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  • 401k profit sharing setup

    Hello,

    I am a partner in a 3 physician practice and we are trying to figure out how to allocate profit sharing for our 401k plan. I am relatively new to this practice, and in the past, there were 2 partner physicians who were in their 60s-70s and the setup was 3% safe harbor plus profit sharing, and they were able to contribute up to the maximum contribution for the partners and then the rest of the staff got about another 2%. One of those two physicians retired, and now we are 3 physicians - me in my mid-30s, another physician in her mid-30s, and the remaining physician who is in his 70s. When we spoke with our third party administrator for the 401k, they said that because of our age and the age of our employees (with one exception, all older than the 2 younger physicians), we cannot max out the employer contribution for the physicians and pass compliance testing. They said we have to "allocate a profit sharing pro-rata basis - equal allocation either by percent or dollar amount for all eligible participants depending on the participant's compensation." Does anyone have any thoughts on how we increase the physician profit sharing in this setting? I can't imagine we are the only practice with young physician partners.

    Thanks in advance.

  • #2
    This happens. There are different formulas for profit sharing, but the one a lot of people use is a new comparability plan. It sounds like that's what you had because there's usually a 5% base required (3% safe harbor plus 2%). Sometimes the demographics don't work out. Either you can contribute more to your employees or just take it as cash if your TPA is correct. To maximize the match and profit sharing, you'll want to be sure you have the max irs allowed salary for calculating employer contributions ($285k in 2020), but just be sure to not lose any QBI doing this as well. Mega backdoor Roth would probably have similar issues.

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    • #3
      Originally posted by ceejay000 View Post
      Hello,

      I am a partner in a 3 physician practice and we are trying to figure out how to allocate profit sharing for our 401k plan. I am relatively new to this practice, and in the past, there were 2 partner physicians who were in their 60s-70s and the setup was 3% safe harbor plus profit sharing, and they were able to contribute up to the maximum contribution for the partners and then the rest of the staff got about another 2%. One of those two physicians retired, and now we are 3 physicians - me in my mid-30s, another physician in her mid-30s, and the remaining physician who is in his 70s. When we spoke with our third party administrator for the 401k, they said that because of our age and the age of our employees (with one exception, all older than the 2 younger physicians), we cannot max out the employer contribution for the physicians and pass compliance testing. They said we have to "allocate a profit sharing pro-rata basis - equal allocation either by percent or dollar amount for all eligible participants depending on the participant's compensation." Does anyone have any thoughts on how we increase the physician profit sharing in this setting? I can't imagine we are the only practice with young physician partners.

      Thanks in advance.
      Ok, this recommendation makes no sense to me. If you can't pass testing for a cross-tested design, try integrated. Pro-rata is ridiculous. You might as well not do any PS. So basically if neither cross-tested or integrated can be passed, you are most likely out of luck. You might consider doing a non-discretionary match or something like that. Hard to say, would have to look at participation, demographics, try various design scenarios, etc.
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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      • #4
        Originally posted by jhwkr542 View Post
        This happens. There are different formulas for profit sharing, but the one a lot of people use is a new comparability plan. It sounds like that's what you had because there's usually a 5% base required (3% safe harbor plus 2%). Sometimes the demographics don't work out. Either you can contribute more to your employees or just take it as cash if your TPA is correct. To maximize the match and profit sharing, you'll want to be sure you have the max irs allowed salary for calculating employer contributions ($285k in 2020), but just be sure to not lose any QBI doing this as well. Mega backdoor Roth would probably have similar issues.
        Thanks for your input. A few more questions... first, my salary is lower than $285k, but that's not something I can change outside of increasing productivity (which of course I am always working on). Who knows what 2020 will bring, but do you think that would help? Is it because any percentage will be a larger amount? Also, I do not know what TPA or QBI are, can you clarify?

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        • #5
          Originally posted by litovskyassetmanagement View Post

          Ok, this recommendation makes no sense to me. If you can't pass testing for a cross-tested design, try integrated. Pro-rata is ridiculous. You might as well not do any PS. So basically if neither cross-tested or integrated can be passed, you are most likely out of luck. You might consider doing a non-discretionary match or something like that. Hard to say, would have to look at participation, demographics, try various design scenarios, etc.
          This is how I felt as well. It seemed like they weren't really trying to help us come up with a good solution. I think a match would be even worse because our employees are not contributing much on their own... We are switching third party administrators for 2020, so we are hoping that the new company is more helpful.

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          • #6
            TPA = Third Party Administrator. QBI = Qualified Business Income.

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            • #7
              Originally posted by ceejay000 View Post

              Thanks for your input. A few more questions... first, my salary is lower than $285k, but that's not something I can change outside of increasing productivity (which of course I am always working on). Who knows what 2020 will bring, but do you think that would help? Is it because any percentage will be a larger amount? Also, I do not know what TPA or QBI are, can you clarify?
              This can make a difference. To minimize employer contribution (and to pass testing better) you definitely need a W2 as high as possible, $280k for 2019. As far as QBI, this is definitely something to consider if your net family earnings are below $400k (ideally below $320k or so). In that case you might prioritize having a lower W2 and making no PS contributions, while maximizing QBI deduction. This is a conversation to have with your CPA.
              Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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