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  • Starting a 401k

    I have a few questions about starting a 401k for my office.  I have five employees one of which is my wife and plan to add a sixth in the future.  I have had a couple of illustrations done both Safe Harbor plans, one with a 3% non-elective match and the other with a 4% match.  Does anyone have advice as to which is the best choice?  I would like to find out how each effect profit sharing if it does and haven't found a good answer to this question other than what an advisor says.  I just want to make the right choice rather than trying to fix the problem later.

  • #2
    Profit sharing is a legacy term for non-elective employer contributions. These are not really "profit sharing" anymore.

    Neither employer match or non-elective employer contributions preclude additional non-elective employer contributions/profit sharing contributions.

    However, additional non-safe harbor contributions may be subject to ACP and/or top heavy testing.

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    • #3
      Depending on how long your employees have been with your practice (I assume your wife has been working as long as you have) and your take-home income you could consider a SEP IRA or even simple IRA. Look through what works best for the practice.

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      • #4
        @murl you should work with the people doing your plan illustrations and discuss your goals, run a scenario

        Say, you are the owner, you desire to contribute up to the annual addition limit with salary deferral and then employer contribution (profit sharing) for yourself. That’s $19,000 + $37,000 = $56,000 in 2019.

        In such a scenario, there may be an amount that you as the employer would have to contribute to each employees account, as profit sharing, in order to pass plan testing. The folks running the illustration should be able to run such a scenario and give you an idea how much it will “cost” you as the employer to be able to reach the annual addition limit for yourself. If that’s a goal of yours.

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        • #5
          Answering one of your other questions. Generally, it is better to offer an employer match for a safe harbor 401k if there are non-exempt employees. Studies have shown that a minority of them will contribute enough to receive the full 4% match. That match is actually 100% of the 1st 3% of compensation and 50% of the next 2% of compensation. So they must contribute 5% to receive the 4% match. Many will only contribute the 3% to get the 100% mach. Some may not contribute at all.

          If the payroll of the staff not including your wife is modest and you want to maximize your contributions, I am going to contradict myself. You should have the people doing your illustrations do so for what is called the New Comparability Method (NCM) of Profit Sharing. You could probably set up two groups and pay the other group a 5% profit sharing (3% 401k safe harbor + 2% to get to 5%; an NCM different safe harbor of sorts). This could allow you and your wife to make a far greater profit sharing percentage subject to testing, based on the census of the other employees. I'm not saying it will be cost effective, but it is worth investigating.

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          • #6
            I have talked to Konstantin and gotten a proposal for him to open our 401k, I just need to ask him about some of these things.  I just like to understand what I am doing and it has been a pretty steep learning curve with opening the practice after residency.  Starting a 401k is foreign to me and my wife and I have been burned by "advisors" in the past.  I handle all of our personal investments myself and feel comfortable with that.  I am not sure I want to take on the fiduciary responsibility of the 401k.  I am planning a trustee directed account.  A friend of mine recommended that I use the company Employee Fiduciary and I have looked into them some, seems like they offer advisor services through another company as well.  I am a client of Cain Watters and only engaged them as fee for service for helping start the practice.  They recommended I use their platform for the 401k which is actively managed funds with a 1.2% AUM fee on average.  I am NOT doing that.

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            • #7


              They recommended I use their platform for the 401k which is actively managed funds with a 1.2% AUM fee on average.  I am NOT doing that.
              Click to expand...


              Cain Watters are kind of the big dog in dental-specific accounting firms.  They are likely to help you with things like domestic manufacturing credits if you have a CEREC machine or something similar.  They have enough industry specific knowledge that you may come out ahead with what they'll save you compared to the cost of a regular local accounting firm.  (My wife's cousin is a partner at a mid sized firm, so we get good service at the "friends and family" rate.)

              That said, I don't think I would pay their hefty fees for a retirement plan.  Just too dear a price when you can get competent service at a lower price elsewhere.

              If you are in California, the California Dentists Guild may be worth a look if you want / need a defined benefit plan.  I don't know that I necessarily would use them for something relatively straightforward like a 401(k).  For a SIMPLE, I'd look to Schwab, Fidelity, or Vanguard.

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              • #8
                Cain Watters has certainly helped me get the practice started and given me some good operational and tax advice.  I am just opposed to an AUM arrangement.  Does anyone run their own 401k plan for a small office without an advisor?

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                • #9




                  Cain Watters has certainly helped me get the practice started and given me some good operational and tax advice.  I am just opposed to an AUM arrangement.  Does anyone run their own 401k plan for a small office without an advisor?
                  Click to expand...


                  @murl, I run our office 401k and it is through Employee Fiduciary. Our plan is only a year old plan and they are good with general stuff. As spirit rider mentioned you should look in to New Comparability PS method which is what we have. However your employee census drives the testing. Last year we gave the same percentage to staff as the owners even though our plan design says each employee is in a separate group. This year I am going to have them calculate separate percentages and see if we can still pass testing.

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                  • #10




                    I have a few questions about starting a 401k for my office.  I have five employees one of which is my wife and plan to add a sixth in the future.  I have had a couple of illustrations done both Safe Harbor plans, one with a 3% non-elective match and the other with a 4% match.  Does anyone have advice as to which is the best choice?  I would like to find out how each effect profit sharing if it does and haven’t found a good answer to this question other than what an advisor says.  I just want to make the right choice rather than trying to fix the problem later.
                    Click to expand...


                    First, you definitely need an illustration with profit sharing.  This should be standard.  Next, you need several illustrations (a design study) that shows what happens when you add staff in the future, and also what happens to the employer contribution cost when different designs are attempted.  This should also be standard.

                    The match is irrelevant without the profit sharing component. The TPA would know which one is better depending on all of the other factors.  This also depends on plan participation, which you probably don't know beforehand (but can estimate by asking the staff).  The whole idea here is to figure out which design is better, and what happens when you add a staff member in the future.  Obviously, if you are younger and the staff is older, you might not ever do profit sharing because of the relatively high cost.  For this reason send many younger docs to start SIMPLE IRA vs. a 401k plan:

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

                    It does not sound like your providers have the capability, the expertise or the interest in doing any of the above analysis (or maybe they know that PS cost is high but they don't want to share the information for fear that you won't open a plan with them), but this is what I would recommend before you decide on setting up a 401k vs. a SIMPLE.  Your cost of doing PS might be so high that 401k might not be advantageous to you vs. the alternatives (SIMPLE).
                    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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