W2 CONTRACTOR Retirement Funds

[erichte]

Hello,

Back story: Out of residency 2.5 years. Was a 1099, but hospital did not renew third party contract and became employee. I'm a young married guy with no health problems (knock on wood), and no kids. I took a big pay decrease going from RVU 1099 to W2 (160k yr loss)....Company state they make it up in benefits. Essentially I gave up the Cadillac health plan and retirement benefits. At my company you have to be 3 yrs vested, but due to family circumstances we can only live in current state for another yr so vesting benefits did not matter to me. So my new w2 contractor status pays me more hourly, but without the retirement and insurance benefits. I'm able to get on wife's health plan. New w2 contractor status also pays for 1/2 FICA/Medicare and Social Security. Crunched the numbers and it boosted my rate $43 more an hour. Spoke to boss and was able to switch from employee based w2 to a "W2 Contractor".

My biggest issue thus far is how to do my own retirement funds. I will still receive a W2 at end of yr, but cannot contribute to company plan. I cant do Roth due to phase out. Besides backdoor IRA what can I use to safe haven tax deferred retirement money? I used to have a Vanguard SEP when I was 1099. Any suggestions?

 

Txs,

Eddie

[s2km]

what's a w2 contractor?  getting a w2 implies you're still being considered an employee...what different benefits (or lack of) comes with being a "w2 contractor"?  And you had a cadillac health plan provided by the company while you were getting 1099 income, but not now as an employee of the company?

Regarding your retirement situation, I think your backdoor ROTH will be complicated by the pro-rata rules because you have a SEP.  If you had opened a solo401k then it wouldn't be an issue.  Do you get any other 1099 income that you can open up a solo 401k with, then you can roll-over the SEP and clear the way for backdoor ROTH.  I don't think you can do a traditional IRA currently either since technically you do have a 401k at work but you just choose not to contribute to it.   I think the only other options are HSA if your wife's health plan has a HDHP option and taxable account.

[jfoxcpacfp]

erichte wrote:

Hello,

Back story: Out of residency 2.5 years. Was a 1099, but hospital did not renew third party contract and became employee. I’m a young married guy with no health problems (knock on wood), and no kids. I took a big pay decrease going from RVU 1099 to W2 (160k yr loss)….Company state they make it up in benefits. Essentially I gave up the Cadillac health plan and retirement benefits. At my company you have to be 3 yrs vested, but due to family circumstances we can only live in current state for another yr so vesting benefits did not matter to me. So my new w2 contractor status pays me more hourly, but without the retirement and insurance benefits. I’m able to get on wife’s health plan. New w2 contractor status also pays for 1/2 FICA/Medicare and Social Security. Crunched the numbers and it boosted my rate $43 more an hour. Spoke to boss and was able to switch from employee based w2 to a “W2 Contractor”.

My biggest issue thus far is how to do my own retirement funds. I will still receive a W2 at end of yr, but cannot contribute to company plan. I cant do Roth due to phase out. Besides backdoor IRA what can I use to safe haven tax deferred retirement money? I used to have a Vanguard SEP when I was 1099. Any suggestions?

 

Txs,

Eddie

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A W2 contractor is a contradiction in terms and may violate IRS guidelines regarding discrimination re: eligibility for some employee benefits.

At some point in your career, you will have excess cash to invest after you have maxed out your retirement accounts and you will likely begin building up a taxable account. There are worse things than a taxable account and you have the advantage of having basis, flexibility, and lower LTCG and dividend tax rates. You're just going to start funding your taxable account earlier than you would have otherwise.

Of course, I'm assuming your financial house is in order otherwise - emergency fund, school loans paid off or at very low interest, at least 20% equity in (or for future) residence, etc.

[erichte]

@s2km:

W2 contractor is where at the end of the year I get a W2 statement. Each pay cycle they take out taxes and the company contributes to half my FICA/SS. So basically its like a 1099 IC, but taxes are withheld instead of me doing 1099 estimates. The company also contributes about 12k to FICA/SS. BUT they don't allow me to participate in the health plan or the retirement plans. When I was a 1099 I had a SEP and had my own health insurance. I then was bought out and we became W2 employees and took big pay cut, but with Cadillac insurance plan and vesting that I wont be able to use since we have to move in a year. This is why I decided to forfeit my benefits for a 43$/hr pay raise.

I think the pro-data rule screws me too. I Have thought about a HSA and that the only vehicle I have really seen others in my situation talk about as well. Thanks. I dont have any other 1099 income...yet, but I may pick up a few shifts somewhere else as  1099 now that you mention it just to be able to do the SEP

@jfoxcpacfp: Ya I have heard that it may be a violation. The company offers the bare minimum employee benefits to not be a violation i.e. workers comp, cobra etc. All other aspects (emerg fund, low loan rates, etc) taken care of. Ya I think that is the best option is to contribute to my taxable acct right now. I was hoping for some further tax sheltering this year, but seems like its hard with this status.

 

Thanks!!!

 

 

[jfoxcpacfp]

s2km wrote:

Regarding your retirement situation, I think your backdoor ROTH will be complicated by the pro-rata rules because you have a SEP.  If you had opened a solo401k then it wouldn’t be an issue.

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s2km is correct and I blew right past that point. Have you kept your business open (i.e. - filing tax returns, still registered with the state?) If so, I think possible to roll your SEP into a SOLO 401k under your tax ID number. Otherwise, you may need to mow a few lawns or shovel some snow to generate some SE income lol.

[Zaphod]

You're an employee. Theres no way you are now getting an extra 160k in "benefits". If youre an employee, you have to generate in excess of what youre paid to come up with a profit for your parent organization. I wouldnt fiddle with the situation as it seems you placed yourself in the worst of both worlds. Get a real W2, and negotiate for as much employer contributed retirement/hsa type stuff you can.

[jfoxcpacfp]

Zaphod wrote:

You’re an employee. Theres no way you are now getting an extra 160k in “benefits”. If youre an employee, you have to generate in excess of what youre paid to come up with a profit for your parent organization. I wouldnt fiddle with the situation as it seems you placed yourself in the worst of both worlds. Get a real W2, and negotiate for as much employer contributed retirement/hsa type stuff you can.

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He's only going to be there another year. If he's getting an extra $43/hr, that comes to $89,770 for a 2,080-hr year, a little more than half of what he gave up. It's not a good situation, I agree, but I understand why he might want to just stick it out and get on with his career elsewhere when the year is up. Just don't see that he has a lot of leverage at this point.

[Zaphod]

Thats true of course. I was mainly thinking that if he stayed an employee, certainly their 401k would allow him to contribute his own funds up to the maximum. Vesting only matters with matched funds, what you invest is always yours. Depends on how simple their system is if its worth it to the OP. Otherwise, a taxable isnt a terrible thing of course.

[erichte]

Yes not the best situation, but circumstances don't allow me to move back home yet and don't allow me to stay for the 3 year vesting so that is out the window. I dont need the health plan as I can get on my wife's like I used to when I was 1099. So I negotiated to give up my health plan to get 43$/hr raise. since Im a newer doc out compared to the rest I took a pay cut my 1099 yr I averaged 242/hr and work 2000hrs. When my IC company was not able to renew contract we signed as employees, which dropped me to base rate of 182 with the added retirement and health benefits (which I cannot stay for vesting and dont need the insurance). So I looked at it as a 182 rate plus insurance if stayed as an employee vs what Id pay on wife's plan which came to 2400 a year. So bottom rate would be 183.20 an hour. Hence the very large paycut.  Frustrating to say the least as I was top rvu earner and had best dispo times and press ganey scores (for what those are worth). So I asked boss about options and he said there was W2 contractor where they hold the taxes still and pay half fica/ss and I give up the rest and raise rate to 225 an hour. So for me personally this 41 dollar an hour raise was worth much more than the other bells and whistles I dont use. I can only stay a year max due to family illness back home so I really dont have any negotiating power. I cant move back immediately as wife has another yr on contract. So stuck for year for sure. Not that big of a deal where I live bc cost of living is wayyyyy cheaper than when we move back.

They actually initially told me 210 an hour and then 2 days later said that they would raise to 225 if willing to stay since I pull a lot hours and work a lot nights. So Im happy with the pay rate. I just haven't really seen any venues for tax sheltering retirement accts when I search. I talked to Vanguard and Fidelity and w2 contractor does exist, but isn't that common and they basically were clueless as well. I think best bet right now would be just beef up taxable acct.

 

I really appreciate all your input

[Zaphod]

Well its only a year. It does exist of course, but like many 1099 folks, youre actually an employee and its like the worst of both worlds. I imagine you'll do fine anyways and put that money to use somewhere.

[erichte]

Hey,

Its been 2 months since last post, but just wanted you guys to know that after a lot of research and talking to fidelity at work (which is what my company uses) they were able to offer me a 403b and 457b. Apparently Co did not know (or chose not to offer) that even though I am in this diff situation where I am an W2 employee/IC hybrid they have to offer me a way to access retirement funds. So after many phone calls they opened it up to me.

Basically, law stipulates that if W2 is sent out then you are able to contribute to retirement plans held by co. My co stated that bc I was considered a IC hybrid that they couldnt. Called the co business lawyer and he fixed it.

Thanks for your help guys.

[jz]

@ erichte,   does your company license the " W2 Physician Partnership"  model to other shops?  Does the consultant  collect on revenue after the initial free consultation?   Like this?  http://www.mercypulse.org/javon/physician_partnership.html

[Edited to delete quadruple link postings resulting in error 404 status. Link works now. jft]

[jfoxcpacfp]

erichte wrote:

Hey,

Its been 2 months since last post, but just wanted you guys to know that after a lot of research and talking to fidelity at work (which is what my company uses) they were able to offer me a 403b and 457b. Apparently Co did not know (or chose not to offer) that even though I am in this diff situation where I am an W2 employee/IC hybrid they have to offer me a way to access retirement funds. So after many phone calls they opened it up to me.

Basically, law stipulates that if W2 is sent out then you are able to contribute to retirement plans held by co. My co stated that bc I was considered a IC hybrid that they couldnt. Called the co business lawyer and he fixed it.

Thanks for your help guys.

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Big high-five to you! So glad it turned out good for you!

[Zaphod]

erichte wrote:

]

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Great job. Never assume the people in charge actually know whats going on. Less important, but this is always a problem at stores when you've done research and then want an "informed" opinion from the person who works there and maybe has personal or customer experiences at hand, they usually look all deer in the headlights when asked anything. Oh well.

[winnedafoo]

Hi, I am in a similar spot.  I am a W2 contract employee at a large HMO.  They say I cannot contribute to the 401k -  can you please point me in the direction of how you found the law stating I am able to do so?

Thanks so much!