Unable to max out retirement plans in age weighted pension plan due to age

[smilebraces]

I am trying to figure out a way to max out my retirement plans in my situation but am being limited by being the younger partner in age-weighted defined contribution plan.  Since I am the younger partner, my ability to get to the 54,000 is being limited by having an older partner and older employees than me.  I do have 1099 income, by working in pediatric dental practice, that I put back into the practice and then draw a salary from.

I know I am not eligible for multiple 401K plans since I own my practice(thanks to for the info here:  https://www.whitecoatinvestor.com/multiple-401k-rules/) but want to figure out a way to at least to get to the max 54,000 year for myself between my practice and 1099 income.  Is there a way for me to use my 1099 income to supplement by age-weighted pension plan contribution and get me to the 54,000.

Thanks

[Wiscoblue]

What is an age weighted plan? We have hired young ones in our practice and they have been contributing to our money purchase pension plan 54,000 from day one. Or whatever the max amount is.

You should talk to your partners to have the plan reviewed and maybe changed.

[q-school]

some years I get reduced because of some safe water harbor testing where they claim not enough low compensated employees contribute to retirement accounts, but I've never been age tested down.  learn something new every day.

 

[Damiboulder]

You should be able to contribute to a SEP based on your 1099 income. Alternatively, you might be able to set up a Defined Benefit Plan for your 1099 income depending on the percentage ownership of the other company. Depending on you age and income, this could be very attractive.

 

Regarding the age weighted plan, they may have different rate groups allowing certain people to max out and others not being able to max out.

 

 

 

[smilebraces]

The original plan was set up when the original doctor was the oldest the employee ( and owner) of the practice.  The age-weighted plan allowed him to maximize his contribution, contribute for employees, and compared to other plans maintain the highest percentage of the overall plan.  If I contribute to the current age weighted plan to get to the 54,000 then I will have to put in more for the employees ( in order for the plan to meet the testing) and it may not make it worthwhile due to the additional amount I need to put in for the employees since I am younger than most of them.

[spiritrider]

There is a profit sharing "Age-Weighted" allocation method. Your easiest option is for the partners to investigate the "New Comparability" allocation method of profit sharing. This allows separating employees by group with certain groups receiving higher contribution percentages. Then again they could have Sr. and Jr. partners as groups and still contribute less for you.

Your description of the 1099 income being directed into the practice makes this sound like "nominee" income. In order to adopt an employer retirement plan. You must be a self-employed individual with earned income from a trade or business. No business profit = no SE tax = no earned income = no employer retirement plan.

Your partnership in the practice does not necessarily make any self-employment subject to controlled group rules. While there can be complex rules. In the most common case, you must have >= 80% ownership in multiple businesses for them to be considered part of a controlled group. Now depending on who the client is you could be subject to affiliated service group rules.

So get some self-employment not affiliated with the practice.

[smilebraces]

I own more than 80% of my practice.  The 1099 income can be all directed to me which I would own 100%.  That is where the I think the controlled group rules come into play.  Since the current age weight plan limits my contribution, I was trying to figure out a way to get to the 54,000 without blowing up the original plan.  Thanks for all those that have chimed in.

[spiritrider]

I'm a little confused. Usually, Jr. partners don't own >= 80% of a practice.

[litovskyassetmanagement]

smilebraces wrote:

I am trying to figure out a way to max out my retirement plans in my situation but am being limited by being the younger partner in age-weighted defined contribution plan.  Since I am the younger partner, my ability to get to the 54,000 is being limited by having an older partner and older employees than me.  I do have 1099 income, by working in pediatric dental practice, that I put back into the practice and then draw a salary from.

I know I am not eligible for multiple 401K plans since I own my practice(thanks to for the info here:  https://www.whitecoatinvestor.com/multiple-401k-rules/) but want to figure out a way to at least to get to the max 54,000 year for myself between my practice and 1099 income.  Is there a way for me to use my 1099 income to supplement by age-weighted pension plan contribution and get me to the 54,000.

Thanks

Click to expand...

What you need is either a cross-tested or an integrated plan design.  It sounds like you probably bought into an existing practice with an old plan design that benefited the older owner (I'm guessing the 20% partner).  So what I would do is meet with the TPA and ask them to do a design study.  It makes no sense that you are limited in your contribution, and it should be really easy to look at a number of possible designs that allow you to max out.  And if you have two partners, you might be able to get a much better design that doesn't cost too much in terms of employer contribution.  If the TPA is not capable or not willing to do this design study, find a new/different TPA.  The first thing that should have been done by your retirement plan adviser when you joined the practice was a design study to make sure that the plan has the best design that allows you to max out your contribution.  Another issue is if/when the 20% partner leaves, this can potentially make even a cross-tested design expensive, so I would have the TPA do a study with only you as the participant as well.

 

[Hank]

This is one more reason why you shouldn’t buy an entire practice, you should buy (most) of the assets of the practice you’re “buying”.

Assume the lease, buy the patient charts, hire some, all, or none of the employees of the old practice, but don’t take on the old retirement plans or assume other trailing liabilities from the old practice.

[litovskyassetmanagement]

Hank wrote:

This is one more reason why you shouldn’t buy an entire practice, you should buy (most) of the assets of the practice you’re “buying”.

Assume the lease, buy the patient charts, hire some, all, or none of the employees of the old practice, but don’t take on the old retirement plans or assume other trailing liabilities from the old practice.

Click to expand...

Yes, I always say that the new owner should terminate the old plan.  Usually those are not in good order, and probably also have expensive investment options and high costs of record-keeping, not to mention various types of administrative/fiduciary errors that have accumulated over time.

And then make a decision on whether to a adopt a new plan based on the practice demographics. The first plan might not be a 401k, it might be a SIMPLE, unless the numbers really make sense.