SEP IRA, Simple IRA, and a potential 401(k) plan…?

Hypothetical planning scenario:  SEP IRA, Simple IRA, and a potential 401(k) plan…?  Lions, tigers, and bears… Oh, my!

A financial advisor who I work with quite a bit called looking for some help.  He indicated that his clients [Drs. Husband & Wife] are trying to maximize their pre-tax retirement savings due to the fact that their combined income is in excess of $1M annually.  The advisor has asked for some informal input.  I disclaimed this one is beyond my scope.  Since he understands not to rely on hypothetical musings, he is still grateful for any input.  We’re trying to jump-start our brains to think this through.  As such, crowd-sourcing this could help us think outside the box.  J  Here are the facts, as we know them:

Husband

• Physician – ER

• Paid as 1099 independent contractor (no employees)

• SEP IRA in place, currently registered under Husabnd’s name (Sole Prop) and maxed to IRS limit annually.

Wife

• Physician - General Surgery

• Owns practice (and has employees)

• Receives W-2 compensation from the practice (so, I am assuming tax entity is a form of corporation or files as one.)

• SIMPLE IRA in place for her & her employees with a 3% elective match.

LLC

• Financial advisor recently became aware that his clients established an LLC (no other employees, likely only the husband & wife);

• The clients’ tax advisor (an EA, not CPA – not that it matters, just more info) is suggesting the husband continues to fund his SEP IRA, BUT through this LLC.  (FYI: Per financial advisor, Husband’s SEP is currently registered under Husband’s name as a Sole Prop.) 

• Further, EA is suggesting Husband pays Wife a salary through the LLC so she may also fund SEP IRA contributions to herself… Again, her practice currently maintains a SIMPLE IRA for the benefit of her employees and herself with a 3% elective match.  This was the EA’s suggestion - NOT currently in practice. >> The advisor is concerned about the EA’s suggestion to do this.  He understands that any comp paid to Husband and/or Wife by LLC is a result of actual services performed for the LLC.  The advisor is committed to making sure everything is on the up and up here.

If the LLC were to sponsor a 401(k) plan (and we assume the LLC will have bona fide earnings/comp to Drs. Husband & Wife), then per this IRS FAQ about SEP plans, I believe Husband might be able to continue his SEP for self-employment income and also contribute as an employee to a 401(k).  However, I believe Wife cannot contribute to her SIMPLE IRA and to a 401(k) in the same year if the two plans’ sponsors are under common control, correct?  Regardless, I am sure there is a whole host of potential nondiscrimination concerns to navigate RE: shared ownership w/ the LLC and her practice.

The big question:  What are the optimal circumstances for his clients in order for both Husband & Wife to save the most advantageous IRS maximum permitted each year?  For this hypothetical, let us assume the clients are willing to make any necessary changes to meet the optimum. 

I'm not a fan of rearranging compensation to try to game the system. 

I would suggest a defined benefit plan and a 401(k) plan covering all entities including the husband and wife as sole proprietors. The wife's employees would need to receive enough benefit to make it worthwhile, which may be a lot if they are older than the husband and wife. 

There are lots of ways to slice and dice it with combined testing, combined plans, offset, cash balance, etc. Those particulars will come down to their personal preference and what they are willing to commit to, and what you are willing to work on. 

Edit to clarify: I would NOT do the SEPs and SIMPLE with the above arrangement. I would discontinue those if going with the 401(k) / DB arrangement. 

Agree with J, and if wife has 3 or fewer employees, the DBP can be limited to the owners, just need to be wary of combined plan deduction limits in addition to (of course) gateway and testing.

Agree with what has been said---best way to review overall is to have an actuary show you what the contributions could be under various scenarios as ours does for clients. This should be right up his/her alley.

Don't see it mentioned, so I'll ask.  Do they have any children under age 21?