New solo practice - retirement set up help

[surfdoc]

Opened solo concierge primary care practice. LLC (taxed as S Corp). I am owner and the only employee. I have assistant who is 1099 right now but will be employee in the next 12 months.

2022 Estimated Gross Income $225K
2022 Estimated Net Income $150K

Should i open Solo 401K now even though my assistant will become employee in 12 months (but will be working less than 1000 hours per calendar year) ?

[jfoxcpacfp]

Sure, fine to have a solo-k in this situation. As long as the employee does not work enough hrs/yr to qualify to participate, you can continue with solo-k. Be sure to specify this eligibility requirement (it is optional) when setting up the plan.

Was there a particular reason you elected to be taxed as an s-corp rather than remaining an LLC? Generally speaking, I wouldn’t have recommended you do this. Did you just start this year?

[surfdoc]

Started 2021. Elected S corp d/t anticipated revenue being higher than it actually turned out to be in 2021. Revenue still expected to triple from these numbers over the next 3 years.

[jfoxcpacfp]

Started 2021. Elected S corp d/t anticipated revenue being higher than it actually turned out to be in 2021. Revenue still expected to triple from these numbers over the next 3 years.

S/b ok then. You def want to keep the s-corp at this point.

[litovskyassetmanagement]

Sure, fine to have a solo-k in this situation. As long as the employee does not work enough hrs/yr to qualify to participate, you can continue with solo-k. Be sure to specify this eligibility requirement (it is optional) when setting up the plan.

Was there a particular reason you elected to be taxed as an s-corp rather than remaining an LLC? Generally speaking, I wouldn’t have recommended you do this. Did you just start this year?

The issue is that the solo plan has very limited options as far as plan provisions and eligibility, so even before the employee becomes eligible to join the plan, a new plan (ERISA variant that's appropriate for owner + staff) that has all of the optimal provisions in place should be in place. So for 1 year you can still run the solo 401k plan (possibly 2, depending on when your employee becomes eligible), assuming the solo 401k plan has the 1 year/1000 hours eligibility (this is critical). Once your employee worked for 1 year for you (as W2), a new plan should be in place by then because if your employee is eligible to join a solo 401k after 1 year/1000 hours, chances are that there are less than optimal provisions (such as cross-tested profit sharing vs. pro-rata, etc), that will make this a lot more costly than it should be. And you can't change to another plan once the employee is eligible and they are allowed to join the plan until the following year. So Possibly for 2022/2023 you can still do the solo 401k plan, but going forward you would need to upgrade to a full ERISA plan and have a TPA draft the appropriate plan document with the best/optimal plan provisions so that you can max out your contribution.

One concern is that the employee might not work 1000 hours first year, but they might the next year, and at that point it would be too late to switch to a better plan, so you really need to make sure that the timing of the upgrade is correct. Also, new rules make part-time employees eligible to join a plan as well (I believe if they work 500 hours in 3 out of 5 years or something like that), so you always have to be careful about these types of details. Solo 401k can be a big headache if an employee is eligible to join while the plan itself is not optimized. For example, if they have immediate vesting for PS, you can't take that away even if you amend the plan into a new one.If mistakes are made, a good TPA would request that any issues are fixed before they take over the plan (and this might require voluntary compliance filings and even ERISA attorney referrals). IRS is very strict about this type of stuff. They want to make sure that all eligible employees get their appropriate employer contribution, plus corrective contributions, so I would not play around with solo 401k plans if you are hiring a W2 unless you really understand the timing and what exactly has to be done to ensure you still have the best possible plan in place.

Not all solo 401k plan varieties are equal - some have more options than others, but in all cases I would make sure that the timeline for upgrading the plan is clear, and that you understand the limitations of a specific product you are using and how it would work with an eligible employee.

[surfdoc]

thank you. sounds like solo/i401K is off the table given hiring employee > 1000 hours in next 12 months.

i guess im trying to figure out best option for investing after maxing out 2022 roth contribution (note MAGI < 210k for 2021, filing jointly, so planning to contribute to roth directly w/o backdoor).

maybe a simple IRA is best? i anticipate needing to do backdoor roth conversion for 2023 and beyond d/t income > roth limits.

2022 (no employees besides myself): Roth + Simple IRA
2023 (myself & 1 employee > 1000 hours): Backdoor Roth and company 401K

any issues doing simple IRA now and then wanting to do backdoor in 2023 (assuming MAGI > 210K filing jointly) along with company 401K ?

[litovskyassetmanagement]

thank you. sounds like solo/i401K is off the table given hiring employee > 1000 hours in next 12 months.

i guess im trying to figure out best option for investing after maxing out 2022 roth contribution (note MAGI < 210k for 2021, filing jointly, so planning to contribute to roth directly w/o backdoor).

maybe a simple IRA is best? i anticipate needing to do backdoor roth conversion for 2023 and beyond d/t income > roth limits.

2022 (no employees besides myself): Roth + Simple IRA
2023 (myself & 1 employee > 1000 hours): Backdoor Roth and company 401K

any issues doing simple IRA now and then wanting to do backdoor in 2023 (assuming MAGI > 210K filing jointly) along with company 401K ?

I would skip the SIMPLE also because it has to be run for a full year, so you can't make changes during the year until the following year. For 2022 you can do a solo 401k plan and call it a day. SIMPLE also has immediate eligibility, so there's that. Just make sure that by 2023 you get a new plan document for the 401k drafted by a TPA that includes appropriate PS formula, vesting, eligibility, etc. It should be done effective January 2023 so that you don't run into the issues I mentioned above (assuming employee is hired in 2023). And use the solo 401k that has 1 year eligibility requirement just in case (I think all of them do it now).

Another alternative is SEP IRA. If you have had your entity for at least 3 years (by the time you set up the SEP, which would be 2023), you can potentially contribute to a SEP while not giving anything to the employee until they are with you for 3 years. SEP won't work with backdoor Roth either, but then you can have it for 2023, and you can potentially have it for 2024 without including your employee (on year 3 they would be eligible, so you can set up an ERISA 401k by then).

If instead you set up a 401k for 2023, vesting rules allow you to keep any unvested portion of employer contribution in a 401k plan, so if your employee does not stay with you for at least 2 years, they will get no PS (SH is always 100% vested, but PS can be subject to a 6 year vesting schedule in a 401k plan).

[surfdoc]

there is definitely uncertainty as to when my current office administrator (only 1099) will meet the threshold of 1000 hours. I would assume this will happen towards end of 2022, but it could be in 2023. it all depends on practice growth.

Maybe a SEP is the right call until the 1099 hits 1000 hours, then i can start safe harbor small business 401k. Note the practice is <3 years old.

My MAGI is less than 208K (married filing jointly) for 2021 tax year, so am i allowed to contribute to roth for 2022 even if i set up the SEP?

Lastly, i have previously rolled over 401K funds form previous employer in TIRA. Can i roll this into the SEP?

[litovskyassetmanagement]

there is definitely uncertainty as to when my current office administrator (only 1099) will meet the threshold of 1000 hours. I would assume this will happen towards end of 2022, but it could be in 2023. it all depends on practice growth.

Maybe a SEP is the right call until the 1099 hits 1000 hours, then i can start safe harbor small business 401k. Note the practice is <3 years old.

My MAGI is less than 208K (married filing jointly) for 2021 tax year, so am i allowed to contribute to roth for 2022 even if i set up the SEP?

Lastly, i have previously rolled over 401K funds form previous employer in TIRA. Can i roll this into the SEP?

If in doubt about rollovers, always consult the IRS rollover chart:

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

You can roll traditional IRA to SEP.

[surfdoc]

If i do go with SEP and my 1099 assistant becomes an employee in 2022, will i be required to make SEP contributions even though she has worked for me less than 3 years? Note, the business was opened in February 2021.
--- if this is the case (yes i would be required), then i assume doing a soloiK in 2022 and switching to safe harbor 401k in 2023 is best option. is this correct?

[litovskyassetmanagement]

If i do go with SEP and my 1099 assistant becomes an employee in 2022, will i be required to make SEP contributions even though she has worked for me less than 3 years? Note, the business was opened in February 2021.
--- if this is the case (yes i would be required), then i assume doing a soloiK in 2022 and switching to safe harbor 401k in 2023 is best option. is this correct?

For SEP, all participants have to meet the rules. For example, if your business is 2 years old, you can not set 3 out of 5 rule. It has to be 2 out of 5 (2021, and 2022) so that you can also contribute. So if she works for you in 2022, that would be 1 out of 5, so in 2023 she would be eligible to join the SEP.

Solo 401k in 2022 can work if it was all of the right features/provisions to exclude any employees who work less than 1000 hours, however you will have to switch to a full 401k in 2022 by December as some key plan provisions can not be changed in 2023, and by the time your employee worked 1000 hours she would be eligible to join your solo 401k if a new plan isn't established, so you would want to have a new plan effective January 1st, 2023.

[surfdoc]

thanks.

For SEP, if assistant worked 230 hours in 2021 (started august 2021) and will work double that in 2022; and i started Feb 2021, then we both would be 2 out of 5?

[litovskyassetmanagement]

thanks.

For SEP, if assistant worked 230 hours in 2021 (started august 2021) and will work double that in 2022; and i started Feb 2021, then we both would be 2 out of 5?

Here's SEP eligibility criteria:

https://www.irs.gov/pub/irs-pdf/f5305sep.pdf

I don't believe 1099 contractors are eligible (definitely check with the SEP service provider), so if your assistant was a 1099 in 2021, then that wouldn't count towards the 2 out of 5. Always check with SEP service provider regarding the eligibility details.