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Does Megabackdoor add additional staff costs to employer?

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  • Does Megabackdoor add additional staff costs to employer?

    As an owner I am getting killed with the staff costs in our retirement plans. I am 29 so the age relative to everyone else is making me contribute a ton if I want to max out 401k at 54k via roth or traditional savings.

     

    Can I make additional contributions in the employee part up to the 54 using a megabackdoor fashion that wont incur anymore staff costs?

     

  • #2
    I believe you'll still be subject to discrimination testing meaning that if enough LCEs (Low Compensated Employees) don't participate in the NRAT (Non Roth After Tax), you'll continue to be limited. Maybe Kon or spiritrider will comment.

    It's important for you (actually, your CPA) to run the calculations to determine if you truly are making any headway with a 401k or if you should change to a SIMPLE + taxable account structure for you personally for a few years. I would not recommend a DB (Defined Benefit) plan at this point in your life.
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3




      As an owner I am getting killed with the staff costs in our retirement plans. I am 29 so the age relative to everyone else is making me contribute a ton if I want to max out 401k at 54k via roth or traditional savings.

       

      Can I make additional contributions in the employee part up to the 54 using a megabackdoor fashion that wont incur anymore staff costs?

       
      Click to expand...


      There is no advantage to you doing this, as it is the same as doing profit sharing. The first thing to do would be to run a design study to see whether you can optimize your profit sharing contribution.  A cross-tested design (or an integrated one, if the cross-tested doesn't pass) would be used for that. Your TPA presumably should have done the study prior to offering you this plan. If the numbers are still too high, you might just end up doing a SIMPLE IRA instead. The following article provides some ideas on how this analysis is done:

      http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

      This absolutely boggles my mind that many plan providers simply give the docs their contract without doing their due diligence to make sure that the docs are actually going to benefit from this type of plan and that they know exactly what their worst case scenario employer contribution would be, as well as trying to do everything upfront to optimize the design, and failing that, offering a SIMPLE IRA instead.  This is what we typically do because it makes no sense to start a plan that you will end up closing because the costs are way more than you anticipated (and higher than the alternative strategies).

      While having a relatively high cost of profit sharing is less than ideal, the question is, would you be better off with SIMPLE plus after-tax vs. maxing out your 401k plan?  There are plenty of border-line situations, so other factors should also be considered such as the overall plan cost vs. benefits. For example, what is the worst case scenario?  Is it possible for the employer contribution expense to grow even more?  In that case you might want to cut your losses now vs. later.  Have your TPA do a full design study that shows full participation/deferrals that also takes into account any potential future demographic changes.

      This happens often when a dentist buys a mature practice with significantly older staff, and unfortunately there is not much you can do in some cases when the design simply does not come out good other than do a SIMPLE plus after-tax to cut costs at least for the first few years.
      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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      • #4
        Database issues, lost some of the posts from yesterday.

        Basically, the question was regarding a huge difference in terms of profit sharing plan designs from different TPAs.

        Yes, that's something I definitely noticed that can happen.  Some TPAs have really aggressive designs that often don't pass testing (especially if they are trying to get a client), and others might not have the experience of doing plan designs (typically large firms might have a junior staffer doing plan designs).  It can take a lot of time to do a correct design because it requires a lot of fine-tuning done by hand, so that's where many TPA firms might cut corners.

        Every year you might have changes in your practice demographics.  As a result you will need to have your plan redesigned every year, and tweaks made to maximize your profit sharing contribution, so it definitely makes a big difference as to who your TPA is.  I always work directly with the TPA because the doc would rarely if ever know what to ask and what to look for, and a TPA might not always explain to the doc that their design might not hold the following year when another employee becomes eligible requiring higher contributions.  So before signing on the dotted line one has to do a thorough design study to make sure that you know exactly what your future liability is.  TPAs rarely do this though, and many docs realize too late that their plan is not going to work as they've imagined.
        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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