would be funneled through this LLC as well.

We will have 2 employees, my parents in their late 60s, who will help us with administrative duties and such. We will probably pay them about $1,000 each a month. Main reason that we will be hiring my parents, in addition to us needing some help of course, is that they are older immigrants and need a few more years of FICA contributions to qualify for Medicare. So far we have been paying them for babysitting our children, but the CPA suggested having them help out with the LLC as well so that we can pay them through the LLC from now on. This way they can also start paying us for rent since we take care of of their housing.

1. Will the fact that we have employees (my parents, who are not really interested in contributing to retirement) affect my plans to have a solo 401k? I am staying away from SEP IRA in order to keep doing Backdoor Roths plus SEP IRA contribution limits are too low

2. I expect to gross about $600,000/year through the LLC. This is way above the average for my specialty but I moonlight a lot and have extra duties at work. My CPA, who takes care of many physicians in the area, recommended I take a salary of about $10,000/month and pay myself the rest as a distribution. I guess that I will need to pay myself a bigger salary if I want to max out solo 401k contributions, correct? Is there a calculator online where I can plug the numbers in so I can plan exactly how much salary to pay myself in order to max out this contribution?

3. Before leaving my job in April I will have contributed for 2018 about $30,000 in a 401a, $18,000 in a 403b and $18,000 in a governmental Roth 457b. Can I contribute more to the solo 401k for 2018? Do I need to deduct my 2018 contribution to the 403b from the maximum I can put into the solo 401k?

4. My current employment-related retirement stuff is with TIAA and consists of a mix of tax-deferred and Roth split among 401a, 403b, and governmental 457b. I also have a Vanguard account for my Roth IRA and taxable accounts. As I leave my current job I’d like to rollover the TIAA accounts into a 401k with Vanguard to keep it all together but I understand Vanguard does not accept rollovers into a 401k and, again, I do not want to roll it into a tIRA. Any way around it or just go with another company? I am thinking E-trade based on what I have read.

I am happy to hear your thoughts inside and outside the box.

 

[jfoxcpacfp]

1. After 1 year of service, I think this will be a problem. According to the IRS topic on one-participant 401k's "If you hire employees and they meet the plan eligibility requirements, you must include them in the plan and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing)." But I will defer to @spiritrider in case s/he decides to weigh in.


2. I don't believe $10k/mo. is a reasonable salary given what you have shared plus you also have the issue you mentioned of not maxing out the 401k. Yes, there are calculators online but they are not always dependable. Shouldn't be a problem, though, because I'm sure your CPA with the many doctor clients does these calculations on a very regular basis.


3. Yes, you can contribute more to the solo-k. Your 403b contributions will be included in the calculation for the maximum amount you can put into the solo-k.


4. e*Trade is a good brokerage and there are several others I would recommend. Vanguard drives me nuts with this prohibition but I accept the fact that the forum folks love 'em  :| . Or you could aggregate at one broker and then transfer to Vanguard, but what a headache.

The fact that you are even asking these questions leads me to wonder if you are not totally confident about your CPA's advice. With all due respect, he should be answering these questions fairly easily.

Just because a CPA works with a lot of physicians does not mean that s/he makes a true specialty of it, just that physicians in a physical area tend to do what the rest of the herd is doing and that sometimes gives them a false sense of security. Quite frankly, I wouldn't have been able to build a specialty practice without knowing my stuff (and making a few fox paws along the way) and building a business based on proactive, on-time service because converting referrals from doctors who have virtual relationships is much more difficult. Just one of those valuable lessons I've learned doing this. CPAs who specialize in a geographic area tend to be pretty good at schmoozing and coasting on the referrals. No slight meant to yours, he may know the advice that is best for doctors frontward in backward - just my .02 based on observations drawn from new and prospective client comments.

In case you're wondering, fox paws is a joke   .

[Dreamgiver]

I appreciated the joke! Thanks Johanna. To be fair I have not tested him yet with these questions, I am just trying to gather my thoughts before our meeting.

[jfoxcpacfp]

Dreamgiver wrote:

I appreciated the joke! Thanks Johanna. To be fair I have not tested him yet with these questions, I am just trying to gather my thoughts before our meeting.

Click to expand...

That makes sense, at least you'll know if you're getting the right advice. Just make him work for his fee - I am not trying to do his job for him, but here to help you.

[spiritrider]

1. Let us first discuss the basic issue of the hiring of your parents. You can not just arbitrarily decide to pay your parents each $1,000 a month. You must pay them a fair market value (FMV) wage for the type of work they are actually doing. Then they must be performing the actual number of hours of so-called administrative tasks your business actually requires. Just exactly what will be those tasks based on services you provide elsewhere? How many hours/week of administrative services can really be justified?

A couple of things to consider. A minimum of $1,320 in earnings is required for a 2018 SS/MC "quarter of coverage". Note: This is a legal term, now it is based on yearly earnings. So a minimum of $5,280/year will earn four (4) "quarters of coverage".

So 8 hours/wk * $16/hr = $128/wk * 52 weeks = $6,656, or 10 hours/wk * $20/hour = $200/wk = $10,400. Remember you only need >= $6,500 to get them both four (4) quarters of SS/MC coverage and eligibility for Roth contributions. Which you could make for them.

The one-participant 401k employee issue is much easier to deal with. IRS regulations and almost all of the one-participant providers except for Vanguard allow the exclusion of all employees < 21 and with < 1 year year of service defined as >= 1,000 hours/wk from the 401k plan. As long as your parents work < 1,000 hours/yr, you can adopt and maintain a one-participant plan.

2. I agree with Johanna. These CPAs who come up with these arbitrary "reasonable salaries" are doing their clients a disservice. The single most determining factor of what constitutes a reasonable salary by the IRS and directly relevant recent court cases is what is the median FMV wage for your occupation in your area. The IRS has continually used the Risk Management Association's median salary surveys as the baseline for determining reasonable salary. You can get these and similar salary surveys from websites like payscale.com, glassdoor.com etc...

FYI, the formula for calculating minimum W-2 salary to maximize 401k contributions is (annual addition limit - employee deferral limit) / 0.25. For 2018 this is ($55K - $18.5K = $36.5) / 0.25 = $146K. However, given your fact pattern of $600K gross business income that also likely isn't even remotely "reasonable". See above paragraph and adjust by factors in the IRS guidance

3. Johanna is correct.

4. Vanguard's Individual 401k does not accept rollovers, would not allow you to hire your parents because they do not allow any employee eligibility restrictions and for good measure do not allow Admiral Shares. Unfortunately, Vanguard has three strikes and they are out as an option.

A one-participant 401k is not an ERISA Title I qualified plan as is most likely also true of the 403b. For asset protection purposes. If the 401a has good low cost investment options. I would leave those assets there and if they accept rollover contributions. I would rollover the 403b there also.

[Dreamgiver]

spiritrider wrote:

1. Let us first discuss the basic issue of the hiring of your parents. You can not just arbitrarily decide to pay your parents each $1,000 a month. You must pay them a fair market value (FMV) wage for the type of work they are actually doing. Then they must be performing the actual number of hours of so-called administrative tasks your business actually requires. Just exactly what will be those tasks based on services you provide elsewhere? How many hours/week of administrative services can really be justified?

A couple of things to consider. A minimum of $1,320 in earnings is required for a 2018 SS/MC “quarter of coverage”. Note: This is a legal term, now it is based on yearly earnings. So a minimum of $5,280/year will earn four (4) “quarters of coverage”.

So 8 hours/wk * $16/hr = $128/wk * 52 weeks = $6,656, or 10 hours/wk * $20/hour = $200/wk = $10,400. Remember you only need >= $6,500 to get them both four (4) quarters of SS/MC coverage and eligibility for Roth contributions. Which you could make for them.

The one-participant 401k employee issue is much easier to deal with. IRS regulations and almost all of the one-participant providers except for Vanguard allow the exclusion of all employees < 21 and with < 1 year year of service defined as >= 1,000 hours/wk from the 401k plan. As long as your parents work < 1,000 hours/yr, you can adopt and maintain a one-participant plan.

2. I agree with Johanna. These CPAs who come up with these arbitrary “reasonable salaries” are doing their clients a disservice. The single most determining factor of what constitutes a reasonable salary by the IRS and directly relevant recent court cases is what is the median FMV wage for your occupation in your area. The IRS has continually used the Risk Management Association’s median salary surveys as the baseline for determining reasonable salary. You can get these and similar salary surveys from websites like payscale.com, glassdoor.com etc…

FYI, the formula for calculating minimum W-2 salary to maximize 401k contributions is (annual addition limit – employee deferral limit) / 0.25. For 2018 this is ($55K – $18.5K = $36.5) / 0.25 = $146K. However, given your fact pattern of $600K gross business income that also likely isn’t even remotely “reasonable”. See above paragraph and adjust by factors in the IRS guidance

3. Johanna is correct.

4. Vanguard’s Individual 401k does not accept rollovers, would not allow you to hire your parents because they do not allow any employee eligibility restrictions and for good measure do not allow Admiral Shares. Unfortunately, Vanguard has three strikes and they are out as an option.

A one-participant 401k is not an ERISA Title I qualified plan as is most likely also true of the 403b. For asset protection purposes. If the 401a has good low cost investment options. I would leave those assets there and if they accept rollover contributions. I would rollover the 403b there also.

Click to expand...

I appreciate your input very much! Yes, the 401a has very good low cost options, I will see if they let me roll over both the 403b and 457b in there. I will also see if TIAA lets me rollover the Roth portion of those accounts over to my Vanguard Roth IRA so that I can invest my Roth portion a little differently. Thanks again.