So. Confused (solo/individual 401(k) stuff)

[poky]

Does anybody on here feel like they have a grasp of the rules around individual 401(k)s, especially as they apply to a partnership? I'm getting the feeling that we can't actually put in employer contributions if we were to set one up (which would make it not worth it to set it up), but I'm not completely sure, and can't really find anything that lays out when employer contributions are OK and when they aren't...

[spotty_dog]

Hrm, we don't have a partnership here, just a sole proprietorship. I'm curious so I might poke around…what's the legal situation with the partnership, are they incorporated? Do they have employees? I think I remember [MENTION=872]JaneDoe[/MENTION] getting accountant and financial advisor input on this situation.

[poky]

Hrm, we don't have a partnership here, just a sole proprietorship. I'm curious so I might poke around…what's the legal situation with the partnership, are they incorporated? Do they have employees? I think I remember [MENTION=872]JaneDoe[/MENTION] getting accountant and financial advisor input on this situation.

They do have a couple NPs - I'm currently trying to find out if they're W2 or not; from what I've read, if they are W2, then that answers the question right there; can't do it at all because it'd have to be regular corporate 401(k). Things like 'are they incorporated' is the kind of question I wanted - I don't even know what to ask to figure out if DH can set one up by himself or not, or if the partnership would have to be his "employer" - in which case, from what I can tell, employer contributions would be a no-go, because everyone would have to set aside the same percentage as employer contributions, and there's no way in hell a dozen docs are going to agree on THAT. Does incorporation make a difference? Can I find out on my own if they're incorporated or not?

[spotty_dog]

I'm rusty on this. I believe you can still have a 401k if you have employees or a partnership or even an S corp, but there are rules about the percentage you take as a salary deferral vs. an employer match? And you have to apply that percentage equally to all employees, so if someone you employ can't afford to defer more than 5% then you can't either? Something like that. Moar research.

[poky]

Hm, this seems pretty clear that W2 employees mean no solo 401(k)...from http://www.individual401k.com/rules.html:

If a business owner has salaried W-2 employees age 21 or older who work more than 1,000 hours in a calendar year they are ineligible for an Individual 401k. Business owners and their spouse do not apply to the 1,000 hour threshold.

A business owner is eligible for an Individual 401k if they employ independent contractors who work more than 1,000 hours in a calendar year (the 1,000 hour rule applies to W-2 employees only).

[poky]

And yeah, that's what I'm running into - if the Partnership is technically the employer, then it seems like everyone has to contribute the same percentage as employer contribution, if anybody does. But I don't know how to tell whether what DH is in qualifies as a partnership for this purpose or not.

[JaneDoe]

This is precisely the situation DH was in when he joined his practice ten years ago. The doctors are not a legal partnership, but they group up to share in the overhead. When DH started, each established DR had his own retirement plan and would contribute the legally required amount to the each employee retirement plan. It was an accounting nightmare and it was expensive. In order for DH to contribute to a retirement plan other than an IRA, he would have to start his own plan. There were a couple of options at the time, but I don't remember what they were. I'm pretty certain a 401k solo was not an option though because he has employees. For cash low reasons related to his age vs the age of his employees at that time, it was not cost effective for him to start his own plan. Our non-taxable retirement contributions were limited to $10,000, $5,000 each that DH and I could contribute to our IRAs. Very meager. About three years ago, DH was able to talk his partners into starting a 401k plan for the entire clinic. Since the older DRs were scaling back and had enough in their retirement accounts, they weren't too excited to pay to start a group plan. DH was able to convince them it was good for their employees and they agreed to it. It's been great for us because we have been able to max out his retirement contributions ever since, something like $51,000 a year. I hope this helps.

[spotty_dog]

Here's Fidelity's breakdown of options: https://www.fidelity.com/retirement-.../compare-plans

[spotty_dog]

I forget when he made partner. Did you receive a K-1 last year? That would be a clue about whether it's a legal partnership for tax purposes.

[poky]

He just became a partner last month. Last year, he got a 1099. No idea what he'll get for this year. We've definitely determined that the nps are w2, so no solo 401k, but it seems that if those nps are not getting retirement benefits, then even a sep ira wouldn't be in compliance. I'm working on finding that out now. The partnership is an LLC. Our adviser pointed me at a guy who does compliance testing, among other things, who at least got me pointed in the right direction and asking the right questions.

[spaz]

What about a SEP IRA? With his first partner, that is what we did. The business could contribute and he did as well. Just a thought.

[poky]

No, it looks like even SEP-IRAs are a no-go if the employees (the NPs) aren't getting some kind of "non-discriminatory benefit". It's a fairness thing; you can't save a bunch of money yourself for retirement tax-deferred if you don't offer a similar opportunity to your employees.

I asked if the NPs were getting retirement benefits, and got back "I don't think your adviser fully understands...we've always done this, no problems. All the docs are incorporated, so what they do with retirement has nothing to do with the partnership"....which is definitely not true, because if you could get around having to provide retirement plans for your employees by incorporating, everyone would just do that, and there would be no point to the rules that say you have to do it...and I know our adviser knows what he's talking about; he's dealt with EM groups having similar issues before (including the husband of one of his employees). This is also the first we'd heard that all the docs were personally incorporated; the payroll person assumed we also were.

The thing is that I think we're one of only two new docs to the group since they started having employees (which was just a couple years ago), and the other doc is younger, and may still be paying off debt and not worrying about tax-deferred retirement quite yet. So it's entirely possible that whatever's going on was fine before there were employees, but could now be running afoul of compliance.

Advisers are now recommending we get a specialist lawyer and stir the pot to make sure what's going on is in compliance or not, and get it figured out and reorganized if it isn't...but we don't actually know what's going on; for now, I've thrown my hands up (metaphorically), and let DH know we need to set up a meeting with the managing partner to find out what HE knows. I know I'm going to have to nag a few times before that actually happens, but I really don't want to spend money on a lawyer just to piss other docs off because we brought to light that their retirement savings for the past two years might not be non-compliant. Ugh. I want to know what EXACTLY the current docs are doing, and why exactly they think it's OK. It's still possible that there's a piece of the puzzle we don't know about that will make it all OK, but it's looking less and less likely. *sigh*.

[spotty_dog]

I guess it could be possible that only the partnership has employees and that the partnership has only S-corps as members? Then as the sole proprietor of the sub-S-corp you have no employees and can set up retirement plans to benefit only yourself? But it's certainly not the spirit of the law that requires "equal eligibility" for employees and employers, etc. And you'd better cross your ts and dot your is because with a sole proprietor S-corp you need to be able to justify your salary, your draw, your business assets, and all the rest if the IRS ever comes knocking. I'd go so far as to say the expense of getting legal and accounting help to set up all that complicated structure, would offset the tax savings of having the bigger tax-deferred space. Just a guess anyway.

[spaz]

Yeah, I think they had an S corp with that first partnership. I'm not really sure. But they only had the two partners and a secretary and an x-ray tech and a nurse, so it wasn't like they had a ton of people.

[metroguy]

if your dh is getting a 1099 - that implies he need to setup his own corp (either c/s/llc).. once that's done, he can fund his won retirement since there are no employees.. this is how normally independent contractors work (at least in the tech world). there's no partnership or anything. everyone (docs) has their own separate llc.. the main group pays their own employees (xray tech/billing) then distribute the money to the separate llc. it's up to the llc to do their own accounting.. (no k1)