The Optometry Money Podcast

Profit Sharing Demystified: How Optometry Practice Owners Can Maximize Their 401(k) with Matt Ruttenberg

• Evon Mendrin • Episode 148

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Episode Summary:
As your practice grows and profits increase, one of the most powerful tax and retirement planning tools available to optometry practice owners is profit sharing within your 401(k) plan. But what exactly is profit sharing, and how can you optimize it for both you and your employees?

In this episode, Evon welcomes back Matt Ruttenberg of Life Inc. Retirement Services to break down everything optometrists need to know about profit sharing contributions. They discuss how profit sharing works, the different methods of calculating contributions, and how practice owners can use this strategy to maximize retirement savings while managing taxes.

Whether you’re new to 401(k) plans or you’re ready to level up your retirement savings strategy, this conversation will give you clarity on how to align your plan design with your goals.

What You’ll Learn in This Episode:

  • What profit sharing in a 401(k) plan actually is and why it matters for practice owners
  • The “three-tier wedding cake” framework of retirement plan contributions
  • Different methods of profit sharing:
    • Pro Rata (the simple but costly method)
    • New Comparability (targeted, strategic contributions that benefit owners most)
  • How factors like employee demographics, age, and owner wages impact profit sharing efficiency
  • Why your Safe Harbor match choice (match vs. non-elective) matters when layering on profit sharing
  • How profit sharing integrates with cash balance plans to supercharge retirement savings
  • Key deadlines practice owners need to keep in mind before year-end

Resources & Links:

Work With Us:
Thinking about working with a financial planning firm that specializes in optometry? At Optometry Wealth Advisors, we help ODs nationwide align their practice and personal finances for growth, tax efficiency, and long-term wealth.

👉 Schedule a free, no-pressure intro call here: optometrywealth.com


The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.

Evon:

Hey everybody. Welcome back to the Optometry Money Podcast. Where we're helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors an independent financial planning firm just for optometrists nationwide. And thank you so much for listening. Really appreciate your time and your attention today. And on this episode, I welcome back to the podcast Matt Ruttenberg with Life Inc. Retirement Services. Matt is a qualified retirement plan ninja and magician for Optometry practices, and we dive into profit sharing for 401k plans in the practice. And we talk about what in the world profit sharing is. The different ways that you can calculate profit sharing contributions depending on your goal, whether it's to provide a broad benefit for all employees, whether it's to skew that contribution as a tax planning lever for the owner, whatever it is. We talk about ways to optimize that profit sharing calculation for that goal. We talk about how your 401k match factors into the cost and the math for the profit sharing. And then lastly, how a cash balance plan fits and integrates together with that profit sharing contribution. I think you're gonna get a lot outta this episode. I will put all of Matt's contact information and our prior episodes in the show notes, which you can find by just scrolling down in whichever app you're using. Uh, or you can find that at our website, optometrywealth.com, at the Education Hub over there. If you have any questions at all, reach out to me. At podcast@optometrywealth.com and if you'd like to. And if you're thinking about these things and you're curious about what it's like to work with a financial planning firm that specializes in Optometry and Optometry practice owners, reach out. I'll put a link in the show notes to our website. You can schedule a no commitment, no pressure introductory call. We can talk about what's on your mind financially and how we help ODs all over the country navigate those same decisions and more. And without further ado, here is my episode with Matt Ruttenberg. Welcome back to the Optometry Money Podcast. I am your host, Evon Mendrin, and I am excited to be joined once again by Matt Ruttenberg with Life Inc. Retirement Services. Matt, thanks for coming back on.

Matt:

Yeah, Evon, thank you so much for having me on. Always a pleasure speaking with you.

Evon:

Yeah, we're at least, what, three or four times already? So are you, I think you're officially a friend of the podcast. Is that kind of how it works?

Matt:

Yeah, I got my, my official button,

Evon:

There you go.

Matt:

I appreciate it.

Evon:

There you go. Yeah. There we go. Well, I, I'm excited to chat about, What I think is a really important planning lever for practice owners, especially as they get out of the Cold Start or recent purchase phase, they're seeing cash flow improve in the practice and they're wondering, okay, what can we do to not only save for our own financial independence and retirement, but also plan practically for taxes? And that is profit sharing in 401k plans. And I see, I tend to see there's a, a, a. Pretty good size gap of education when it comes to profit sharing and 401k plans. in terms of what it is and how it works and how it's all calculated and, very often for me. I know you've described it, Matt, as, these retirement plans as sort of this upside down cake with, with different layers. most people are familiar with the employee contribution amounts and 401k plans and the amount that each person, including the owners, can put in as an employee. In, in there, which is$23,500. If you're under 50, there's an additional bump if you're over 50. But there's, there's not always a good understanding of that next layer of the cake, which is profit sharing.

Matt:

Mm-hmm.

Evon:

describe for the listener what, what is profit sharing in a 401k plan?

Matt:

Yeah, great, great question. Very in depth. lots of variables, lots of wheels turning. but let's go back to that upside down three tiered wedding cake that you, you brought up, and it's an upside down three tiered wedding cake or, or a pyramid, if you will. The bottom layer is that 401(K), which is considered employee contributions or deferrals. So if you've had a 401(k) in the past through a day job or something, and you submit, I want to do 10%, I wanna do 5%, that's a deferral. And it's withheld outta your, your pay your paycheck, right? Your W2. the next level up on that pyramid is employer contributions and profit sharing is a portion of that. The other portion is the match, like the employee match. Now there's various different types. sharing. it there, the most basic form is called pro rata. and then there's other advanced that we're gonna dive into here today, but this is the portion that comes directly from the employer, the employer account. So it does not pass through payroll. It comes outta the profits of the business. And then it's a, identified amount that goes to. employees. but hopefully the goal is to get most to the employer to where they're having, most of those contributions. that goes up to something called a 415 limit. Okay? So the 415 limit, let's go back to that upside down three tiered wedding cake, right? bottom layer, that's 23 5.$23,500 that you mentioned for 2025, and then you go up that next step. Those two layers together, it's called the 415 limit tax code 415, and that can get you up to$70,000. So technically you don't, you're not stuck at that 23 5 plus a match. You can go all the way up to$70,000 doing both those layers in that pyramid.

Evon:

Gotcha.$70,000 is the total combined amount you, each individual can get into their 401k plan, regardless of which of these sources it comes from. And, one of my recent episodes on the podcast, and I'll, I'll throw link to this in the show notes, was. key tax levers you can pull when, when doing tax planning and looking at, the tax return or, or if we're looking proactively at a tax projection and saying, what are the key parts of that return we can impact or influence to have really good results, really high, high impact results and. These profit sharing contributions, depending on the demographic demographics of the practice, depending on how strategic we are with the owner's wage. these profit sharing contributions are really Impactful way to, to hit those planning levers. And so that's one of the things I mentioned in that episode. And so for those of you who are listening, potentially thinking about how can we improve our own tax planning, listen closely here. I, I think this is gonna be a really helpful conversation for you. And so, Matt, as you talk about that, you mentioned there's a couple ways to calculate how exactly these profit sharing contributions work, because it does need to go into all employee accounts. it's not just something for the owners. The, the golden rule here is you can't discriminate in favor of only the owners or the highly compensated employees. So how does that work? You know, the, let's say the owner wants to talk to you, they want to think about doing these profit sharing contributions. What are the different ways they can calculate those?

Matt:

So let's kind of go back to that most basic version. I called it pro rata, and that's what most people, most business owners, consider as their only option, right? So whatever you give yourself, which is up to 25% of your salary, assuming you're an S corp. is what you can give to yourself above and beyond that 23 abo and beyond the, the bottom layer of the, upside down retirement plan stack. pro rata is you have to give your employees that 25%. It's basically the most simple form of employer contributions, which I, I don't remember the last time we've done that. And the reason we is the goal once a, once you go above and beyond the match, 99% of business businesses out there. Are looking to now say, I want to maximize my own contributions.

Evon:

Yeah.

Matt:

everything, I'm, I'm being fair to my employees. I'm giving'em a match. I'm giving'em the 401k. There's a Roth component. The investments were fantastic, but the most basic form is prota And Most of the, I guess, the online direct to consumer, programs that are out there, they're more boilerplate versions. I would, is what I call'em. those are mostly gonna be the, the pro-rata and it's not something that's favorable to the owner. It's very favorable to your employees.

Evon:

And that's, that's something I was mentioning to you, Matt before we started recording, was that very often with new clients they'll have, a 401k plan from x, y, z tech-based platform, and then pro rata profit sharing and not really sure what that means or why that was selected, why that's the case. And so. I think there's a lot of room for education to just ask, okay, what is the goal here? If you do do profit sharing, what, what's the goal for that profit sharing? What do you wanna get out of it? And let's make sure that, you have the, the type or the method of profit sharing that makes the most sense for that goal. And so, pro rat, it seems like it's the, it's the simplest, the, the very basic, it's the same percentage essentially across all employees that you're gonna give to yourself as the owner, right? And, Drawbacks are that it's expensive because you need to apply that same percentage across the board to to all employees. And so I guess if your goal is to do that, if that's what you want out of profit sharing, then that will accomplish that. But very often, like you mentioned, we're trying to use that as a tax planning and say an investing tool for, for the owners very often, or at least the, the associates as well. And so outside of that very basic pro rata method, what are some of the other calculations that they might consider?

Matt:

Yeah. And, and I'm gonna, I'm gonna kind of lump all of those into one overarching category, and it's called New Comparability.

Evon:

Okay.

Matt:

new comparability has many, many, variables that we can work off of. And the, the whole point is, is targeting, that's the key word, is targeting. we still go through your annual testing. like you mentioned, non-discrimination issues. We, we, we can't. We can't cut out, for the most part, any employees inside of a qualified plan. So this is a qualified plan. Profit sharing, 401(k). It's considered qualified. once we get to this point, and we always ask our clients two, two questions. Number one, what is your number one priority? That's absolutely number one. And the question, the answer is multiple choice. Is it you? As the owner, like are you trying to stockpile into retirement and tax save or is it for your employees, or is it both? And if someone says, my employees are my number one priority, we might go with the pro rata route, but 99% of the time the answer's gonna be myself. I'm doing this for taxes. I've put in a lot of blood, sweat, and tears in this business. It's my baby. Now I want to reap some of the rewards off of my profits that have now shown up and my tax bill used. Right? So. The overall concept is we want the owners to get that money and we run off of these efficiency ratings. But, out of the, let's say a client says, Hey, I got a$50,000 that I need to get off the books because my CPA is telling me that I have a, a, a tax bill I need to get rid of, or a hundred thousand or$200,000. And, the goal is to get most of that money in the hands of the business owner, the variables involved. All these different kinds of calculations. We run'em from all these different angles. Age is a big factor in this, age, age weighted. So the closer your employees are to, closer to retirement, the more they're gonna get. And then also at the same time, tenure with the company, that's, that goes into the, the category. So let's say you are the oldest person in the room. For example, so you as the owner are the oldest person in the entire company. That is phenomenal. We're able to get you absolutely. The mass majority, we're shooting for maybe 80% efficiency rating where 80% of the money goes to you and 20% goes to the employees. however, on the other end of it, let's say you are the youngest person. In, in the, in the, in your company and all of your staff is older than you and they make pretty good money, that's gonna be more that you're gonna have to give to them. So that's one of the variables, but it's a very, very, very important part of the equation on why and when and what type of calculation. But let's say there's a range. so let's say you're kind of right in the middle. Your age is, let's say 40 years old, and then you have 60-year-old employees, and then you have 20 year employees. And now we've said discrimination is not part of the equation with these, but in reality, what we can do is we can target the youngest person in your company who's also maybe paid the least. And then because they're so far away from retirement, they're not gonna get as much and evens out. Evens out the entire, uh, employee pool with their con contributions.

Evon:

when you say Target, what does that mean? I, I understand what you mean, but just kind of for the listener. Like, what, what does that mean?

Matt:

Yeah. And it's kind of, it goes against what a lot of people think of retirement plans is the fairness rule annual, I used to say this all the time. Annual testing is fairness. Like you gotta give something to your employees for you to give something outta your, outta yourself or give something to yourself. And, when you do new comparability. That kind of goes out the door. You can target individuals and say, I want to take care of this person the most

Evon:

Hmm.

Matt:

my mission critical key employee. On paper, on the on the calculation, and we can change that year to year. So every time we do a cal a a profit sharing calculation, we can say we want employee number six to reap the benefits this year and next year we wanna switch it over to employee number two, because maybe one of your older staff fell off, they quit, they retired, whatever it is. But we're able to actually say, I want this person to get. Most of the benefits, but since they're the youngest and least paid, the equation turns out to be the same as one of the older, so you can do that.

Evon:

Interesting.

Matt:

you can do is quite, quite interesting where let's say you have a larger company. You have, we've done, we actually just finished up a couple plan designs on this one, it was a doctor's group. Okay. So this is pretty relevant, to the podcast where we had a group of, doctors, medical professionals at the top, and they were the owners. then we had some physicians assistants in the middle. And then we had a, a big chunk of staff. were able to remove whole departments from eligibility, from profit sharing. So where they still get the match. Like we, if we're using the Safe Harbor 401k on the bottom layer, but we are only targeting the, the physician's assistants and the ownership. And there's some, there's some definite, equations in there that we want, we'd like to see 25 people in that middle group if we, or in the total, eligibility. But you're actually able to remove full departments out of your equation. get more of those dollars over to the ownership.

Evon:

So you're able to segment out your employees into different groups. I mean, could it even be like ownership group, non od, non ownership od group, and then staff, like can you even segment it based on roles like that?

Matt:

Yeah. So, you know, thinking of, Optometry industry, right? You have the, the, the doctors at, they're, most of the time they're the owners.

Evon:

Yeah.

Matt:

they're also considered highly compensated employees, and that definition is they either own 5%, it could be a spouse, or you pay them over$155,000. owners and highly

Evon:

Hmm.

Matt:

employees are, are a full category. Okay. those are easy. The IRS doesn't care about highly compensated employees. They only care about the non-high compensated employees in terms of fairness. So we would say those are one category and then we'd clump, a bunch of other ones together, which would be the, the, the physician's assistants or, or, Maybe even like nurse practitioners in some medical fields, things like that. And then the bottom would be, maybe the receptionist desk or, or back office team, that you can remove that. So those tend to need to have larger, employee pools, maybe 40 to 50. and then underneath that we're just doing the targeting. if it's a smaller company.

Evon:

Gotcha. And, to, to highlight your point about why age is important. In terms of the testing of fairness, in, in whichever way you need to do that, whether it's targeting, for example, part of the reason that age is important there is because as you mentioned. A younger employee, or just like a younger optometrist, has a much longer time to save and invest towards the retirement goal. And you would need to put in, let's say hypothetically, the OD is trying to invest towards a goal. Well, if you have more time, you, you, you can put in less dollars into the account each and every month. And still reach that goal. Someone that's much older is going to need to put in much more over a shorter amount of time in order to reach that same goal. And so that same sort of, we'll call it time value of money math is essentially that same concept is working here for the benefit of the older doctors or the older owners. Right.

Matt:

Yeah,

Evon:

Uh.

Matt:

similar with that. With that new comparably, new comparability, age-based, it's, it's like, yeah, the older you are, the more you can put into it when you're targeting and things like that. so very, very similar equation. Just a little bit more on the backend when, when you're going to the defined benefit side of it.

Evon:

Gotcha. Gotcha. Okay. This is helpful. And again, this is if we are trying to skew that profit sharing contribution as much as possible, if that's the goal, to the accounts of the owners. As we're using this as a tax planning lever and an investment lever for the owners, this is one really great way to do that. And how does the, the wage of the owners fit into this too?

Matt:

Yeah, very important actually. So we, it has to do with your entity structure. Okay.

Evon:

Yep.

Matt:

LLC, are you follow as an S corp? Are you falling as a C corp and S-corp is very, very important. and we generally have income planning meetings before the end of the year everything. Is based on your W2 if you files an S corp. if you file an S Corp and you have, let's say you don't pay yourself a salary at all, just taking distributions. There is no income to calculate any of these con You can't do the bottom layer with a 401k and you certainly can't do any profit sharing, contributions either when you are operating as a schedule or as a S corp, you're operating as, as s an LLC or, so in a single member LLCs common or even just a sole proprietor even. And, and you know, a lot of people who just outsource their staff or they use staffing companies or things like that. It's based on your net, your net income after expenses and things like that. And that's what those calculations are based on. So, again, the bottom layer 23 5, as long as you're paying yourself$23,500, you can put that towards the 401k portion. The profit sharing, let's assume you're an S corp, is up to 25%. So if you are paying yourself. A hundred thousand dollars salary, but maybe you have a$400,000 total profit. we don't care about the 400, we

Evon:

Yeah.

Matt:

about that$100,000. So you're gonna do 25% of 100$25,000 contribution into your profit sharing plan is what you're allowed to do.

Evon:

Got it. And so it's really important to test. If we're running these profit sharing contributions with the administrator, for example, Matt's, Matt's business over there, it's important to test out different wages to see how that impacts the, these results. Because there, there's sort of this, there's always this tension here between, keeping the wages down towards the lower end of what's sort of reasonable, reasonable wage for an S corp for, for tax planning purposes.'cause we're trying to limit those Social Security Medicare taxes. But on the other hand, for retirement plan contributions like profit sharing contributions. The, the, the tension's going The other way is we may want to increase those wages to, to get more of that profit sharing contribution into the account of the owner. And so it, that's a really important thing to test and to, and to see what makes the most sense.'cause our, you know, for the most part, the owners are tr I think, sort of trained at this point a lot of the times to pay as low of a wage as possible. To their detriment at times. And when I'm running a tax projections and working with, the tax professional, we want to see if we're, if we get a profit sharing number from an administrator, for example, we want to see if we increase wages and do this profit sharing contribution. What does that do to the tax outcome, including the extra FICA taxes, but. It will, it, it, it may still very well make sense even if you have to pay more into Social security Medicare taxes. So keep that in mind. Owners like that, that wage is really important and there's that tension there to keep it lower for certain tax planning reasons, but also to potentially increase it for other retirement planning reasons. And you want to make sure you're not holding on too, too hard or too strongly to an artificially low wage when it doesn't make sense to you. But I, I'm really glad you brought that up. Or you're able to, shed more light on that. I think that's really important. And so the age, it seems, is really important. The, the wage is really important'cause it's, it's limited to that 25% of wages. The, though in hearing you talk about the targeting, you know, trying to target a, a, maybe a, a younger employee, it does sound like even if the owner isn't substantially older than the average of the other employees, it it's, it does still seem like the math can favor that owner in a new comparability. Like, do you see, like, do you see, or do you have like general guidelines to say like. If you're not X amount of years older than the average, you know, like what? Do you have anything to add to just sort of how young the owner can be to where it still often makes sense or doesn't make sense? Or is it just based on each individual demographic?

Matt:

So every, and this is something that I'm, I'm trying to get out, out there, into the, into the world is, is every business is completely different.

Evon:

Yeah.

Matt:

design should be different. And that's why you don't wanna do these boilerplate because you're not. Cost ends up being a major part of the equation. Just like anything when you're, when you're searching for payroll or you're searching for bookkeeping, you're like, what's the overall cost? What's the cost? but a lot of times they're looking at like the administration fee and the record keeping fee and they're like, okay, what is that there? There's a huge part of that equation that is often lost in. How much, obviously tax strategy, right? How much, what is your net taxes like you said earlier. you know, you increase your salary so you can do contributions or vice versa? It's this big balance and everything has a cost and everything is, are you in the black, you in the red. That's everything that's business in, in, in a nutshell. But, at the end of the day. You have to give too much money to your employees. That's an additional cost I've seen very much where, I've had business owners who are working with somebody and that upside down three tiered wedding cake that we brought up a few times. Every layer needs to be designed a certain way, and we'll get in that a little bit more here in a minute in order to maximize a layer above it. But if you don't, if you don't, If you don't make that design as efficient as possible, you're throwing, I've seen upwards of$50,000 too much to their employees because they didn't have the proper bottom safe harbor version

Evon:

Mm-hmm.

Matt:

they're giving a match versus a non-elective to contribution, which we'll talk about here in a minute, but. That's very, very important. but going back to your question on, you know, what is a good ballpark age? I'll give you an example. this was a dentist group actually. And and, one of these, gentlemen heard me on a podcast, and they wanted to do their profit sharing contributions and. They owned a few buildings and they were in their thirties, I think it was. but they had some staff in their like mid sixties and that just didn't work. In order for him to get to that seven, that,$70,000 415 limit that we mentioned earlier, they had to give$55,000 to their employees. That's clearly not efficient. That's

Evon:

Right.

Matt:

the red. And we, they, they said, don't do that. What we helped them identify is they owned the building, so they did some sort of cost segregation studies to help offset taxes instead. But, what you, what you did there was you, you said, okay, I'm the youngest person in the room. That's not gonna work.

Evon:

Hmm.

Matt:

times outta 10, that's not gonna work if you're the

Evon:

Yeah.

Matt:

person in the room. if you have one person above you, even in, let's say you're 40 years old and you have a 60-year-old, but everybody else is around your age or younger, maybe just a year or two older, that's fine. That will most certainly work out. it's so if, if we have somebody to target, somebody else, a non highly compensated employee to target, other than the 65-year-old staff member. Then the numbers most likely will work out, and it's

Evon:

Gotcha.

Matt:

the efficiency rating. Are we in the red or in the black? If you're in

Evon:

Gotcha.

Matt:

it works. If you're not, you just don't do it.

Evon:

Gotcha. Okay. That makes sense. That definitely makes sense. And short of firing all employees and only hiring employees that are much younger than you, it really just depends on the demographics of every, of every practice individually and the, and strategic planning on the wages to see what's possible and how we can make the U the most use of that 401k plan, depending on the goals of the owner. And you mentioned something I, I want to get into this. You mentioned deciding on whether you do a match or something different. And most often, again, going back to like basic programming or. A lot of the onboarding sessions with a lot of these, these tech providers on the 401k side, most owners tend to skew towards picking a match, with the understanding that it might be lower cost or incent, it incentivizes employees to also contribute. There's a lot of good reasons to have a match. But you mentioned that sometimes it may not make the most sense if the owner's going to be do doing consistent profit sharing. Can you talk about that? What, what's the issue here?

Matt:

Yeah. And, and again, this kind of goes to those two, I I mentioned the first question that we asked in the beginning. It's, you know, what is the goal? Who's the, what's the priority, I should say, owner, is it the employees? And the second question is, how much do you wanna allocate towards this? And if we know that they want to max out as much as possible, we're going to design it one way. If we are not sure we're gonna design it another way. And a lot of people, I think it's due to maybe, a lack of education from the provider

Evon:

Yeah.

Matt:

it's match versus a contribution. When does that make sense? When does it not? and the other part of that equation is have you pulled your employee pool? If you offer a 401k, are they gonna contribute too? Industry is a big part of this equation too. you know, whether they're gonna contribute or not. And, you know, sometimes if they say, I, no one's gonna contribute, then we'll go with the match. Because if no one's contributing, there's no match, right? No less out of pocket. But, most of the time in the medical field, we're gonna get a larger contribution rate the employees. So. At that bottom layer that we've talked about a couple times now, when you add profit sharing on top and the profit sharing is discretionary from year to year, right? You don't, if you have a great year, you use it. If you don't, you don't have to use it. But let's say you wanna consistently use it'cause you have good profits every year. And, what we're gonna do is we're going to, there's a, there's a gateway. Between bottom layer and the top layer. So what I mean by that is there's a 5% gateway. Once you start targeting individuals using the new comparability, which 95% of the time we're doing new comparability, we're not doing, Pro rata.

Evon:

Yeah.

Matt:

You're going to have to give everybody the bare minimum of a 5% contribution from your, from the employer. Okay? Bare minimum. And then everybody might get a little bit more. Okay? So. Certain types of safe Harbor 401(k)s on that bottom layer go towards that 5%. So it's called a new, excuse me, it's called a non-elective safe harbor. And it's a 3% that you give to everybody whether they participate or not. It's just like a bonus that you give to everybody. they can put in 20% contribution or zero. Everybody gets the same 3%, but that 3% goes towards. 5% minimum on profit sharing. So now you only have to give'em an extra 2% if you do a match versus the non-elective you're stacking, let's say it's a 3% match or a 4% match, you're stacking it on top of the five, and now you gotta give'em eight or 9% of their annual salary instead of just five. So that's just a really good example of what we need to do to make sure and really understand what the goal is. And that's something you can change and amend from year to year because maybe your profit went went higher, you're not in growth mode, you're in, you're in now more a stable company and you're just trying to get profits instead of maybe expand into other offices or something like that. That's very important to understand what those goals are, through those questions that we ask. but it is very, very important that. If you're gonna do profit sharing every year, a match is probably not the best way to do it. A non-elective contribution goes towards the profit sharing calculations, which means less to the employees and a higher efficiency rating that goes to the employer.

Evon:

Yeah, I mean that's, that is a great overview of this and. Very often it's thought of the 3%, non-elective contribution where you're depositing to everyone's accounts. The business, I should say is depositing, regardless of whether employees contribute or not. Very often that's seen as the more expensive option, right? Because you may have employees that aren't contributing or are not contributing 3%, and then you're still doing that. However, as you mentioned, like if your goal then is to consistently use profit sharing, that may be the lower cost option. If your goal is to use that profit sharing contribution consistently, and so that decision of we are going to use profit sharing on a, on an off and on, or just on a regular basis, we have the cash flow to do it. That's an instant trigger to talk to your administrator and say, okay, which matching style or which contribution style and the safe harbor plan makes the most sense. And I think that step is missed Very often it is just talking with the administrator or having an administrator to talk to in the first place. And figuring out, okay, I know I want to do profit sharing, which style of profit sharing makes the most sense, but also let's review this match and make sure that my safe harbor match or the 3% is the best fit for my practice, knowing what I wanna do. Great, great overview. Important for each listener to just review that for yourself, to make sure that you're getting the most outta your 401k plan. Ultimately, that's what this is all about, based on what you're, you're trying to use it for. So we have that 5% minimum contribution gateway rule. Really important. We've talked about the different methods. one final thing I just would kind of want to hear from you is, yeah, let's say we have a more mature practice now. we have very consistent cash flow. We've gone through the$70,000 already for the, the profit sharing side, in the 401k side. You know, that owner or a group of owners may be wondering, okay, what's next? Like, what, what can we do? What's next? Maybe they're preparing for an eventual exit of one of the owners, coming up soon. So maybe there's a particular big tax planning goal coming up. tell us about a cash balance plan and, and how that might fit in with the profit sharing.

Matt:

Yeah, that's, so this is where the efficiency I, I've been saying the efficiency rating a few times, efficiency rating, just to kind of sum that up, is how much do we have to give to the employees and how much does the owner get to take home with them? And when you start adding that third layer, this is that third layer on the on the retirement plan stack. The efficiency rating goes through the roof. Okay. I'm talking 90% or more. Okay. the, the, the one plan design where we were able to segment out, for example, this is a, a great case study. Very, very efficient. where we were able to put a million dollars total into the plan per year, and we only had to give$70,000 to the employees. That's

Evon:

1 million.

Matt:

1 million. Yeah.

Evon:

million. Okay.

Matt:

up to 3 million, but,

Evon:

Let's not be greedy here. Come on one. I think one million's Good, right?

Matt:

1 million into the plant, but there's, there was five owners here, so it was just, it was, it was able to get that, and

Evon:

Yeah.

Matt:

multiple, locations and things like that, but a million dollars in and 70 went to the employees. so that's a 93% efficiency rating, which, you know, that's, that's a almost a$500,000 tax savings right there, your net. Net out the, the contributions you had to give to your employees and you are way ahead of schedule.

Evon:

Right.

Matt:

So, again, this is a define that top layer is considered a defined benefit plan. There's actually different versions in there. so an old school pension that, you know, Ford and GM used to have before they bought everybody out. That's a more of a formal version. the cash balance plan is really a more Casual version really built for small businesses.

Evon:

Hmm. It's

Matt:

calculated the same as a pension. Whereas you're shooting for that future benefit, like it's, you're not gonna pay yourself an income, we're just, we're just calculating based on the income. and then you shut it down when you're done. So the instance of where, maybe we have a partnership and some of the older partners are looking to retire and within the next five years, but they wanna start taking out some more of the, of the, equity in the company or, or cash flow and they want to put it into A tax savings tool. the Cash balance band is fantastic'cause you only really need it for about three years. and then you can shut it down and it just rolls right over into your 401k when you're done. And so it's again, a much more flexible version of a pension plan. we've had clients where they've had to pause because there's been some sort of industry issue, where there's been a big change in the industry. They had a big drop in their income and we needed to pause for a year. Freeze it for a year and then turn it back on the next year. And you're okay doing that so that you get the flexibility of the defined contribution plans, which is 401k and profit sharing, but you get the, the maximum. These, the, and I'm talking six digit contributions

Evon:

Yeah.

Matt:

you get into this level, you're the, the older you are, the more you're able to put in. So if you're in your forties, you're gonna be able to put in close to$200,000 or maybe a little bit more per year when you're doing all three stacks on top of each other. When you get into the, the older, maybe 60, 65 age, you're looking at$350,000 or more into these plans. And there's ways to get it above and beyond that, even with strategies. But there's, it, it really comes down to what is the goal, what are you trying to do? What does your tax bill look like? Is that what you're trying to fix? And understand what you're trying to do with that money. And then, then you'll be able to, adjust and pivot and evolve and add layers as your company becomes more and more successful and more profitable. And those are conversations that we have.

Evon:

I mean, that's really cool, for, for those established practices that are very mature, consistent cash flow on a, on a regular basis, meaning there aren't any unanticipated, shocks to Optometry or COVID like events. Again, probably plan on three years though for that cash balance plan. To make, to make sure it's running, running alongside the rules. But after that, you have the flexibility to, to pause it or freeze it or to, or to shut it down. So, really it could be a three year temporary, huge contribution to these plans. And that's, that's pretty substantial. I mean, for, for one tax year, man, that's, that's pretty substantial there. okay. I, I appreciate that. So we, we've gone over a lot. We've gone over different profit sharing contribution methods. We've talked about that 5% minimum contributions and the importance of reviewing the match and making sure that's the most appropriate. We've talked about adding that third layer of the, the cash balance plan. Anything else you wanna leave with the listener in terms of, reviewing their plans related to the, to all this, or maybe deadlines they have to keep in mind now that we're in September.

Matt:

deadlines are big. That's what that was. You read my mind actually, Evon. So as we record this, right, we're, we're, we already passed the, the extension, for, For an S-corp, which is 9/15, that is also the same deadline for contributions for previous years. For ca cash balance plans, whether you're an S-corp, whether you're a single member, LLC doesn't matter. It's always September 15th. But, that bottom layer, the$23,500, that is. up by 1231. Those contributions need to be done for the most part, by, by, December 31st. Okay. those top two layers, those do not need to be implemented or contributed towards until the day you file, including extensions. again, we just passed the 9/15 deadline As we record this, we

Evon:

2024,

Matt:

For 2024, Thank

Evon:

Yes. Yes.

Matt:

2024, we just finished implementing a bunch of 2024, plans where those contributions were able to offset. So as long as you file your extensions, you have all, all the way up until September 15th to do both the profit sharing and cash balance plan, and, and contributions. Now, it does take. A few months to get things going. You gotta, there's a ramp up, an onboarding phase, so you, you don't wanna wait till September 1st to get'em going. takes about 60 days to get those done. but those are the deadlines. So just because we passed these deadlines for, you know, October 1st as a safe Harbor implementation, there's ways to get around that. It's all about just having the conversation saying, this is what I need, this is what I wanna do, and then you create the plan around it, and then the following year you pivot, make amendments to whatever you have to do. We have a lot of people who miss deadlines. We have a lot of people who miss deadlines just'cause they waited just a little bit too long. Or, you know, when you're a business owner, you're. head is down and you're running your business, and then all of a sudden you look up, you're like, my tax bill is what, and that's, you gotta have those conversations ahead of time if you can. We have conversations for years before just so you know what is available to you. And then you have this idea of when do I flip to switch to add it to my retirement plan stack. okay just to have those conversations earlier. there's no pressure to have that. It's just to understand it. And it's kind of hard to have to do the research on your own to figure out what's what, because clearly there's a lot that goes into these equations. There's a lot of deadlines for every layer. And what do you do this and how much do you have to give? It's all about just having conversations ahead of time. otherwise you, you might get behind the eight ball and miss a major deadline.

Evon:

Couldn't agree more. That's, I think that's a great way to wrap this up here, Matt. how can people find you and, and follow you and learn more about what you're doing?

Matt:

just over to 401k.expert. That's our, our landing page. it gets you some, some case studies, some analysis on what you can and can't do, but also just gets you right in, in touch with one of the experts at our, at our company. so 401k.expert is the, is the landing page that takes you right there.

Evon:

Gotcha. We'll put all of that into the show notes as well as our, past episodes here. So we'll get that all in the show notes. you can reach out to Matt if you have questions. You can reach out to me if you have questions, but for the listener, really appreciate your time and your attention today. We will catch you on the next episode. In the meantime, take care.

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Evon Mendrin CFP®, CSLP®

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