Life as a W-2 employee: the planning that changes after you sell

What did I just lose?

When you sell to a private equity backed platform, you stop being a business owner and become an employee of the management company, and a long list of owner-only tax and benefit tools ends on the closing date. Some of the loss is obvious and some of it shows up on your first tax return as an employee.

The biggest item is the retirement plan. Your practice's solo 401(k), profit sharing plan, or cash balance plan is terminated at closing. As an owner you could put away $72,000 a year in a defined contribution plan and several hundred thousand more in a cash balance plan. As an employee you get whatever the MSO plan allows. If you did not use the final ownership year to fund a plan, that window is closed; the cash balance plan page explains what was possible.

Then the deductions. The self-employed health insurance deduction, employer HSA funding you controlled, and the auto, continuing medical education, travel, and home office costs that flowed through the practice are gone. Unreimbursed employee expenses are not deductible. If your state has a pass-through entity tax election that let the practice deduct state tax at the entity level, that benefit ends too, and your state tax on wages runs into the federal SALT cap.

And the income itself. The scrape takes 20 to 30 percent of your former compensation to create the profit the buyer is paying for. Income repair, meaning getting back toward your old pay through productivity bonuses or growth, can take years and does not always arrive. Plan on the lower number.

What does the MSO's 401(k) actually offer?

Most management company plans are ordinary: a $24,500 deferral in 2026, a catch-up of $8,000 at age 50 (or $11,250 at ages 60 to 63), and a modest match. There is usually no cash balance plan, because the MSO is spreading benefits across hundreds of employees rather than a handful of owners.

The feature to look for is after-tax contributions combined with in-plan Roth conversion. Together they allow what is called a mega backdoor Roth. The overall limit on all contributions to a defined contribution plan is $72,000 in 2026, or $80,000 with the age 50 catch-up and $83,250 at ages 60 to 63. If the plan permits after-tax contributions, you can fill the gap between your deferral plus the match and that overall limit with after-tax money. If the plan also permits converting that after-tax money to Roth inside the plan, or withdrawing it to a Roth IRA while still employed, the money becomes Roth almost immediately and grows tax-free from then on.

Ask the plan administrator two direct questions. Does the plan accept after-tax (not Roth) employee contributions? Does the plan allow in-plan Roth conversion or in-service distribution of after-tax amounts? If both answers are yes, this is likely the largest tax-advantaged savings vehicle you have left. If either is no, a group of physicians joining at once sometimes has enough weight to ask the MSO to amend the plan.

Why did my catch-up contribution become Roth in year two?

This rule surprises almost every former partner. Section 603 of SECURE 2.0 requires that catch-up contributions be made as Roth for any participant whose FICA wages from that employer in the prior year exceeded $150,000. The rule took effect January 1, 2026, after the IRS issued final regulations on September 16, 2025.

The reason it surprises physicians is the phrase "FICA wages from that employer." As a partner taking K-1 income, you may have had little or no FICA wages, so the rule never touched you. In your first year as an MSO employee, your prior-year wages from the MSO were zero, so the rule still does not apply. In your second year, your prior-year wages from the MSO are well over $150,000, and every catch-up dollar must go in as Roth. It is not a large dollar amount, but you should expect it rather than discover it on a paycheck.

How do I keep doing a backdoor Roth IRA?

A backdoor Roth is a non-deductible contribution to a traditional IRA followed by a conversion to a Roth IRA. In 2026 the limit is $7,500 plus a $1,100 catch-up at age 50. Direct Roth IRA contributions phase out between $242,000 and $252,000 of income for a married couple, so the backdoor is the route for nearly every physician.

The trap after a sale is the pro-rata rule. When you convert, the IRS treats all of your traditional, SEP, and SIMPLE IRA balances as one pool, and the conversion is taxable in proportion to how much of that pool is pre-tax. If you rolled your terminated practice plan, perhaps several hundred thousand dollars or more, into a traditional IRA, a $7,500 backdoor conversion is almost entirely taxable and the strategy stops working.

The fix is sequencing. Before you make the backdoor contribution, roll the pre-tax IRA balance into the MSO's 401(k), if the plan accepts incoming rollovers (most do). Plan balances are not counted in the pro-rata calculation. With the IRA at zero on December 31, the conversion is tax-free. Do this before year end of the year you convert, because the pro-rata test looks at IRA balances on December 31.

When do Roth conversions make sense after a sale?

A Roth conversion moves money from a pre-tax IRA to a Roth IRA and pays ordinary income tax now so that all future growth is tax-free. It works best in years when your bracket is lower than it will be later, and for a former owner the years right after the sale can be exactly that.

Your W-2 pay is 20 to 30 percent below what you earned as an owner, the practice profit that used to pass through to your return is gone, and the sale year is behind you. If your earnout and second bite are still years away, you may have a stretch of years where your taxable income is the lowest it has been in a decade. Those are the years to convert, in amounts that fill the current bracket without spilling into the next one. See the tax pillar page for the 2026 brackets.

The effect is larger if you move. A conversion done after a bona fide change of residence to a state with no income tax, such as Texas or Florida, avoids California or New York tax on the converted amount entirely. The move must be real and complete before the conversion, and both California and New York audit large-income years with mid-year residency changes closely. The California and New York pages explain the residency tests.

Where does the net investment income tax show up now?

The 3.8 percent net investment income tax under Section 1411 applies to interest, dividends, capital gains, rents, and royalties once your modified adjusted gross income exceeds $250,000 for a married couple filing jointly or $200,000 for a single filer. Those thresholds are not indexed for inflation, and the 2025 tax law did not change them. A physician on W-2 pay alone is almost always above them, so the tax applies to the income on the sale proceeds you just invested.

It will also apply to the second bite. When the platform sells, you are by then an employee of the MSO, not an active owner of the entity being sold, so the exclusion for gain from a business in which you materially participate does not reach the rollover exit. If the holding company is a corporation, its stock gain is investment income by definition. Budget 23.8 percent federal on the rollover, not 20. The second bite page covers what else to expect.

Which accounts should hold which investments?

Asset location means deciding which account holds which kind of investment so that the least tax-efficient assets sit where tax does not reach them. After a sale you typically have a large taxable account holding the sale proceeds, a rollover IRA or 401(k) holding the old plan balance, and a Roth account that is small but growing.

• The pre-tax IRA or 401(k) is the place for bonds, real estate investment trusts, and high-turnover funds, because their income is taxed as ordinary income anyway and the account shelters it.
• The taxable account is the place for broad equity index funds, which pay low dividends and defer gains until sold, and for municipal bonds if you want fixed income there, since their interest is federally tax-free and not subject to the net investment income tax.
• The Roth account is the place for the holdings you expect to grow the most, because that growth will never be taxed.

What happens to my disability and malpractice coverage?

Disability insurance

Owner-paid group disability coverage through the practice ends at closing. The MSO may offer a group policy, but group coverage is often capped well below a specialist's income, taxable if the employer pays the premium, and lost if you leave. An individual own-occupation policy, meaning one that pays if you cannot practice your specialty even if you could do other work, is the standard for physicians. Bought with after-tax dollars, it pays a tax-free benefit, and it goes with you if you change employers. If you do not have one, price it before closing.

Tail coverage

Most physician malpractice policies are claims-made, which means they cover claims filed while the policy is active. When a claims-made policy ends, a claim filed later for care you gave earlier is not covered unless you buy a tail (an extended reporting endorsement). Occurrence policies cover the care regardless of when the claim is filed, so they need no tail. A tail typically costs around 200 percent of the annual premium as a one-time payment, so a $40,000 premium implies a tail of roughly $80,000, and it must be purchased within a 30 to 60 day window after the policy ends.

Who pays is contractual. In private equity deals the buyer often assumes the group policy and provides prior-acts (nose) coverage for physicians who continue with the platform, so a continuing physician may need no tail at all. Retiring or departing physicians, and the professional corporation's own entity coverage, often do need a tail, and it should be negotiated as a closing cost. Read the employment agreement for what happens if you leave the MSO later, because a tail obligation at that point can be a large unplanned bill.

How do I rebuild a savings rate when my pay just dropped?

Before the sale, much of your saving happened automatically through practice retirement contributions and retained earnings. After the sale, your pay is 20 to 30 percent lower and those channels are gone. The sale proceeds in your taxable account can make saving feel unnecessary. For most physicians that is a mistake, because the proceeds replace the practice you no longer own; they are not there to fund current spending. Set the savings rate as a percentage of the new W-2 pay before the first paycheck arrives, automate the 401(k) deferral and the backdoor Roth, and treat the sale proceeds as a separate long-term pool. If income repair arrives, raise the savings rate rather than the spending.

How should I think about the rollover equity I am holding?

As a concentrated, illiquid position that may pay out well, or late, or not at all. Rollover equity is a minority interest that sits behind the platform's lenders and the sponsor's preferred return in the waterfall. It pays nothing until the platform sells, which may be 5 to 7 years away or longer, and if the sponsor sells to a continuation fund you may be asked to roll again rather than cash out. For many physicians it is 30 to 40 percent of their net worth on paper.

The planning answer is to size everything else as if the rollover were worth zero. Your retirement plan, savings rate, insurance, and asset allocation should all work without it, and it should not be counted on to fund a fixed date or expense. When it pays, treat the proceeds as a windfall and plan for 23.8 percent federal tax plus state tax on the gain. The rollover equity page explains the waterfall and the leaver provisions that decide what you actually receive.

When does this page not apply to you?

• If you are retiring at closing rather than continuing under an employment agreement, most of the 401(k) and catch-up discussion does not apply. Your focus is the rollover of your plan balance, Roth conversions in low-income retirement years, and the tail.
• If your platform holding company is a partnership rather than a corporation and you are treated as a partner rather than an employee, you may still receive K-1 income rather than W-2 wages, and the mandatory Roth catch-up rule may not reach you. Confirm your status with the MSO.

What to do next

1. Get the MSO plan document

   Before closing, ask for the 401(k) summary plan description and confirm whether it allows after-tax contributions, in-plan Roth conversion, and incoming rollovers. Decide whether your terminated plan balance goes to an IRA or into the MSO plan based on the answer.

2. Sort out insurance in the contract

   Confirm in writing who pays for tail coverage at closing and if you leave later. Price an individual own-occupation disability policy while you can still document owner income.

3. Map your next three tax years

   Estimate taxable income for each year after the sale, including any earnout payments. Identify the lower-bracket years and set Roth conversion targets for them. If a move to a no-tax state is planned, sequence conversions after the move is complete.

4. Rebuild the plan without the rollover

   Set the new savings rate, place assets across taxable, pre-tax, and Roth accounts by tax efficiency, and write down what you will do with the rollover proceeds if and when they arrive. The second bite page is the place to start on that last question.