Plan Design for Partnership

[Gary]

Say we have a partnership that includes 3 partners and 10 employees.

The partnership implements a DB plan where the formula is 2% of avg pay per year for the employees and each partner has their own chosen benefit formula based on the amount each wants to contribute to the plan.

For purposes of this topic, we will assume the plan passes coverage and non discrimination.

The client has no problem combining plan assets in one trust for the employees.

However, the client is concerned and wants assurance that each partner funds his own pension.

Of course the plan can be funded using individual aggregate based on the earned income for each partner.

The challenge comes with regard to asset allocation.

FOr example if after five years the partner terminates and wants to receive a distribution.

Say the partner has a benefit with a lump sum value of 200k, but an asset allocation of 175k.

The client wants the partner to come up with the additional 25k not the partnership.

So the question is: how is this type of situation related to partnerships handled?

DO you just typically have the partner make the 25k contribution? Don't think partner can forfeit the pension.

Thanks.

[Andy the Actuary]

These are always interesting especially when you have highly paid people whining about equity.

Suggest rather than allocating assets each year, maintaining separate book accounts for the partners. Each year, the book account will be increased by the book contribution (on an IA basis) and then by investment income at the market rate of return for the entire portfolio. This is clean since each partner starts with a book account of $0. Each partner will also be required to contribute an additional amount which could be a percentage (e.g., based upon partnership income allocation percentages) of the total contribution under 430 in excess of the sum of the partners IA contributions. This additional amount will not affect the partners' plan book accounts. When a partner leaves, there will be a gain or loss depending upon whether his lump sum is less than or exceeds his book account. Such additional amount would adjust the partner's equity account at time of settlement (taking away from or giving to the other partners).

[FAPInJax]

This is the perfect situation for a cash balance plan. There are 'accounts' that each partner can see and track. There is also the 'new' law permitting the account balance to be treated as the PVAB.

[Gary]

So let's say the partner's lump sum is 200k and his book account is 180k.

Instead of having the partner pony up the additional 20k to the pension plan, you suggest that he receive 200k from the pension and that they reduce his partnership equity by 20k?

[Andy the Actuary]

So let's say the partner's lump sum is 200k and his book account is 180k.

Instead of having the partner pony up the additional 20k to the pension plan, you suggest that he receive 200k from the pension and that they reduce his partnership equity by 20k?

Yes, because at least in theory there will be an actuarial loss that will be part of the 430 calculation and the remaining partners will have to fund this loss.

I did not suggest a CB plan since I ass-umed the plan in question had already been implemented.

[Gary]

The plan hasn't been implemented and we will likely implement a cash balance plan.

I don't expect them to be too keen on adjusting the equity and having the partners absorb the actuarial loss.

So I presume that the partner paying the shortfall for his pension may be the only alternative.

Thank you.

[Gary]

Or to look at a DB pension plan with partners and a partnership another way.

It seems theoretically that we have a plan that is funded for the employees as one plan.

And a separate plan for each partner where each partner must individually fund his own plan (even though it is within the one company sponsored plan) even if assets are aggregated.

Individual aggregate funding can certainly handle this type of situation.

Does that make sense?

[tymesup]

The plan hasn't been implemented and we will likely implement a cash balance plan.

I don't expect them to be too keen on adjusting the equity and having the partners absorb the actuarial loss.

So I presume that the partner paying the shortfall for his pension may be the only alternative.

Thank you.

Agreed that a cash balance stabilizes the target each partner is shooting for.

Adjusting the equity for each partner may be construed as a CODA and get them in trouble. I don't have a cite for this, but remember the issue from working on a large law firm that had this problem. Note, it's not clear how the feds can police this.