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CuseFan

DB Lump Sums and Restricted Employees

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DB plan (CB format, but that doesn't matter) for law firm has multiple terminated former partners who are among top 25 restricted HCEs/former HCEs and cannot get a lump sum because plan is not, and will not after distributions, be 110% funded. Employer is interested in funding up the plan to be able to pay one particular restricted HCE, but not all of them. All the regulatory guidance I've seen appears in the context of "a" restricted employee. Favoring/discriminating for one HCE over another HCE may not have any qualified plan ramifications, but the danger may be other legal implications. I don't know if the partnership agreement stipulates anything in that regard - let's assume it does not, otherwise the answer would be easy, right?

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Partnership agreement doesn't say anything. Can the employer fund up and just pay the one HCE, telling the others sorry, still restricted?

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Yes, but put that aside - what if this was a mid-size medical practice and one owner retired and wanted a lump sum while two others left to form their own practice and also wanted lump sums, and the plan was sufficient enough to pay just one but the others would then be restricted? Could the plan pay the retiree and leave the TVRs restricted? Pay the first request but not the other two? Pay the largest, pay the smallest? What if through the receivables of one of the exiting owners the employer funded up enough to pay just that owner? i know these are all questions that stress the importance of a good partnership agreement, but what if it's a PC?

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The plan administrator's fiduciary responsibilities extend to any interpretation it makes.  At the least, they are inviting a law suit from the disenfranchised.  They need (independent) ERISA counsel.

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Are disappointed doctors supposed to be better losers than lawyers?

Technically, if a plan is just well-funded enough to pay one lump sum but would fall under 110% if they were to pay a second, then the first one out of the gate wins.  But wouldn't it be cheaper to fund up enough to meet the full demand for lump sums than to have to try to defend against litigation?

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Yeah, really. it does seem like if you're going to fund up it should be for all - or for all who request lump sum distributions, or do not fund up for anyone. But if the existing funded status was sufficient to pay one lump sum, then I think the Plan Administrator is obligated to facilitate that pay out and subsequent requests are SOL, agreed?

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I find it better to give the departing partner an opportunity to specify additional funding against their equity interest in the firm and its receivables.  If they are willing to complete their pension funding with pre-tax dollars, everyone benefits.

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On 3/24/2017 at 4:54 PM, My 2 cents said:

Are disappointed doctors supposed to be better losers than lawyers?

Technically, if a plan is just well-funded enough to pay one lump sum but would fall under 110% if they were to pay a second, then the first one out of the gate wins.  But wouldn't it be cheaper to fund up enough to meet the full demand for lump sums than to have to try to defend against litigation?

2 cents - can you share your guidance for the “first out the gate” comment?

 

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Have any of the other restricted partners requested a lump sum and been denied?

 

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