DB and PSP

[thepensionmaven]

Prospect currently maintains a profit sharing plan for two doctors and their spouses, no common law employees.

One of the doctors wants to initiate a defined benefit plan, the younger doctor does not wish to participate, and wants to contribute to the profit sharing plan.

I assume since these are all HCEs there is no problem setting up a DB for one owner and his wife and setting eligibility to exclude the other doctor and his wife.

[David MacLennan]

You are OK, assuming the spouses are really employees. Sometimes doctor's spouses are paid a salary but don't really work. Remember 401a26 applies to DB plans and you must benefit 40% of eligible employees.

[david rigby]

Any concern about whether a (worthwhile) deduction will be available under 404(a)(7)?

[thepensionmaven]

You are OK, assuming the spouses are really employees. Sometimes doctor's spouses are paid a salary but don't really work. Remember 401a26 applies to DB plans and you must benefit 40% of eligible employees.

That is why the older doctor wants to go with as DB. He had one several years ago as a sole proprietor and foolishly terminated it.

Thanks.

[David MacLennan]

Now you have a complication. The prior sole proprietorship sounds like a "predecessor employer" in the new 415 regs, similar to Lear Eye Clinic case, where sole proprietor preceded a partnership. This means the prior DB plan must be aggregated for 415 and you have a MASD for the older doctor due to the prior DB plan. The MASD rules are not out yet, so if you are funding for a benefit close to the reduced 415 limit (reduced by the prior distribution), then your actuary could have unresolvable issues and/or you may need custom drafted language in your document with a FDL.

Also, David Rigby's concern about 404a7 is a good point, and should be looked into.

[Belgarath]

The IRS has flip-flopped on the issue of whether the DB plan participants in this situation are considered as "benefitting" under the PS plan if they are "beneficiaries" due to having an account balance. However, my recollection of their latest flop position is that if they are not benefitting for 410(b) purposes in the PS plan, then there is no overlapping participation and 404(a)(7) shouldn't be an issue. But it's one of those dreaded "gray" areas.