Interesting Kon thanks for your post as usual you always provide good information.
Just curious, can you give some rough examples? I imagine most physician practices do not have very many HCEs unless employing a lot of mid-levels? Aside from employed HCEs perhaps if you had a huge elderly staff?
Well, it only takes a handful of staff to make a plan expensive, especially if the owner is very young. Physicians might have PAs who often make six figures, but who might not be HCEs (who can be excluded from profit sharing/matching, for example, if they make $120k or more). Dental associates, on the other hand, are almost always HCEs. If you are in your 30s, and you got 3-5 staff making $40k-$80k (and possibly close to $100k in the case of PAs) who are in their 40s, 50s and 60s, things go downhill from there, but again, depending on the actual details the employer contribution might vary from relatively low to marginally acceptable (and your tax brackets play a role because your employer contribution is tax deductible, so this definitely takes a lot of the bite out of it if you are in the 50% bracket). I can't actually cook up a detailed example because it takes sophisticated software to do an actual illustration, and details matter. And this won't help a bit because every practice is different. For a tiny practice even hiring (or letting go) of a single older staff member who is highly compensated can either improve or exacerbate the employer contribution situation.
Profit sharing is assigned based on age and salary, so if you are really young and your staff is much older, that can create a problem, but sometimes a TPA can assign profit sharing in creative ways to minimize employer contribution to older staff, and there are other tricks that can be used, up to a point. I see this issue more often with dental practices, because dentists tend to buy practices with older staff, and can be very young. This is not so much a problem with medical practices, but practices that have lots of staff might have issues (for example, larger practices might have billing staff or lab taff). Also, if the doc does not make enough to max out and has a relatively low net profit, then employer contribution can be high if demographics is poor. It is rarely all bad or all good, usually most practices are somewhere in the middle, but at some point the practice owners might balk at doing a 401k plan if the cost of profit sharing is high (which in their mind can be any number they are not comfortable with).
In short there are lots of reasons this situation can occur. And people can disagree on what 'expensive' means. That's why I prefer side by side analysis so that things are put into perspective. Someone in the 50% bracket will benefit a lot more from an 'expensive' retirement plan than someone in the 25% bracket.
Leave a comment: