Announcement

Collapse
No announcement yet.

401k with profit sharing question

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • 401k with profit sharing question

    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.

  • #2
    https://forum.whitecoatinvestor.com/...ey-into-a-401k
    spiritrider may be able to shed more light on this subject

    Comment


    • #3
      litovskyassetmanagement
      Might shine some light on the question. This is his business.

      Comment


      • #4
        Originally posted by doctorpa87 View Post
        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.
        Under the New Comparability Method (NCM) of profit sharing, a 5% non-elective employer contribution* is an NCM safe harbor against a maximum 3:1 highest:lowest group rate ratio. All NCM plans are still subject to general testing. I have personally never seen a plan with 20% for the highest rate group pass general testing without a significant rate for the lowest group.

        20% is unnecessary at the compensation limit with a maximum employee deferral to reach the annual addition limit.. 2021 annual addition limit $58K - $19.5K employee deferral limit = $38.5K / $290K compensation limit ~= 13.3%. After testing, I have seen more like a roughly 2:1 ratio for highest:lowest rate groups. You will need to have a TPA do an illustration with your specific census of employees. Then the actual rate will be determined each year based on the current census.

        *Since the 5% non-elective employer is > the minimum 3% non-elective employer safe harbor contribution, the employer match can be eliminated. It is quite likely that the general testing will be in the ballpark of your current 3% employer match + 4% non-elective employer contribution = 7%.

        If Kon sees this thread, he can fill in the details. A New Comparability Method plan will cost some small amount to amend your current 401k plan (if supported) and likely more ($1K - $2K) to amend to a new plan document/TPA, because of startup/conversion costs. Likewise annual general testing will probably add $1K - $2K.

        Comment

        Working...
        X