401(a)(26)

[Blinky the 3-eyed Fish]

Hypothetical situation of 3 doctors who own 1/3 each of a company and are separately incorporated, an obvious controlled group. There are no other employees. Now if each doctor were to have his own DB plan for his corporation, then obviously 401(a)(26) would not pass for any of them. But, what if each plan included the other doctors' corporations and benefits in each were at the 415 limit?

Now each doctor would be getting 3 times the 415 limit, so language would call for benefits to be reduced appropriately because the 415 limit benefit was provided under another plan. Doctors 2 & 3 would have benefits reduced in doctor 1's plan, doctors 1 & 3 would have benefits reduced in doctor 2's plan, and so on. (I would have to perfect the language.)

The 415 limit is disregarded when determining if someone is considered benefiting for 410(b)/401(a)(26), so each doctor would be considered benefiting in all the plans and 401(a)(26) passes while the doctors get nothing but in the plan sponsored in their own corporation.

Anyone see a problem with this?

[Guest flogger]

Is there not a requirement to actually accrue a benefit in order to be consider some who is participating? Perhaps not for (a)(26), but certainly for IRA eligibility purposes. I really can't think of anything else that might be an argument against your proposal. Thanks for the idea. Have you receive any other feedback anywhere on this?

[Guest arttepfer]

We have a plan like this for a small law firm. I believe that 401(a)(26) will require you to give a meaningful benefit in each plan. This is because the IRS has determined (incorrectly I believe) that 401(a)(26) is a discrimination section not a coverage section. Otherwise, we would be able to skirt the issue as you described. The IRS may assert the "meaningful" benefit argument even though these are HCE's. Discretion is the better part of valor. By the way, the reason we went through this approach was only for the "self directed" aspect of the plan having a single HCE participant.

[Blinky the 3-eyed Fish]

Self-direction and not being responsible for other owners' benefits in case they leave is the reason behind this as well.

As for needing to accrue meaningful benefits in both plans, I am not sure how the IRS could assert that you must decrease another plan's benefit to allow a person to accrue something in this plan. The regs clearly say that 415 is disregarded in determining whether or not someone benefits. The formula in the plans would be over the meaningful benefit criteria sans 415.

So, I am not sure from where the IRS opinions came you reference, but I don't see an argument for that position.

[AndyH]

Blinky, just another thought. They better have very deep pockets.

What happens if one of these investment einsteins loses 30% and claims he cannot affort the contribution? Or they need to hire an employee. Or another doctor group merges into them. Then maybe you need to cut the formula. Then you have a fiasco.

Even if you can get by 401(a)(26) your demographic and other risks are huge.

[Blinky the 3-eyed Fish]

What happens if one of these investment einsteins loses 30% and claims he cannot affort the contribution?

Then I jack up the pre-retirement interest rate to 12%.

In any case where this was used, the communication would be there to avoid any surprises. I used a 3-person example, but if it's 5 or 10, then the horrors you speak of diminish in possibility. Also, I could set the formula in the "other" plans to be 0.5%, so worst case is there is that extra amount of funding.

[AndyH]

About six or seven years ago I got dragged out by an investment person to talk to a Doctor who had a DB plan that was grossly overfunded.

He couldn't terminate it because there was too much money in it.

It seems this Doctor was "an investment einstein" who claimed he had achieved a 100% return in the last year. Apparently it was true; some high risk investing had taken place. I had not seen this "skill" before. I was asked to propose some ideas for solving this problem.

Before I put pen to paper I read an article in the newspaper that this Doctor had been indicted for something like 54 counts of medicare fraud. I got a call from the broker that day to tell me we should cancel the proposal/study. I told him I already read the paper that day.

The moral of the story is that I now have a bias against Doctors who claim to be investment einsteins and want to manage their pension money. Many odd things can occur to their practices.