Tweet
Hi all, I joined a private practice last year that has a safe harbor 401k with profit sharing plan. The practice has 4 partners, 2 employed docs including myself, and 15-20 other employees between managers, biller, MAs, and front desk. I will be eligible for the 401k in 2022 and I was surprised to learn that the highly compensated employees (i.e. the docs) are unable to contribute the max $58,000 between the employee and employer contributions in the current plan set up. When I asked the plan administrator/accountant about this his reply was:
Defined contribution plans have an annual addition limitation of $58,000. In order to fully do that, the employer would need to make a larger contribution for all participants which would be cost prohibitive. The contribution formula currently is 3% for safe harbor and 4% for profit sharing. The profit sharing component is integrated with social security so employees who are paid more than the social security wage base get a bit more than 4% (approximately an extra 2% in 2020). In 2020, those who had maximum payroll ($290,000) were credited with $25,842 in employer contributions. Adding the $19,500, total for 2020 was $45,342 (under age 50).
Does this make sense for a practice of this size? Is there a way to better structure the profit sharing so the docs can contribute the full $58,000 without significantly raising the costs of the plan for the partners? It seems as though currently the plan is using the "Integration Method". Does anyone have experience with the "New Comparability Method" where you can split employees into different groups, such as Doctors/Owners and All Other Employees. It turns out you can profit-share just 5% of salary with the “All Other Employees” group, while profit-sharing 20% of your own salary. Any idea how much extra this costs?
I know every practice is different but my understanding was that most small business private practices had plans set up such that the doctors could contribute the max $58,000 but I am mistaken.
Thanks in advance for your insights.
Defined contribution plans have an annual addition limitation of $58,000. In order to fully do that, the employer would need to make a larger contribution for all participants which would be cost prohibitive. The contribution formula currently is 3% for safe harbor and 4% for profit sharing. The profit sharing component is integrated with social security so employees who are paid more than the social security wage base get a bit more than 4% (approximately an extra 2% in 2020). In 2020, those who had maximum payroll ($290,000) were credited with $25,842 in employer contributions. Adding the $19,500, total for 2020 was $45,342 (under age 50).
Does this make sense for a practice of this size? Is there a way to better structure the profit sharing so the docs can contribute the full $58,000 without significantly raising the costs of the plan for the partners? It seems as though currently the plan is using the "Integration Method". Does anyone have experience with the "New Comparability Method" where you can split employees into different groups, such as Doctors/Owners and All Other Employees. It turns out you can profit-share just 5% of salary with the “All Other Employees” group, while profit-sharing 20% of your own salary. Any idea how much extra this costs?
I know every practice is different but my understanding was that most small business private practices had plans set up such that the doctors could contribute the max $58,000 but I am mistaken.
Thanks in advance for your insights.
Comment