The Background
The Cambium Small Business Advisory Group was introduced to this talented medical practice by their CPA. A successful doctor’s office founded by a husband-and-wife team. The husband is a lead surgeon and the wife runs the practice. They have several physicians and close to 30 staff. The practice cared very much about their staff and had adopted a SIMPLE IRA plan many years ago which had a high participation rate.
The Diagnosis
Over time, the owners’ income had increased dramatically to over $1mm and the SIMPLE IRA limits were now yielding nominal tax benefits. The owners’ incomes were now subject to the highest federal rate, and they were seeking higher annual contributions to offset this burden.
However, their sensitivity to the rising employee costs of running the plan increased as a result. These were comparatively high and the cost to benefit for the owners was now skewed. Further, the 3% SIMPLE IRA Match has no income cap and two of their employees had high compensation, so this further added to the costs.
2022 SIMPLE IRA Tax Limits
Their CPA came to us seeking a solution. A better plan design that would:
- take care of their employees
- dramatically increase owner deferrals without dramatically increasing employee costs
These owners had looked at other plan designs in the past and thought all was lost as they had no luck in finding something that would solve their problems. A SIMPLE IRA is often presented as being easy to set up. But the administration, fiduciary responsibility, and risk falls on the shoulders of the business owner.
Without a recordkeeper or a third party administrator, business owners must keep track of enrollment and payroll often involves making manual deposits into each participant’s individual IRA account. They were solely responsible for the oversight of the plan.
The Prescription
We undertook a detailed analysis of the firm’s employee population. We proposed an integrated profit-sharing and defined benefit plan.
401(k) Profit-Sharing & Defined Benefit Plan
Through deferrals, catchups, matching, and profit sharing we increased each owner’s deferral from $23,000 to $65,000 while keeping the employee costs at the same level as the prior SIMPLE IRA. This design shines in what we proposed with the integrated Defined Benefit Plan. We enabled the owners to now shelter an additional $360,000 while only bearing an employee cost of $15,000.
In total, the owners’ contribution/deferral went from $46,300 to $491,000. And their employee cost rose by only $15,000.
Lastly, we implemented this solution by providing a robust support infrastructure of professionals to bring administrative oversight, fiduciary assistance, employee communications and payroll integration. The owners were no longer burdened with these responsibilities.
If you or your small business owners are interested in learning more, please contact us at cambiumhelp@cambiumonline.com
This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 800 Westchester Avenue, N409 Rye Brook, NY 10573, 914-288-8800. PAS is a wholly owned subsidiary of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Hypothetical examples are not intended to suggest a particular course of action or represent the performance of any particular financial product or security. Cambium Group, LLC is not an affiliate or subsidiary of PAS or Guardian. 2023-156001 Exp 05/25