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  • Leased employees and i401K


    I am a private practice surgeon, business is an s-corp with myself being the only employee of my business. I do not have any ownership of the medical practice (4 partners), but share overhead and pay rent for the building.  We have 8 FTEs in the office and do not currently have an office retirement plan, long story but has been frozen for 6 years, mismanagement, etc. All this was before I joined the group. As such, I have been contributing to an i401K for my retirement at my CPAs recommendation. My other partners are very gun shy about creating another company plan for the employees given they just finished paying $200K in ERISA lawyer fees.

    I have been investigating other options for a DBP to add to my i401K and found out that I am probably leasing the employees to run my business so I can not contribute to a 401k any longer (much less start a DBP) without creating a safe harbor plan for them. Is this true? Does anyone else out there have a similar setup where they have an i401K with only one employee (self) who is also the employer (self)? If a i401K is not an option for a retirement plan, how can I put away retirement monies in a tax-advantaged way? The last thing I want is a tangle with ERISA, but I am surely not the first high-income earner to be in this situation.

     

  • #2
    I believe you are skating on thin ice. You have used terminology such as "joined the group" and "my other partners" and it does sound as if you have an informal kind of leasing arrangement. This is not something I am qualified to advise on and you should probably speak to an ERISA attorney about this and about what to do with the solo-k you've been contributing to.

    Generally speaking, you could set up a kind of plan called a "mirrored" plan that all of the other "partners" have to abide by. If they aren't interested, you're probably going to have to leave the "group" or look at taxable retirement accounts. This is my opinion only.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3




      I am a private practice surgeon, business is an s-corp with myself being the only employee of my business. I do not have any ownership of the medical practice (4 partners), but share overhead and pay rent for the building.  We have 8 FTEs in the office and do not currently have an office retirement plan, long story but has been frozen for 6 years, mismanagement, etc. All this was before I joined the group. As such, I have been contributing to an i401K for my retirement at my CPAs recommendation. My other partners are very gun shy about creating another company plan for the employees given they just finished paying $200K in ERISA lawyer fees.

      I have been investigating other options for a DBP to add to my i401K and found out that I am probably leasing the employees to run my business so I can not contribute to a 401k any longer (much less start a DBP) without creating a safe harbor plan for them. Is this true? Does anyone else out there have a similar setup where they have an i401K with only one employee (self) who is also the employer (self)? If a i401K is not an option for a retirement plan, how can I put away retirement monies in a tax-advantaged way? The last thing I want is a tangle with ERISA, but I am surely not the first high-income earner to be in this situation.

       
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      You absolutely can not have a solo 401k if the income comes from the practice, so your CPA was wrong to suggest that.  You can have a solo 401k IF you had a source of income other than from your practice, but it sounds like you were using your practice income for the solo 401k, which is wrong. And leased employees are basically employees for the purpose of retirement plan set up.  So no, unless you haven another source of income, the best bet is to set up a plan for the practice (but to do it correctly from the start).

      There is no reason to avoid an ERISA plan just because previously it was botched by your providers.  We see this all the time.  In fact, we specialize in fixing up messed up plans that were not taken care of properly by other providers, so we have plenty of experience making sure that plans are operating properly.  It goes without saying that to work on group practice plans one must have access to an ERISA attorney and an ERPA, as well as a qualified TPA/actuary, and an ERISA 3(38) fiduciary.  Most plans like yours are run by bundled providers that have no experience or interest in dealing with complex plans, so this does not make your job easier.  The second time you try it, you have to do your due diligence as well as to understand why things went wrong and how your new providers can make sure that this (and anything else for that matter) does not happen again.
      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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