The Hidden Profit Sharing Traps Costing Practice Owners
Dr. Sarah runs a successful 3-doctor practice in suburban Denver. Her 401(k) includes profit sharing, her employees are happy, and everything seemed to be running like a well-oiled machine.
Until she discovered she was leaving money on the table - every single year.
The issue wasn’t whether her plan had profit sharing. It was how that profit sharing was designed.
If you're currently making - or planning to make - healthy profit sharing contributions to your practice's 401(k), there are two key design features you should review with your plan’s third-party administrator (TPA):
1️⃣ The Profit Sharing Method – The Cookie-Cutter Mistake
There are different ways to calculate how much profit sharing goes into each participant’s account - and how much ends up in your account as the owner. That design choice directly impacts the cost to the practice and the value you get from the plan.
In conversations with new clients, I often see plans that default to pro rata profit sharing - where everyone gets the same percentage of compensation.
These are typically “off-the-shelf” plans offered by tech-based 401(k) platforms, and most owners understandably never realized there were other options.
It’s the vanilla ice cream of profit sharing: simple, predictable… and not particularly exciting if you're looking to maximize contributions to your own retirement.
Why it matters:
As the owner, your goal is often to skew contributions in your favor, within IRS rules. That means choosing a profit sharing method that aligns with your goals.
💡 The Game-Changer: New Comparability Design
A better fit in many practices is the new comparability method. This allows you to legally contribute different percentages to different employee groups - essentially creating “tiers” in your contribution structure.
Example:
Instead of giving everyone 10% of salary, you might (hypothetically) contribute:
- 20% to yourself and other owners (up to IRS limits)
- 5% to associate doctors and support staff
Everyone benefits - but the design maximizes contributions to ownership without blowing up costs.
The catch? It requires the right plan structure and annual IRS testing. That’s where a good TPA comes in. It depends heavily on the ages of you and your team and how you set your wages.
A great team can help you figure out how to make the most of a design like this.
2️⃣ Match vs. 3% Deposit – The Safe Harbor Surprise
Here’s where many practices get tripped up:
- Scenario A: Safe Harbor match (typically 3.5-4%)
- Scenario B: Safe Harbor 3% nonelective contribution to all employees
Most assume Scenario A is cheaper - and on its own, it may be. It also encourages employees to contribute, which is a win.
But when paired with new comparability profit sharing, the math can change.
Here’s why:
To use new comparability, the IRS requires a “gateway” contribution of at least 5% to all non-highly compensated employees (NHCEs).
✅ The 3% nonelective contribution counts toward that 5%
❌ The match does not
Translation:
- With the match, you may pay up to 4% plus an additional 5% in profit sharing
- With the nonelective, your 3% counts toward the 5% - potentially reducing total contributions
Your Action Items
- Review your plan goals with your TPA and financial planner
- Confirm whether your profit sharing method fits those goals
- Reassess your Safe Harbor strategy - match vs. nonelective - based on what you’re trying to accomplish
Bottom Line
The difference between a basic and optimized profit sharing plan can mean thousands of dollars in extra retirement contributions for practice owners each year.
Your 401(k) should work as hard as you do. Make sure it’s designed for your practice not just copied from a template.
A great TPA is a huge resource to your business, helping you follow the rules and make the most of the plan.
Want help reviewing your plan or finding a great TPA?
Reply to this email, or click here to schedule a quick intro call.
Have a great weekend!
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