Starting Private Practice - How to handle retirement accounts

[Miss Bonnie MD]

Posting for a friend-

I am a physician working as 1099 and have a SEP IRA as a 1099 now. I was thinking of opening a solo-401k this year to move the SEP-IRA into so I can start a backdoor Roth IRA.

Next year I plan to start my own practice (solo practice) and will have employees (support staff). Can I still use the solo-K or will I need to create a different kind of 401k since I have employees? Will I have to contribute to their 401ks as their employer? If not, does this mean I will need to go back to having a SEP IRA? Who should I talk to about this if I need help creating a 401k for my practice? Thank you!

[jfoxcpacfp]

This is a potential problem. No, your friend (will assume female) cannot continue to use the solo-k when she has employees. She will have to cover them. If she doesn't open a 401k for the practice, she will be treated as having closed the 1099 business and w/h to shut down the solo-k and roll it into an IRA, back to where she started.

The above assumes that she does not open a 401k for the practice. If she does, then she can just roll the solo-k into her practice 401k account and she will be able to contribute/convert to tax-free backdoor Roth IRAs.

[Miss Bonnie MD]

So if she opens a 401k for the practice - does she have to contribute to all the employees accounts?

[jfoxcpacfp]

No, but should will probably want to offer some level of matching. And because she'll be a highly-compensated employee, anti-discrimination rules will be at play so the contribution formula will not exactly be straightforward. She may want to use a safe harbor plan.

[Miss Bonnie MD]

If she is still working at 1099 part time while starting PP, can she still do solo K that year - 2018?

[jfoxcpacfp]

Possibly, if she defines eligible employees as those who have worked there for 1 year. I believe that would include herself, though. She really needs to speak to a 401k provider, though.

[pistolpete]

For a solo 401k, Technically she can have employees as long as they do not work more than 1000 hours in one year, correct?

[jfoxcpacfp]

pistolpete wrote:

For a solo 401k, Technically she can have employees as long as they do not work more than 1000 hours in one year, correct?

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That is correct, I forgot to mention that.

[spiritrider]

And the Adoption Agreement gives that option and the sponsor selected that option or amends it.

The reason I mention this is Vanguard does not allow any employee eligibility restrictions in their i401k adoption agreement.

Also, many people when they are adopting their one-participant 401k plans do not know to put these restrictions in place.

The 1,000 minimum hour requirement is under the length of service restriction. No length of service restriction, no 1,000 minimum hour restriction.

[pistolpete]

I'm reading that someone who has a solo 401k can hire a non-spouse W2 employee who works under 1000 hours a year, but apparently can also hire an independent contractor and that an IC can work more than 1000 hours a year. Is this correct?

[toothcarpenter]

jfoxcpacfp wrote:

No, but should will probably want to offer some level of matching. And because she’ll be a highly-compensated employee, anti-discrimination rules will be at play so the contribution formula will not exactly be straightforward. She may want to use a safe harbor plan.

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Are you familiar with that company? Flat fee pricing on 401k looks interesting!

[jfoxcpacfp]

toothcarpenter wrote:

Are you familiar with that company? Flat fee pricing on 401k looks interesting!

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No, I just thought the post summed it up nicely. Most 401k advisors offer flat fee pricing; not for asset management but for admin (reporting, recordkeeping, etc.)

[litovskyassetmanagement]

Miss Bonnie MD wrote:

Posting for a friend-

I am a physician working as 1099 and have a SEP IRA as a 1099 now. I was thinking of opening a solo-401k this year to move the SEP-IRA into so I can start a backdoor Roth IRA.

Next year I plan to start my own practice (solo practice) and will have employees (support staff). Can I still use the solo-K or will I need to create a different kind of 401k since I have employees? Will I have to contribute to their 401ks as their employer? If not, does this mean I will need to go back to having a SEP IRA? Who should I talk to about this if I need help creating a 401k for my practice? Thank you!

Click to expand...

What's interesting is that with a SEP you can potentially exclude the staff for a year or two (depending on when you started the SEP) using the eligibility requirements (such as 2 out of 5 or 3 out of 5 years).  So if you do a SEP this year, and the following year hire staff, you can basically do the SEP for as long as such eligibility requirements are not met (so with 3 out of 5 you can exclude the staff for 2 years, but you have to be careful because you are subject to the same eligibility rules, so you have to meet hose yourself.

You can start a custom-designed 401k with a plan document drafted by a TPA with appropriate eligibility requirements and vesting so that when the staff becomes eligible you can enroll them.  I would recommend doing a pooled 401k at that point (vs. participant-directed), since you can simply open a single account and just have the staff participate in your own plan:

http://www.dentaltown.com/Dentaltown/Article.aspx?i=393&aid=5411

This way you do not have to make any changes to your plan document and your plan going forward when you add staff.

 

 

[litovskyassetmanagement]

toothcarpenter wrote:

jfoxcpacfp wrote:

No, but should will probably want to offer some level of matching. And because she’ll be a highly-compensated employee, anti-discrimination rules will be at play so the contribution formula will not exactly be straightforward. She may want to use a safe harbor plan.

Click to expand…

Are you familiar with that company? Flat fee pricing on 401k looks interesting!

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All such companies look good until you look under the hood.  This company seems to do everything, and somehow charge nearly nothing for it.  It is also a technology company, which is also a red flag.  I've worked with one such company (which provided record-keeping services) because it was really good, but it imploded because it didn't reach enough size quickly enough.

"Guideline offers a maintenance-free 401(k) plan that is employee-focused and fully automated. "

As I've written before, there is no such thing as a fully automated 401k.  And if you dig deeper you'll quickly see that they do mostly Safe Harbor 401k plans or those with pro-rata profit sharing and have no capacity to do custom-designed plans.  You'll also eventually realize that if you have any plan errors (even caused by them) that their 'automated' platform won't be up to par, and if your plan has any errors they won't have the capacity to fix them for you (or even to recognize those errors, given that they probably have very few if any TPAs on their staff).

And of course, they won't provide you with any level of advice (other than automated advice that says what your asset allocation should be).  But anything else regarding salary setting, optimizing plan design, adding a Cash Balance plan, backdoor Roth, accumulation/distribution strategies, controlled/affiliated groups, you would be out of luck.

I've seen a number of such platforms pop up, and for one thing these are in many cases unsustainable (they are typical startups which will implode unless they reach a specific size quickly - this one is no different). It can be a hassle moving your assets once a company like that goes belly up.

The case of OP is a perfect example of what a typical small practice plan might be like - lots of moving parts, lots of good value-added advice needed, no way to automate any of it, and requires services that can not be provided by an automated one size fits all platform.