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Plan design question


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Two doctors own a medical practice.  They want to start a pension plan.   They each have their own corporations.   They have 7 employees of the practice who are eligible for the plan.   They each want to establish a pension plan for their respective corporations without covering any of the employees, and to  establish a separate 401k Profit Sharing plan for the employees.  CPA insists that several TPAs have told him this design is ok.     Can this pass IRS rules.   

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  • Lois Baker changed the title to Plan design question

Suppose they only have defined contribution plans. If the three plans have the same benefits, rights, and features, and when all three are tested together they pass coverage and nondiscrimination, then that’s fine. Why have three identical plans? Well, the two doctors’ plans covering only the 100% owner doctors can file 5500-EZ, which is not open to the public and not subject to ERISA. Only the employees’ plan files 5500-SF and is available to view on the DOL site.

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9 hours ago, John Feldt ERPA CPC QPA said:

Suppose they only have defined contribution plans. If the three plans have the same benefits, rights, and features, and when all three are tested together they pass coverage and nondiscrimination, then that’s fine. Why have three identical plans? Well, the two doctors’ plans covering only the 100% owner doctors can file 5500-EZ, which is not open to the public and not subject to ERISA. Only the employees’ plan files 5500-SF and is available to view on the DOL site.

Agreed. But I don't think that was the original question.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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Given the kind of tax shelter plans the docs want, they should hire a retirement plan expert who specializes in shelter plans for high earning professionals.  They should be able to afford it, and there are plenty around.  (Regardless, if this would work, then the annual testing would be complicated and the docs should anticipate that annual bother and expense.  Just an educated guess.)

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On 1/8/2023 at 12:46 AM, arthurkagan said:

I want to know if each doctor can set up a separate plan covering just themself in this scenario.  This appears to me to be an Affiliated Service Group among the three entities, and they would need one plan with three participating employers.   

just being part of an ASG does not require a single plan. ASGs have multiple different plans for different entities all the time. As mentioned above, they just have to pass combined test.

If it is a single ASG, then any plans of the employer need to be tested together. Sounds like you are proposing two DB plans(for the HCE), and one 401(k) plan(for the NHCE) for a single affiliated service group. 

I am not an actuary, but seems minimum coverage under 401(a)(26) would likely have a hard time passing, even if the benefits in the 401(k) plan were generous enough so that overall benefit testing with all three plans passed. 

I agree with the others, if the CPAs are sure its allowed, they should do the testing and admin for the three plans. And i'd be curious to know what actuary would sign off on it. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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arthurkagan, you have not provided a full fact set (are the employees shared employees between the two corporations, for example), but assuming by "pension plan" you mean a DB plan, the plans would likely fail 401(a)(26). Again, you have not provided full facts.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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