Cash Balance Plans

[Gary]

We have a group of doctors, let's say 25 doctors, who want a cash balance plan for 2009.

They are interested in contribution class levels of say:

10,000 annual credit

20,000

30,000

50,000

75,000

100,000

So in other words, some doctors will be in the group that receives annual cash balance credits of 10k, others in the 20k class and so on.

Now here is where it gets interesting or perhaps too unorthodox.

They (the doctors) want to be able to potentially change their contribution credit from year to year. Of course most would stay at the same contribution level each year. So for example, a doctor may want a credit of 50k in year one and then a credit of 75k in year two and then a credit of 30k in year three.

Now this can be done with annual amendments before each year.

WOuld the IRS strike such a plan design down?

Perhaps iIt could be said that it doesn't meet the definitely determinable benefit rules.

And then there are the accrual rules. While the benefit may increase by more than 33% from one year to the next, it isn't based on the attainment of a specific age or amount of service, which would presumably violate the backloading rules.

Curious to hear comments on this type of cash balance plan design approach.

And lastly say the first plan year is 1/1/09 and contributions for a participant total 100k for the year made proportionately throughout the year.

Could there be no plan interest credit for 2009 and then have the balance at the end of each year (eg. 12/31/09) be credited with interest on 12/31 of each subsequent year? So in other words the account value as of 12/31/09 would not receive an interest credit and the balance as of 12/31/09 of 100k would be hit with an interest credit on of 12/31/10 based on the amount as of 12/31/09 and so on?

Thank you.

[Mike Preston]

Corp or partnership/soleprop? If the former, should be no problem as long as the "elections" each year are not left solely to the participants and that the entity applies appropriate safeguards to ensure the decisions are made in a manner intended to uphold/maintain the plan's qualified status.

I've never seen a plan that provides for an interest credit in the first year, so how else would it work other than the way you have defined?

[Blinky the 3-eyed Fish]

Corp or partnership/soleprop? If the former, should be no problem as long as the "elections" each year are not left solely to the participants and that the entity applies appropriate safeguards to ensure the decisions are made in a manner intended to uphold/maintain the plan's qualified status.

Mike, I know, you know and the IRS knows that if a single participant has a fluctuating contribution credit, that participant is the one making the decision. The question is do they care if the decision is documented as an entity level one? Because you never seem to know what you get with each IRS auditor/reviewer, I encourage less frequent changes. By the way, what is your answer if it's a partnership?

Gary, you don't have 411(b) problems because an amendment is considered as if it applied for past years.

[Gary]

Thanks.

The entity I am referring to is a corporation with many doctor/shareholders.

It might as well be a partnership.

I don't know of the situation being any different if it were a partnership, except that the k-1 income would need to be divided between plan contribution and plan compensation, which is what they intend to do with gross compensation (divide between plan contribution and W-2 compensation) anyway.

Thanks.

[Mike Preston]

Blinky. I don't know that. In many plans, the "requests" of the individuals are routinely denied because the plan would suffer the slings and arrows of 401(a)(4). I know that for sure, since it is my tests that guide the committees in determining how the benefit levels are set. I can assure you that the ultimate decision rests with a central authority and that, while not fixed (and therefore it does indeed fluctuate), it is absolutely obvious that the participants are not the ones making the decisions.

In a partnership, things are a bit different. For some reason, the IRS believes that some things which are perfectly acceptable in a coporate environment are nonetheless 401(k) type (deemed CODA) issues. So, with a partnership I recommend that the proverbial ERISA attorney be involved so they can assess the landscape intelligently.