DB Plan With Multiple Formulas For HCEs

[Guest merlin]

I'm designing a plan for a group of emergency room physicians. The group includes physicians (all HCE), physician's assitants (some HCE, some NHCE), and the office manager (NHCE). The first try resulted in a plan the satisfied the calculation-based safe harbor. Then some of the docs asked for lower contributions, which will mean lower formulas. Will this blow the safe harbor because I no longer have the same formula, or can I still avail myself of the exception that allows for benefits of lower value to HCEs?

[AndyH]

That works, as does a design that has different formula covering different groups, each of which passes coverage and is by itself a safe harbor. Then the plan as a whole is a safe harbor.

Merlin, I hope for your sake that you get to design this and then walk (run) away! Otherwise, you'll find some that want to "opt out" and some that want to self direct their assets. Also, what happens when one of them leaves and the plan is funded less than 110%? But of course I don't need to tell you the pitfalls of this setup.

[Blinky the 3-eyed Fish]

No, don't run, just make sure they understand everything in advance. From a tax perspective it's still a good deal.

[Guest merlin]

Thank you both for the replies and the suggestions. Pitfalls abound, no doubt about it. Forget the funding level issue. What happens in the normal run of events when Dr. No. 3 goes to leave the practice, and his PVAB is more or less than his "account". There is an attorney involved who is supposed to be versed in these issues. We shall see.

[Blinky the 3-eyed Fish]

Again one of the pitfalls, one recommendation is to have a cash balance plan or regular DB plan with the actuarial equivalents equal to the 417(e) rate. That takes away one of the variables at least.

However, like you said, there is still the matter of the asset performance not matching up to the accrual rates. If the attorney or anyone comes up with a solution to that, I would be interested to hear it. You can try and limit fluctuations with investment choices that mirror 417(e) returns as close as possible, but of course, it can't be exact.

[Dougsbpc]

Merlin.

We administer a plan like this. As Blinky mentioned, we went the extra mile to make sure they understood how the plan worked.

In this case the employer had two 50% owners, one age 55 and the other age 45. When they asked what would happen if one of the two left, we suggested they either have some type of agreement to have the company make up the difference via payment(s) to the owner that left or to terminate the plan at that time. Although potentially an expensive alternative (100% vesting for EE's etc), they chose this option. The PVAB vs. asset problem is then often solved as excess assets are more heavily allocated to the owner that left provided he/she does not have a 415 problem and provided they pass 401(a)(4) with that allocation.

The company could then establish another DB (if desired) in the future with the remaining owner participating.

[SoCalActuary]

In researching a 401(a)(26) question, it was clear that separate asset pools did not comply with the intent of a26, even going so far as to note any outside indemnification agreements between owners.

Why does this matter? If the partners want to receive benefits based on plan asset levels, or they want separate asset funds to determine their distribution, then they want a DC plan. However, if they want the higher deduction levels of DB plans, the owners need to deal with the asset disparity issue.

When an owner wants their funds, what do you pay? The other owners don't want to pay someone else's underfunding off, but the DB plan needs to distribute benefits under the terms of the plan. Otherwise, they fail a26. Of course, if the plan is underfunded, you would have the 110% current liability funding level to deal with, keeping the terminating HCE from receiving their distribution immediately.

I like the plan term allocation approach unless you have NHCE's. Then you have more serious issues, especially for underfunded PBGC covered plans.