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hired my first set of w2 employees this year. accountant says "no solo 401k

Home Retirement Accounts hired my first set of w2 employees this year. accountant says "no solo 401k

  • Avatar FCP 
    Participant
    Status: Physician
    Posts: 89
    Joined: 01/26/2016

    Hello,

    Since finishing residency not long ago, I’ve maxed out my solo 401k (54-56k/yr) for past few years.  I hired my first two w2 employees this year.  My accountant told me that now that I have w2 employees, I can’t do the full contribution to a solo 401k; that I can only contribute to the 19k employee limit.

    I was wondering: what is the best solution to this?  I max out a backdoor Roth and HSA every year, and save several hundred thousand in my taxable account each year.  Would it be possible to do a SEP-IRA and back-door Roth IRA and have that allow me to somehow contribute more tax-deferred money toward retirement, or is that not possible in this situation?

    Also, I do have a real estate LLC that my medical practice rents from; I don’t know if that could somehow be utilized to create a retirement acct; or maybe not since the rent is probably considered passive income?

    Thanks for any feedback/advice.

     

    #214380 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 4229
    Joined: 01/08/2016
    what is the best solution to this?

    Click to expand…

    well now you are not solo. so you need to establish an employer plan.

    Would it be possible to do a SEP-IRA and back-door Roth IRA

    Click to expand…

    yes, but the pro-rata rule exists.

     

    #214383 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7950
    Joined: 01/09/2016

    Your accountant is probably correct, unless your plan document stipulates a 1-yr service period before participation. You need to check on this. However, a solo-k means just that – no employees other than your spouse.

    You can limit SEP participation to any employee who has worked for you in 3 of the last 5 years. If you have been in business at least 3 years, that will give you a little breathing room. You will need to r/o your SEP to your 401k before 12/31 to avoid the pro-rate rule.

    There are a lot of moving parts here – you need to work closely with your accountant and make sure you follow the rules and don’t slip up.

    Of course, I would think at some point you want to provide this benefit for your employees, also, don’t you? You’ll need to hire a TPA, which will cost you more.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #214384 Reply
    Liked by FCP, DCdoc, Peds
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 535
    Joined: 06/14/2016
    Splash Refinancing Bonus

    Sounds like you earn a lot if you’re able to save several hundred thousand per year. And if you’re hiring new W2 employees, business must be growing. If you want to retain the employees, start a group plan so they can participate too. Yes, you can’t do a solo 401k if you aren’t solo anymore

    #214386 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1864
    Joined: 02/01/2016

    If you didn’t elect employee eligibility restrictions before you hired your first employee, you would be in non-compliance on the day you hired your first employee. If you elected a one-year of service requirement, you would have one year after hire before you would need to freeze, terminate or amend your one-participant 401k to a small business 401k plan.

    #214400 Reply
    Avatar jsx30 
    Participant
    Status: Physician
    Posts: 9
    Joined: 04/04/2019

    My wife is in the same boat. She has done a sep ira for a few years but I was trying to figure out how to increase contributions to tax deferred accounts. She has a few part time employees and I just can’t find a way for her to be eligible for a solo 401k. Unfortunately, a group 401k plan has significantly higher fees. The cheapest I found was going to be about 2000-2500/year. Her max contribution would be about 26-27k per year right now. If she could put 50 or 55k into it, setting up a group plan might be worth it. But at her current max contribution, I’m having trouble justifying the cost of a group plan. I’m thinking we are going to be stuck with IRA’s for a while…

    #214449 Reply
    Liked by FCP
    Avatar FCP 
    Participant
    Status: Physician
    Posts: 89
    Joined: 01/26/2016

    Thank you all for your responses.

    I did some more digging online, and found this thread: https://www.bogleheads.org/forum/viewtopic.php?t=165853

    It looks like I may be able to at least contribute the full 56k for this tax year (2019) before becoming ineligible, since none of my employees meet the eligibility requirement (min 1 yr of service, etc).
    #214467 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7950
    Joined: 01/09/2016

    My wife is in the same boat. She has done a sep ira for a few years but I was trying to figure out how to increase contributions to tax deferred accounts. She has a few part time employees and I just can’t find a way for her to be eligible for a solo 401k. Unfortunately, a group 401k plan has significantly higher fees. The cheapest I found was going to be about 2000-2500/year. Her max contribution would be about 26-27k per year right now. If she could put 50 or 55k into it, setting up a group plan might be worth it. But at her current max contribution, I’m having trouble justifying the cost of a group plan. I’m thinking we are going to be stuck with IRA’s for a while…

    Click to expand…

    You can get quality services for less than that, but I agree, if you are looking totally at overall net dollars, it’s doubtful you’re going to be able to justify it. You also might consider the intangible benefits of employee satisfaction at some point. I realize, however, that lower level/younger employees tend to value income over retirement benefits until they have reached a certain point in their careers, so there are definitely two sides to that pancake.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #214468 Reply
    Avatar FCP 
    Participant
    Status: Physician
    Posts: 89
    Joined: 01/26/2016

    If you didn’t elect employee eligibility restrictions before you hired your first employee, you would be in non-compliance on the day you hired your first employee. If you elected a one-year of service requirement, you would have one year after hire before you would need to freeze, terminate or amend your one-participant 401k to a small business 401k plan.

    Click to expand…

    Oh, crap.  Well, If that’s true hopefully I can do some damage control with the 19k employee contribution I made for the 2019 tax year.

    #214469 Reply
    Liked by Tim
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2273
    Joined: 03/01/2018

    the bogleheads thread you linked, includes this pertinent point in the first post

    “When I opened the 401K platform with Fidelity, I listed that only employees with 1 year service are eligible to participate in the plan.”

    You should review your own plan document – I assume you have a copy of this? – and determine if you made a similar election.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214479 Reply
    Liked by jfoxcpacfp
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 896
    Joined: 01/09/2016

    If you didn’t elect employee eligibility restrictions before you hired your first employee, you would be in non-compliance on the day you hired your first employee. If you elected a one-year of service requirement, you would have one year after hire before you would need to freeze, terminate or amend your one-participant 401k to a small business 401k plan.

    Click to expand…

    That is correct.  You can’t just come up with eligibility requirements not in the solo 401k plan doc.  Also, you can’t change what’s in the solo 401k plan doc, so what’s in there is that you can’t have employees who are non-spouse. Thus, you can’t use solo 401k plan with employees.  No TPA will actually amend a solo 401k plan doc as there is a ton of things to amend, thus they would most likely require a new plan doc created right away. You have to set up an actual 401k plan, which is not such a big deal.  Rent is not eligible as income, and you just need to set up a plan for everyone.  This might come at some cost, but in any case, given how few employees you have, the cost will more than justify the benefit.  Docs have it easier than dentists, who have lots of staff (compared with most doctors) and yet many still end up with 401k and Cash Balance plans because numbers make sense.  You’ll probably need to get an illustration to decide whether it would be worth it.  If staff is much older and is relatively highly compensated, yes, this can increase the cost to you.  On the other hand, if you are old enough and the staff is mostly younger, you will also have the option of setting up a Cash Balance plan in addition to a 401k plan, and this will definitely add more options for you (especially if you have the capacity to make the maximum contribution).

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #214514 Reply

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