Owner/HCE Participant Exclusion - New Cash Balance Plan

[Guest JimJ]

When implementing a new cash balance plan for a professional organization (medical practice or really any organization) with 7 owners/HCE's... is it possible to exclude one or two owners if they do not wish to participate and contribute? Can this be done while drafting the plan? Does the number of owners or owner demographics play a role in the ability to do so or not? Does the company structure play a role? Most seem to be LLC's or partnerships. Thanks in advance for any help.

[mbozek]

There is no prohibition on excluding an HCE from a Q plan under the plan terms or by waiver of eligibility to participate in the plan.

[Guest JimJ]

thanks mbozek, that was my tought process as well... but i have heard that doing so for the owners of a partnership or LLC (taxed as a partnership) who elect out of a cash balance plan, may be an problem because of the cash and deferred issues. When a partner is excluded from the plan, his take home pay will be higher than it would be if he were in the plan. The result is that he is basically “electing” to take cash rather than making a contribution – therefore I've been told that a convincing argument could be made that I have just impermissibly converted the cash balance plan to a classic cash and deferred 401(k) by allowing the exclusion. maybe just a little too conservative?

[Effen]

Also be careful because 401(a)(26) still applies, so excluding 1 or 2 would not be a problem, but 5 would.

[Guest dsyrett]

JimJ

It is generally accepted that a one time election to opt out of a plan (either by the terms of the plan or by a waiver by the participant) does not trigger CODA issues.

CODA issues get triggered when there is multiple opting in and out.

[mbozek]

Under that logic every SE person who establishes any retirement plan would be deemed to establish a cash or deferred 401k plan, because establishing a PS plan reduces taxable income.

[SoCalActuary]

mbozek did not complain about a new cash balance plan?

[mbozek]

Why would I complain about someone who is smart enough to opt out of a CB plan?