New Comparability/Safe-Harbor - Partners max, but want to give less to one of the partners

[Guest THess]

I have a client that is a law firm. The plan is a New Comparability w/Safe-Harbor. The formula is discretionary, based on class. (Class 1 is the 2 partners.) I ran the allocations/testing and the partners can max out for 2004.

The client called me and asked if they can give one partner $41,000 and the other partner $20,000. They have worked something out where the partner who is getting $20,000 will receive the difference as a bonus.

Can this be done?

I would think as long as the "other" groups are still getting what they should get, what's the big deal?

Please help! I need to get back to this client ASAP.

Thanks so much!

[wmyer]

No, they shouldn't do this, because this would presumably be a "deemed coda" (i.e. bad). The plan should be set up so that next year one partner is in class 1 and the other partner is in class 2.

[Blinky the 3-eyed Fish]

The deemed CODA issue is so low on the IRS' radar and there are simple ways around it as well; I wouldn't worry about that. Your concern is simply a document issue. How are you going to give one person more than another in the same class? So the "big deal" is following your document, and that is something the IRS is concerned about. Changing the document at this point would be an impermissible 411(d)(6) cutback.

[Guest THess]

Thanks Blinky.

The document is worded that

1) the contribution is discretionary

2) that the contribution to class 1 is maximized based on class 2

3) the employer determines the amount

The employer (the partner who wants less) is the one making the decision.

When he first asked me, my initial response was, Oh no, you can't do that. He then asked why? Since I couldn't find anything in writing, that got me to thinking....why not? (It's not hurting the rank and file.)

Do you have a cite that I can send him?

Also, how would that be any different then if you were to reduce both the partners (Class 1) to $30,500 (using the total of $61,000 for both), when the document states "maximized"? The contribution ratio would be equal, but not maximized.

[WDIK]

There should be language in the document that explains the method for allocating a contribution among members of a class, for example, pro rata to compensation.

The total contribution to class one is most likely "maximized" in terms of contributing the highest dollar amount that still enables the plan to pass cross testing, although I guess it could refer to deduction or other limits. In any regard, it is the total contribution to a class that is maximized/determined by the employer, not the apportionment among the members of the class.

[Guest THess]

The total contribution to class one is most likely "maximized" in terms of contributing the highest dollar amount that still enables the plan to pass cross testing

Exactly my point....

The highest dollar amount would be $82,000 ($41,000/each). Even if I give them equally $30,500, that is not the highest dollar amount available that still passes the general test. So, why would that not fall under the anti-cutback rules?

I know I'm covering 2 issues, but I'm confused as to why one would be and one would not be.

Do you have an IRC section, Treasury Reg, Notice or Announcement where I can get something in writing that clarifies this so I can give it to the client? (These are lawyers and the only thing they will accept is something in black and white.)

Thanks so much!

[david rigby]

It appears one partner wants more cash in hand. Does the plan have a mechanism that allows that person to receive an in-service distribution?

[Guest THess]

Pax,

Unfortunately, no.

[Guest Pensions in Paradise]

THess - Both Blinky and WDIK answered your question but you seemed to overlook their answers. The cite you are looking for is in your plan document. It will specify how the contribution for Class 1 is allocated among the participants in Class 1. Most likely a pro rata method.

If you want to give a different allocation percentage to each partner in future years, then you should amend the plan to put each partner in their own Class.

[Guest THess]

Pensions...

Both Blinky and WDIK answered your question but you seemed to overlook their answers.  The cite you are looking for is in your plan document. 

I did not "overlook" their answers. I understand why they cannot give different allocations to the same class. They answered my first question and I appreciate their responses.

If you were following along, I was past that....

as I quoted; "I'm confused as to why one would be and one would not be."

Which brought me to my second question. Why wouldn't reducing the rate for the HCE's (pro-rata even) fall under the the anti-cutback rules then? That is not following the formula in the document either. Which was sort of a question, but not expecting a response. Don't you ever question why some things are okay with the IRS and some are not (when either one is a reduction of benefits)?

And the cite I was requesting was in regards to where in Section 411(d)(6), or elsewhere, does it discuss contributions to a DC plan and how they pertain to the anti-cutback? I don't know what document you use, but mine does not cover every Code section definition.

To everyone else:

Thank you so much for all your help.

[Guest merlin]

THess,

My understanding of the IRS position is that the basis for the allocation , rather than a particular allocation amount, is what's subject to the anti-cutback rules. Once a participant has met the requirements (1000 hours, last day, etc.) to get an allocation the basis is fixed. Any amendment to the classes or allocation fromula within classes would violate 411d6. So,yes, you can choose to allocate $82000 or $28000 or $1 to Class 1, but the dollars must be allocated as per the terms of the plan. Assuming you have a calendar year plan you're stuck for 04. The best you could do for 05 would be to put each partner in his/her own class as previously mentioned. If your plan has a 2/28 y.e. or later, and a last-day requirement for the allocation you've still got a shot. In any event you still have to watch out for oddball requirements, like " a paticipant gets an allocation in the year of retirement regardless of hours worked".

[AndyH]

THess, PIP is exactly right. Lots of knowledgeable people have tried to help you, but your comments are full of attitude and make little sense, IMHO.

What is this secret "mechanism" that the document has for class 1 allocations that might create a 411(d)(6) violation? If you want an answer, you should present facts.

[WDIK]

The highest dollar amount would be $82,000 ($41,000/each). Even if I give them equally $30,500, that is not the highest dollar amount available that still passes the general test.

If the plan language requires "that the contribution to class 1 is maximized based on class 2", and that amount is $82,000 (and the cross-testing works), it appears that $82,000 must be contributed to class 1 to comply with the plan document.

I think the real issue may have been clouded by the fact that "[t]hey have worked something out where the partner who is getting $20,000 will receive the difference as a bonus." If you are interpreting the terms of the plan document correctly, contributing the $61,000 is not even an option.

In my opinion, it is a poor design that would lock class 1 into the maximum and not allow some flexibility. Is it possible that the plan uses language such as "up to the maximum" or something similar? If so, then we are back to the question of proper allocation, in other words $30,500 each if the partners' salaries are equal (again assuming a pro rata allocation). If not, it seems that $82,000 is the magic number.

In either case, it does not seem like the partners can justify their arrangement.

[Tom Poje]

I am not sure if the amount is definitely determinable unless it is specified how testing will be done.

for instance, what if interest rate assumption of 7.5% is used rather than 8.5%.

or test using accrued to date, or test using allocation method, or even testing on a compnent plan basis, using age nearest or age last....

[AndyH]

right. Tom's point is exactly correct. Such document language would not have been approved, which is why it is a wonder that we all must guess what the document actually says.

[Guest THess]

Merlin,

Thank you for your answer. You've cleared it up for me.

WDIK,

I agree that it is maximum or nothing, based on the wording in the document. Thanks for the second opinion.

Tom,

It does state the pre-retirement and post-retirement assumptions as well as the table used. Thanks for your response.

Quint,

I'm sorry for the "attitude". I didn't have an attitude until PIP got one...with her comment that I wasn't paying attention. Thanks for your opinion.

I appreciate all the responses I got.

Thank you all!

[AndyH]

THess, would you mind sharing your conclusion?

[Guest THess]

Sure...I'll try.

I wasn't aware of a mechanism that would create a violation, that's why I was confused and probably why I made little sense.

I was thinking that the violation pertained to the actual allocation (causing a reduction of benefits) when it actually pertains to the plan design regarding the allocations. By putting "up to the maximum" in the document, it wouldn't violate the anti-cutback. Otherwise, giving one more (or less) than the other, or even giving them both less than the maximum (when the doc states maximum) would violate the anti-cutback either way.

Since the document doesn't state "up to the maximum" (which would allow prorating class 1's allocation down on a prorata basis, without violating any anti-cutback), that even though the contribution is discretionary, if they wanted to do less than the maximum, their only other option would be none, because that would violate anti-cutback also. (Good point brought up by WDIK.) Which negated, or answered my second question, however you want to look at it.

I have a great deal of respect for Blinky, and all the others as well, but for some reason, this time it made more sense to me the way Merlin and WDIK explained it.

In any case, we need to revisit the document wording to allow more flexibility. I know the client will not want to put the partners in different classes, since this was a one-time deal that they wanted to do. But we do need to amend it to read "up to the maximum" (or something similar) for next year. That will allow them to contribute less (prorata) and not violate any anti-cutback.

Did I understand it correctly?

Thank you again everyone!

P.S. What does IMHO mean?

[Bird]

IMHO = In My Humble Opinion

I don't think it's a big thing at all to simply put the partners in different classes, going forward. But, if they don't want to, fine, just clean up the existing language so you at least have discretion in the total to be allocated to the existing class.

BTW, your cryptic "up to the maximum" and "the maximum based on group 2" (or whatever the existing language is) is leaving me a bit confused. I think I know what you're getting at but honestly I find it hard to believe that the existing document locks you into the maximum. Care to post the exact language?

[could be me maybe not]

Tracey, I strongly recommend investing $195 at the link below (no I have no connection whatsoever). I bought this a couple of years ago and it took all the mystery out.

I do think you are still a bit confused about what useful language might look like as well as what some of the ancillary issues are. Reading this would resolve that.

http://www.cyberisa.com/erisa_docs.htm

p.s. and yes, Merlin is magical and Blinky is quotable.

[Alf]

it is a poor design

The document is your problem and you can't amend it after 12/31. Plan for next year.