Partners make varying PSP contributions

[Guest long]

A physicians practice (corporation) has a profit sharing plan and each physician wants the discretion each year to receive in their plan account all or part of the maximum allowed profit sharing contribution each year. Is this allowable? In other words, can HCEs determine what amount of profit sharing contribution they receive?

[Guest jashendo]

Since you say that the practice is a corporation, what will happen with respect to the amounts that the physician/shareholder elects not to have contributed to the plan? Will he receive it as additional salary? (I assume so, otherwise why would he opt for less than the max?) If so, then the arrangement would be a CODA, and would have to meet the requirements of a "qualified cash or deferred arrangement" (i.e., 401(k) requirements) or else (i) the physician would be taxed on the full amount, whether or not received, and (ii) the amount that actually was contributed would be an after-tax contribution..

[Lori Foresz]

Hi,

I agree in theory, but I think that there are ALOT of plans out there were the owners/partners are individual rate groups and they decide on PS contribution amounts each year. Does anyone out there know of a situation where the IRS has come in and said this type of arrangement is a CODA? I haven't seen any published guidance that individual rate groups are deemed CODAs, however, I wouldn't be surprised if it is out there.

[david rigby]

Not sure if this will help, but there have been a couple of questions in the GrayBook about this topic, with some change over the years.

Gray Book 1992-39

Regulation Section 1.401(k)-1(a)(6)(ii) requires "any arrangement that directly or indirectly permits individual partners to vary the amount of contributions made on their behalf" will be treated as a cash or deferred arrangement.

(a) Would it be permissible for a Highly Compensated/Key Employee to make a revocable election not to participate initially in a new Plan, but to commence participation at some future date, specified or unspecified?

(b) For non-401(k)/CODA Plans sponsored by entities other than partnerships, (e.g., a Profit Sharing Plan for a professional corporation), could contributions on behalf of certain Highly Compensation Employees be varied without being subjected to 401(k)/CODA testing rules?

If yes, how could such variations be made?

(i) Participant election

(ii) Plan Amendment

(iii) Other

ANSWER:

(a) No. This does not fit the standard of the regulation.

(b) It may be possible to set up an arrangement, however, the IRS is not in a position to indicate how this might be done.

Gray Book 98-24

A defined contribution plan permits HCEs to waive participation on a year-by-year basis. Would this be considered to violate the requirement that benefits, rights and features be available on a nondiscriminatory basis? Would the availability of the waiver be viewed as a tacit cash or deferred arrangement resulting in current taxable income for any HCE who elects not to waive?

RESPONSE

This would not be viewed as a violation of the requirement to provide nondiscriminatory benefits, rights and features because the result is a smaller benefit for HCEs than otherwise available. However, if the facts of a particular situation reveal that the HCEs who waive participation receive cash compensation in return for their waiver, then indeed, the arrangement would be viewed as a cash or deferred arrangement (CODA). Absent evidence to the contrary, there would be a presumption that the individual did receive consideration in exchange for the waiver. If viewed as a CODA, not only would adverse tax results occur for the HCEs with respect to current accruals, but also the plan would violate the requirement that benefits, rights and features be offered on a nondiscriminatory basis because the NHCEs have been barred from using the CODA.

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[KJohnson]

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