By Dr. James M. Dahle, WCI Founder
The single best tax break available to physicians is maximizing your retirement plan contributions. Most self-employed or partnered doctors already have a defined contribution/profit-sharing plan (SEP-IRA or 401K) available to them into which they can contribute $58K a year for 2021 ($64,500 if they're 50+.) If your federal and state marginal income tax rate is 37%, you just knocked $21,460 off your tax bill. But what if you want to save MORE of your money toward retirement? You can use a backdoor Roth IRA or even a taxable account, but neither of those reduces your tax bill this year. One option you should consider is using a special kind of defined benefit plan called a cash balance plan.
Two Broad Categories of Retirement Plans
Retirement plans can be divided into two broad categories.
#1 Defined Contribution
A 401(k) is an example of a defined contribution plan, where you contribute a certain amount each year. Depending on investment returns, that initial contribution may grow to be a small amount, a large amount, or even disappear completely. There is no guaranteed benefit at the end. All that is defined is how much you can put into it as you go along. The amount of money you will have to spend in retirement depends entirely on how much you put into the account and the performance of your selected investments. The risk is all on you.
#2 Defined Benefit
A defined benefit retirement plan works differently. The classic example is the increasingly rare company pension. You work for a company or government entity for 20 or 30 years, and after you retire, the company pays you a defined benefit for the rest of your life. The company takes all the investment risk. If the investments do well, the company can get away with putting less money into the account. If the investments do poorly, the company must contribute more to the account. But either way, there is no difference to you. You get the defined benefit.
Cash Balance Plans Are a Hybrid
A cash balance plan is technically a type of defined benefit plan, but it can act like a defined contribution plan in two important ways:
- Depending on how your plan is designed, you can actually change how much you can contribute each year (or if you want to keep your plan administrator happy, every few years) to the plan.
- Upon separation from the employer, or when the plan is closed for any reason acceptable to the IRS, you can transfer the money tax-free into a 401(k) or IRA, just like a 401(k) or most other defined contribution plans.
For most participants, the cash balance plan is essentially an extra retirement plan allowing for additional tax-deferred retirement contributions above and beyond those allowed in the 401(k). Perhaps the best way to think of a cash balance plan is that it is an additional 401(k) masquerading as a pension. It has to follow the actuarial rules that apply to pensions, but at the end of the day, (wink wink nod nod) we all know you're just going to roll it over into your 401(k) in five or ten years.
When private companies were trying to get rid of their expensive pension plans, many of them converted their pension plans into defined contribution plans, transferring the investment risk from the employer to the employee and often lowering the cost to the employer (and the benefit to the employee). However, some companies simply changed their pension plan into a cash balance plan. Employees didn't like this any more than seeing a 401(k) replace their pension, but this concept of a cash balance plan does provide an additional tax-sheltering retirement plan option for a physician or other high income professional.
How Cash Balance Plans Work
A cash balance plan seems complicated because, as a defined benefit plan, it must at least resemble a typical pension. That means the participants in the plan generally select or manage investments in the plan, at least not in the frenetic way that many frequent traders “invest”. The cash balance plan requires complicated actuarial calculations to determine the maximum contributions that can be made into the plan for any given employee. The contributions also must technically come from the employer, not the employee. Due to these complications, fees on a cash balance plan are generally higher than those in a 401(k). Unless you are an independent contractor with no employees (and maybe not even then), this type of plan is not a do-it-yourself project; you will need to hire an experienced company to design and run the plan. Our WCI Recommended Retirement Plan Advisors are pros at doing this and can customize the best plan for your business.
Contributions to the Plan
All contributions into the plan are generally pooled and invested together by the plan trustee. However, hypothetical individual accounts are tracked and credited with a certain amount of interest each year, depending on the performance of the underlying investments.
If the investments perform well, that credited interest rate may be higher up to a certain point, such as 5–7 percent per year. If the investments perform very well, the additional earnings, above and beyond the 5–7 percent limit, are allocated to a surplus account where they can be used to make up for future shortfalls in investment performance or to reduce future required contributions. If the investments perform poorly, the owners of the company may be required to contribute additional money to the plan to make up the losses over a period of a few years.
This aspect of defined contribution plans turns off many physicians (who are generally not only the participants in the plan but also the owners of the company). However, in reality, this mechanism is of significant benefit to the physician. In a market downturn, not only do you GET TO (also admittedly HAVE TO) defer even more money into the plan, but the make-up contributions are also deductible. You are essentially forced to buy low, boosting future market returns. In essence, the company is taking the investment risk, not you. Of course, for many doctors, you are the company, so you're taking it either way.
Example #1: Predetermined Interest Plans
For example, in my old cash balance plan, it worked like this. The money was invested across 8 mutual funds, in a 54%/46% stock/bond ratio. Each year an investment committee (made up predominantly of physicians in the plan) decided how much interest to credit the participants. In the event the investments had little to no return, participants didn't get an interest payment. In the event of a high return, the interest was capped at 6.5% and the rest went into the reserve account. If the return was negative, money was pulled from the reserve account. In the event of a really low return, the company (ie, the physician partners) had to make an extra contribution to the account to make up some of the losses.
While that sucks to have to do in an economic downturn, especially when you'd rather be buying low yourself in your personal accounts, at least by doing so the plan is buying low, which should improve future returns. When you retire or leave the company, you did not get any share of that reserve account even if there had been recent high returns in the plan, but nor were you required to make an extra contribution if the plan has a significant loss the year you separate from the company or partnership.
Under this arrangement, how much more could you have to contribute in the event of a severe market downturn? In 2008 my plan lost 22.8%. First, the reserve account was applied, reducing the net loss to about 15%. By law, that loss is spread over 5 years, so it is divided by 5. The “company” (i.e. the partners in the plan) had to make their regular annual contribution, plus 3% of what they had in their “individual account” in the plan at the beginning of 2008. So if you started 2008 with $100K in the account, and your annual contribution was $10K, the contribution due at the end of 2008 was $10K + 3%*$100K, or $13K. Of course, that entire $13K is tax-deductible. There was also a much smaller contribution due in 2009, but investment gains then put the plan back into a surplus.
Example #2: Plans That Credit with Actual Returns
Some newer cash balance plans credit your account with the ACTUAL RETURNS of the underlying investment(s). My partnership has had three cash balance plans while I have been there. The first one worked as described above. The most recent one essentially allowed me to choose between three Vanguard Life Strategy Funds (Moderate-60/40, Conservative-40/60, and Income 20/80) as far as how much risk I wanted to take in the plan. (If you care, I chose the most aggressive one because it was closest to my overall asset allocation, knowing that I could potentially have to put additional money into the plan in a downturn.) In this case, if the fund makes 12%, I'm credited with 12%. If it loses money, I lose money.
There are lots of options in how the CBP actually works; you should discuss all of them with your retirement plan professional when implementing a new plan and read the paperwork carefully (and ask questions) if you join a practice that already has one in place.
As in a 401K, the money grows in a tax-deferred manner, and you can't access it before age 59 1/2, except for some limited circumstances, without paying a 10% penalty (plus the taxes due).
When you retire or separate from the company, you can either annuitize your “account balance” or you can take it as a lump sum, either in cash or by rolling it over into an IRA or another retirement plan.
How Much Can You Contribute to a Cash Balance Plan?
This is, unfortunately, a really complicated question. The answer depends on how much is in there already and how old you are. It can range from just a few thousand to over $300,000. There's a law that only lets you accumulate up to “an annual benefit” of ~$2.9 Million (2020) into the cash balance plan. So the older you are, and the less you have in there, the more you can contribute. Additionally, the annuitized benefit cannot exceed either the average of your top three years of consecutive compensation or $230,000 (2020), whichever is lower. See what I mean about not being a do-it-yourself project?
In general, you contribute either a percentage of salary or a flat sum (such as $5,000 or $40,000) each year. Of course, if you have employees, non-discrimination testing must be done and you may have to contribute 5-7.5% of their salary for each of them. Many plans, due to actuarial restrictions and top-heavy testing, limit you to much lower contribution limits than what is theoretically possible. My contribution limits have ranged from $15,000 to $30,000 in my plan, but some older members of my partnership can currently contribute as much as $120,000 per year.
Watch Expenses
Expenses for cash balance plans can be considerably higher than for a 401K plan, because they require an actuary to get involved. For example, one of the plans I had charged 0.2% for the 401(k) and 0.6% for the Cash Balance Plan.
What Are the Downsides to Cash Balance Plans?
It's possible the investments perform poorly for a long period of time and you have to make up the interest payments out of your cash flow. That doesn't seem like a big deal if you have to make up a 5% payment on a $50,000 balance ($2500), but coming up with $50K could be a huge issue if you have a $1 Million balance. If you're not already saving $58K (2021) into a 401K (and probably maxing out backdoor Roths for you and your spouse), then you're unlikely to benefit from a cash balance plan especially given the decreased flexibility and higher expenses which drag on returns. The average physician (making $275K) probably doesn't need one of these plans simply because they don’t make enough money to really benefit from them.
Although the money in the plan technically belongs to the company, not you, the assets must be managed for your benefit and are not subject to the company's creditors. They are also generally protected from your creditors. The pension is also usually insured by the Pension Benefit Guaranty Corporation, a government entity. Your company generally pays $35 per year per participant for this insurance, but may be exempt if there are fewer than 25 employees.
Also, if you're required to make significant contributions for your employees, this can be an additional practice expense, eliminating the personal benefit to you, the owner.
Cash Balance Plans Are a Good Option for Partnerships
Many physicians and dentists incorporate both a 401(k)/profit-sharing plan and a cash balance plan into their practices. Despite the additional expense, the immense tax break available, as well as the asset protection (generally fully protected from creditors, just like a 401K) make them particularly attractive. The flexibility available through the plans is also a huge benefit. Partners can make different contributions, the plan can often be made physician/dentist-only, liability between partners can be managed, and you can scale back on contributions or even amend or terminate the plan relatively easily if cash flows decrease.
Independent contractors without employees can also use this combination of accounts. An individual 401(k) is relatively easy to set up. A personal defined benefit plan is a little more complicated but still widely available from a number of firms at a fair cost. Because you are both the trustee and the participant, you will have even more control over your investments.
Advanced Thoughts
There are two other considerations to keep in mind. If your business qualifies for the 199A deduction, remember the cash balance plan contribution counts as a business expense. That means it will lower your ordinary business income and potentially, your 199A deduction. Of course, it is also possible that this deduction actually brings your taxable income down into the range where you now qualify for the 199A deduction. I wish it wasn't that complicated, but unfortunately it is, at least for a few more years until the 199A deduction expires.
Also, if you are a super saver, you may wish to preferentially use tax-free contributions such as Backdoor Roth IRAs, Roth 401(k)s, Mega Backdoor Roth IRA contributions to a 401(k), Roth Conversions, and Health Savings Account contributions instead of making additional tax-deferred savings like a defined benefit plan. This is one reason WCI, LLC doesn't have a Cash Balance Plan. Naturally, you can later convert these dollars to a Roth IRA, but that may not be worth it to you. There are not a lot of these doctors out there (for example, only 8% of my physician partners maxed out their DBP when it had a $30K/year contribution limit) but this audience includes a lot of them.
Bottom Line on Cash Balance Defined Benefit Plans
Cash balance plans are an additional 401(k) masquerading as a pension. Physicians interested in boosting retirement savings and minimizing their annual tax bill should give strong consideration to adding a cash balance plan on top of their existing 401(k) plan. A cash balance plan is a great option for those who wish to save for retirement and are already maxing out their 401(k)s and backdoor Roth IRAs.
What do you think? Do you have a cash balance plan? How does yours work? What is the maximum contribution? Are you making it each year? Why or why not? What percentage of your group is maxing it out? Comment below!
Super dumb question. Did not notice it addressed in the text. Can a W2 physician open a cash balance plan for themselves? I am assuming no but figured I asked.
No, but you can try to lobby your practice to consider opening one for the group where the plan can be funded by you (rather than by employer). I’m sure many docs working with you probably don’t even know about these types of plans, and would be interested if they found out how they worked.
No dumb questions.
No, just like an employee can’t open their own 401k, they can’t open their own DBP.
Excellent post, Jim. As a prior trustee for a CBP, I can tell you it is extremely difficult to educate your partners on how these plans work. Also, having physicians manage these plans is often like the blind leading the blind. Another drawback of CBP’s is their lack of transparency. That said, they are especially beneficial in high tax states (e.g. California, New York).
That’s a great point. I find that groups can benefit from both good advice and also good education on the CB plan prior to adopting one. As far as transparency, this is easily reached as long as whoever is managing the plan is doing their job to both educate and advise the partners on the pros and cons as well as on how the plan investments should be managed for everyone’s benefit. There are so many misunderstandings about these plans given how complex they are, but they don’t have to be. These plans can be made relatively straight forward with enough communication between service providers. This is another missing link – actuaries are rarely good communicators, so if there is nobody on the plan sponsor’s side to bridge that gap, that’s where you get the lack of transparency.
I found this post and prior CBP posts very informative. The topic (and these plans) do certainly seem confusing. A question I still have is this: If my practice decides to offer a CBP plan, can the participants direct the investments of the profit sharing and 401K deferral contributions? As in, can these portions be self-managed while the CBP portion is per the plan’s design and specified investments? I apologize if I missed this in the posts/comments.
Yes. They’re actually separate plans.
They can unless your 401k plan is a pooled plan, just like CB plan. I still see those floating around, some are decades old.
two, maybe three questions.
1- is there any difference between CBP & DBP?
2- Our group [6 docs] have a DBP. We contributed heavily over 10 years, reached maximum actuarial allowed contribution. We are in the process of dissolving the plan, and rolling over $ to individual 401k’s/IRA’s. We have a side agreement of percentage ownership that goes from 7-21% depending on individual’s contribution over the years. Is our side agreement of percentage ownership kosher? does anyone know any IRS regulation that prevent side agreement?
1) There are some differences. CB plans have a hypothetical account value, DB plans don’t, so this makes it easier to understand CB plans by partners, as they are similar to profit sharing in a 401k plan. CB plans are definitely preferred for small group practices with staff given the pros vs. cons. But for a group without staff it probably does not make much of a difference. Actuaries like CB plans more though for multiple reasons.
2) I would talk with your actuary and/or an ERISA attorney regarding this one.
1. Technically a CBP is a type of DBP.
2. Dunno
Is a CBP appropriate/cost effective for a single 47 year old sole prop with no employees in the 35% tax bracket? I currently max out 58k SoloK/6k Backdoor roth/3.6k HSA. Due to paying off my mortgage in 2020, I am now debt free and therefore started a taxable brokerage account november 2020 for additional savings/investing. However, after reading about the consider tax savings for a CBP, I am wondering if the establishing a CBP as a single Sole Prop makes more sense than focusing only on the taxable brokerage after the Solok/Roth/HSA each year. Or, if the fees may be prohibitive since I would be a “1 person” CBP.
I will give you my non-expert answer [ from experince]
Yes CBP/DBP. You can put more than 100K/ year in your DBP[ your 404K/Roth will pale in comparison to the amounts you can put in DBP]
So you will have 58K/soloK/Roth/HSA/ DBP, then put extra in brokerage account!.
This is my non exerpt answer. wait for the experts.
If your family AGI is in the 37% bracket, then yes. If you are in a high tax state such as CA or NY, then also possibly yes even if you are in the 35% bracket (but you do need an income of at least $500k to make this work without any issues). CB maxed out over 10 years is going to beat a brokerage account even with a low return, if you are in the highest tax brackets. If you are in the 35% bracket, you can probably make the case for setting one up, but you need to be mindful of several things:
1) You would get the most benefit from running this plan for at least 5 years, but ideally 10. If you have uncertain future as far as 1099 vs. W2 vs. partnership, then I would skip it.
2) Be mindful of the costs. Starting/terminating this plan costs quite a bit, even if ongoing cost is reasonable. For that reason I’d say 10 years should be the target.
3) A net income of at least $500k is recommended for cash flow purposes (if you are older, I’d say at least $600k is better). Cash flow can be an issue even if your income is high.
Otherwise, I’d skip the CB plan and concentrate on the taxable.
Fees can be a pretty low on a personal defined benefit plan. I think last I looked it was something like $1200 to establish and $1200 a year or so.
I don’t think fees are this low, haven’t been for a while. Even Schwab is higher than that, $2250 startup and $1750 ongoing, and that’s bottom of the barrel. Anything better is going to be more like $2k-$2.5 ongoing if you are going to pay a TPA for both 401k/CB plans. Most docs would want to have both 401k and CB plans administered together by the same TPA/actuary, not just the CB plan, so it does add up. Also, there are termination fees that can be quite high ($2k-$4k depending on the service provider), so that should also be taken into account.
Thanks for the correction. I was thinking of Schwab’s product.
Thank you for the info
I’m 35% tax bracket and will probably never be in the 37% bracket as a single wage earner.
I live in Texas, so no state income tax although property taxes are not low.
I’m at approximately 400k per year -it varies since I am 100% 1099 income – esp with covid last year, the freeze this year, etc.
My saving rate is quite high now that all debts to include mortgage are paid off. I have 2 kids in high school, and I have saved most of what i am comfortable putting into a 529 by the end of 2021. No weekend home or expensive hobbies, Therefore, starting 2022 I will be predominantly focused on saving for retirement . I am not comfortable with a large bond portion to my porfolio, so If i did a CBP I would likely put in Vanguard Growth Fund VUG or VOO OR VTI, perhaps The Growth Lifestyle Fund which is 80% equity.
Ideally, as a single CBP, I could specify a minimum of 0 each year to balance any fluctuations in the equity portfolio.
Im ok with the 5 to 10 year time frame.
I currently put bond and bond alternatives in my self directed Solok ( mostly real estate debt funds).
I guess it really boils down to the fees involved and how much additional federal income tax savings can be sent to the CBP. I would love to lower my federal income tax bracket by using the CBP.
I’ll check with my CPA about the amount of federal income tax savings and the CBP fees.
Thanks again!!!
1. Does anyone have 10+ years experience with Cash Balance Plans and have you encountered any issues from the IRS?
2. Would a cash balance pension plan be considered a legal loophole for a solo independent contractor locums physician or is this a recognized and legitimate retirement strategy?
3. Does a $1,200 set up fee and $2,400/year accounting fee seem reasonable for a cash balance pension plan for myself only? For context I would plan to defer around $160K in taxes per year into this plan, so while the fees seem quite high at least there would be a considerable tax savings for the year I contribute?
Thanks in advance for all your help!
1) Biggest issues are not with the IRS. You need to have a very good TPA/actuary who can guide you and make sure you are not making mistakes and doing things wrong. There are many ways to mess things up, from over-funding the plan to hiring employees if you have a solo plan.
2) CB plans are just as legitimate as 401k plans.
3) This seems about average if both 401k/CB plans are administered together (which they should).
You also need to be aware that your PS contribution is limited to 6%, so this means you can do MBR 401k for the rest up to the maximum ($61k). Your TPA/actuary has to know how to do this to advise you on the process (it is tricky as you need to set up an additional Roth account), as this can be quite a large amount (possibly as much as $20k) that you don’t want to miss out on.
1. Yes. No.
2. Totally legit. Just like a legal loophole would be. Why don’t you think something that is legal is legit?
3. Yes, that’s kind of the going rate.
Thanks for your replies. I have a follow up question but first wanted to provided some context.
Late last year I decided to proceed with opening a Cash Balance Plan with Emparion after vetting a few of the TPAs endorsed by this site. I went with Emparion mainly because during the sales pitch, I was told that I would be able to defer $160K each year for 4-5 years, terminate the plan, and roll this money into a solo 401K.
For context, I’m 34 yo and would plan to potentially terminate the plan in 5 years if/when I transition from 1099 to a W2 position. The idea is to not terminate the CB plan, but I’d like the flexibility to do so if my practice changes.
I recently had a phone call with Kon who mentioned that if I contribute $160K/year at my age and terminate the plan in 4-5 years that I may run into major overfunding issues which would cause significant tax consequences. Unfortunately, this was never something that was shared with me during the initial sales process at Emparion and I have already created my plan with them. I have since spoken with Paul at Emparion and he mentioned that if I am overfunded and plan to terminate I should simply leave my plan open for several years longer (all while incurring administration fees) until I am no longer overfunded.
My question: is there something unique to Emparion that allows them to provide a greater amount of tax deferred contributions than the other TPAs? Are some TPAs able to create actuarial projections that allow for more tax deferred contributions than others? OR is it your understanding that every single one of these TPAs needs to abide by the exact same actuarial projections and the amount of tax deferred contributions that you can make in a 5 year period will be the same regardless of which TPA you choose? I ask because in the event that there is variance between these TPAs, then it would make the most sense in my situation to go with one that would allow for the most aggressive amount of tax deferred contributions.
There are several variations on the types of designs available for solo plans, and some are higher risk than others. The formulas are all the same, so all actuaries have access to them. Your lifetime maximum is a hard-wired constant that can not change, so at the end of the day, ALL designs will allow you to contribute the same amount, albeit at a different schedule. The problem is that some unscrupulous actuaries/salespeople want to entice younger docs to open a CB plan, so they try to present the front loaded scenario without adequately explaining that the account might have to remain open for longer than 10 years, especially if there are gains in excess of the crediting rate, unless you want to forfeit a good portion of the gains. Not only does this incur extra fees, but at some point you lose control because either your investment is in the money market (returning very little, until recently that is), or it is in higher risk/higher volatility funds that can potentially make the situation worse. Also, in some cases you might no longer want to maintain this plan due to various business issues, so if you have to terminate your plan early, the front-loaded version is very high risk.
There are some creative solo designs that I’ve seen that avoid the front-loading problem, but you are not going to get as aggressive in funding the plan in the first 5 years. One actuary I know does 1 year on, one year off (front load for 1 year, contribute nothing the following year). This avoids the really bad overfunding that can happen with 5 year front-loaded design. Also, there are many docs whose 1099 income is not exactly rock stable, so if they have to terminate the plan early, they wouldn’t be able to due to this front loading. The idea is that 10 years is the longest amount you need to max out your plan. Anything longer is not necessary as you will reach your lifetime maximum at maximum contribution in 10 years.
What you want is the best actuary that actually explains their design and its pitfalls. A company that is run like a mill that sells front-loaded designs without doing their due diligence (especially to younger docs who would otherwise not be able to make substantial annual contributions using regular design) and without making sure that it is appropriate in each and every situation (and without providing a good explanation of what will happen if the plan is overfunded, which is a very real possibility when you max it out in 5 years) is not the right one for someone whose 1099 income situation can change quickly. Most actuaries will not talk to anyone who is younger than maybe 35 at the very least. Anyone who is trying to sell CB plans to under-35 docs without studying their situation in detail and making sure that this type of plan is the best one for their specific situation is doing a big disservice to younger docs.
Any doc setting up a CB plan should be told that a 5-year front-loaded plan can run for longer than 10 years, and that it can not be terminated sooner than 10 years without forfeiting some of the gains, because it is specifically designed to run for at least 10 years, longer if gains are larger than the crediting rate (of course this does depend on how much it is front-loaded, but the numbers provided seem like it would be maxed out in 5 years or less). If the actuary is not doing that, they are doing a sales job, nothing more, to entice younger docs to participate in a plan that is most likely not appropriate for them until they get older and can contribute more without front-loading.
$160K is a huge contribution for someone as young as you.
I wonder if you can make some smaller contributions in years 3-5 if it’s starting to look overfunded.
Even if you do have to pay some admin fees to keep the plan open a little longer, it may still be worth it to have such a huge deferral.
Compare this the contribution for a 35 year old doc in my partnership DBP: $5K. Even my contribution is only $17,500. That’s probably more conservative than it has to be, but it’s a long way from there to $160K.
Thanks for your quick responses. Please let me know if my understanding then is correct:
The maximum amount of money that I can defer over a 5 year period is essentially a fixed number regardless of which TPA I employ. In other words, no matter which TPA I use, the only variables to consider should be the costs and service received. No one TPA can can help draft up a plan that allows me to defer substantially more over a 5 year period than another given that the lifetime maximum deferral limit is a hard-wired constant.
If this is true, (roughly) what would that maximum 5 year deferral in a CB plan be for a 34 yo?
No, not over 5 years. Over 10 years. The maximum is calculated assuming you are contributing the maximum over 10 years. So what you can put into your plan over 10 years is the same amount, whether you frontload over 5 years, or whether you have a fixed/constant contribution over 10 years. You can’t get any more money if you run the plan longer than 10 years. If you have to use up the gains over a period longer than 10 years (or over a time period that is essentially a variable that you have little control over) that’s a bad design. Your plan can easily be designed to be maxed out in 10 years, and you don’t need to run it for longer than that but your contributions will be a lot lower, more like $85k, not $160k. The problem with overfunding over 5 years is that the plan can remain open for longer than 10 years to use up the gains, and that’s a defect that does not need to be there as the amount you get into the plan is maxed out at 10 years, so the rest is just paying actuarial fees for nothing at all.
The design you got is a 5 year front-loaded one with the idea that after 5 years no more contributions are made. A 34 year old opening a CB plan can contribute about 1.35M into the plan over 10 years, plus some inflation adjustments that are done every 3 years or so. You can put away this $1.35M in 5 years, but then over the next 5 years the assets can grow, resulting in overfunding. That’s why this can remain open for longer than 10 years, but your overall contribution won’t be much higher than $1.35M. Also after 10 years do you want to roll this money into a 401k if possible, as it does not pay for you to keep it locked up in a low volatility (usually all bond) investment.
Just to clarify. You can certainly participate in a CB plan for 5 years only. You can make level contributions that range from $85k at age 34 up to $105k at age 39 so the total might be shy of $500k or so. Front loading if you want a 5 year plan (that terminate after 5 years) is just plain nuts.
The answer to the first question is yes. That’s all actuarially determined. I don’t know the answer to the second though. I’d have to ask an actuary.
The problem is that the actuary hands the doc this design with a specific idea to overfund over 5 years. The problem is not just paying admin fees but being handed a plan that’s too risky because it can’t be terminated quickly and because might have to stay open for longer than 10 years for no reason at all! If your maximum is fixed, there is no reason to do anything else other than make annual contributions over 10 years. This is just a sales job with solo DB plans (to sell the higher contribution), I don’t know any reputable actuary who would do a 5 year overfunding with the idea of keeping the plan open after that. And worst of all, they are not telling the doc about this – it is a feature, not a bug.
I am 48 in solo practice with 4 young employees and I offer a 401K to my employees. Due to a seemingly irreparable ASG/control group exposure, I’m unable to participate in this 401K or other qualifying plans (CB). This sucks as I can not take advantage of benefits of single member llc ownership with funding the plans for my family.
How much is this lack of participation going to impact me? What other tax advantages retirement vehicles are available to me? I’m most interested in those that mitigate tax exposure in retirement but wouldn’t mind some breaks while as a working stiff as well.
First, it is unclear what you mean by ASG/controlled group exposure when you’ve only named one practice. Did you mean that you also have an LLC through which you pay yourself? Why can’t you participate in your own practice 401k plan?
I have ownership in a surgicenter with several other surgeon groups. When this surgicenter was setup, no one addressed the control group issue. It remains an outstanding issue. When I transitioned to solo practice and went to setup plans for my employees, the issue was discovered.
This has been confirmed by my TPA and 3 national ERISA attorneys. My surgicenter partners differ in their stance with my tpa and 3 experts….
Are you better off continuing to own the surgicenter and not having a 401(k) plan at the practice or selling the surgicenter in order to do so? I suspect the former.
At any rate, you’ll still be able to do a personal and spousal Backdoor Roth IRA each year, an HSA, and invest in taxable.
Thank you for the reply. Would you please generalize the maximum dollar amounts allocated to each account?
Other options would include taxable accounts, real estate, or perhaps maximizing vertical integration in whatever businesses owned: ie, owning the lithotripsy center, another dialysis center: becoming a REPS /owning a prop mgmt llc for any commercial or residential properties owned?
Thanks in advance. I trust the opinions I’ve accumulated and the TPA’s stance. It’s really frustrating to not have these relatively mindless (401k, CB) options available to me especially in light of being a business owner.
If you’re under 50, Roth IRAs are $6,500 a piece per year, HSA is $7750 this year for a family. No limit on taxable account whether it is invested in mutual funds, real estate, insurance products, small businesses etc.
In your situation think of the retirement accounts as a icing on the cake, not the cake. It’s okay to save for retirement outside retirement accounts if none are available to you. Most of our savings now goes into a taxable account. It’s a good problem to have because it usually means you have a really high income. Joe Average doesn’t save more per year than he can put into a Roth IRA.
Thank you
1) This sounds like it is not a controlled group, it is an affiliated service group.
2) Depending on the facts and circumstances it might be possible to go around the ASG. There are ERISA attorneys and there are ERISA attorneys. While identifying an ASG is not difficult, fixing it requires some creativity. And even then it is not always possible. What is % of your net income that you get from the surgery center?
3) Setting up a plan for your employees is not going to avoid the ASG issue – you still have to test this plan with the plan for the surgical center/other ASG members if there is an ASG, so just because you don’t participate, that does not absolve you from the responsibility to be in compliance. If there is an ASG then all involved parties should be setting up a single plan for all entities in the ASG. This might actually not be a bad idea as it will cut down on the costs, and if these are similarly sized groups it might be possible to even set up a Cash Balance plan, but I’m guessing some of these groups probably have their own independent plans and probably don’t care about ASG (I’ve seen this too).
We’ve run into this issue multiple times. Depending on the facts and circumstances it is often possible to proceed with a plan even though there are ASG concerns, provided an ERISA attorney can find an appropriate solution. If an individual solution can not be found, going with a single plan for the ASG is often the best solution.