Law Firm Plan Design

[Guest susand]

I am the Benefits and Compensation Manager for an international law firm with about 500 attorneys. Currently, we allow our Associates (non-partner attorneys) to participate in our 401(k) plan with deferrals only. The are not eligible for a matching contribution nor are they eligible for the firm basic contribution. This has generally been standard practice in the past with other law firms, but I'm wondering if this is now changing.

We are hearing from our Associates that other firms that they have spoken with are indeed giving Associates a match and some even a firm basic contribution. I would love to hear from any other B&C Managers at law firms to find out just what the trend is these days. I really appreciate any feedback! Thanks.... Susan

[bzorc]

As a recordkeeper for law firms, I can say that the majority of firms either offer a match or a firm contribution, or both.

Examples: Match 50% up to first 6% of compensation. Match is on a graded vesting schedule

Firm contribution from 3 to 5% of comp.

[Guest Dook]

One reason that this may have previously been the practice is that, prior to 1998, matching contributions to partners in a partnership had to be counted as deferrals for ADP testing.

Effective for plan years beginning in 1998 this rule was changed.

[Jon Chambers]

I'm an investment advisor with a number of law firm clients. I agree with most of the posts, that historically few firms contributed for associates, but that this is starting to change. I'm not sure that I have enough information to describe a "typical" formula, but feel confident asserting that many firms are now making contributions for associates.

[IRC401]

The problem that you have that 99% of the law firms in the country don't have is that your second year associates are HCEs.

[Wessex]

Wouldn't a top 20% group election eliminate most, if not all, of the problem IRC041 identifies?

[IRC401]

I should have stated that she has both a problem and an opportunity that most law firms don't have. I assumed that the partners had a profit-sharing plan and that they wanted the associates to be HCEs to improve the test results. There are a lot of possibilities, and a professional services firm of that size should be willing to pay for advice.

[Guest susand]

IRC... you appear to have made several assumptions without facts to back them up. All of your assumptions were incorrect. We are not looking to make changes for purposes of testing, and we are not in a situation that "99% of law firms in the country" don't share.

My sole purpose in this request for information is for recruitment and retention of associates. A simple eligibility question. And to answer your question, yes, we can certainly afford to hire professionals, however, we ARE professionals and understand the workings of a plan.

May I suggest that you not offer opinions that are not based on fact in the future?

[lkpittman]

susand:

I am an ERISA paralegal for a mid-sized law firm in CA and am involved with compliance and testing issues with our own plan, as well as compliance/testing issues for some client law firm plans. Same as ytours, our plan (and some clien'ts') only allows associates to particpate in salary deferrals (partners, other ees all receive discretionary employer contribution--based on an aggressive cross-tested tiered formula, by the way--and match). The only potential "problem" that we have run into is if the plan is top-heavy. If you cannot justify that your associates are "key employees," they will be required to receive the top heavy minimum, even if they are not eligible for the employer contribution. In any event, I don't know if this info helps you--I don't know how "common" it still is to allow associates only to defer, but we're still doing it, and so are some of our clients. Hope this helps!

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LKP

[david rigby]

I'm curious about the top-heavy comment. Do most firms classify associates as key or non-key?

[Hoard1]

I work with several Law Firms in both San Antonio & Austin Texas. In Austin due to the growth of the high tech market which is putting in plans with no eligibility or vesting provisions there has been a change of design of all types of plans including law firms because of the desire to attract qualified canidates.

[Guest susand]

Thanks everyone for your comments! It would appear that there still is no general consensus among firms across the country, but is still a geographical consideration to remain competitive.

Pax, to answer your question, I don't see how a firm could classify an associate as "key" in any situation if they are a partnership since an associate has no ownership interest in the partnership. If, on the otherhand, the firm is incorporated, which is rare, indeed, then the key issue develops with respect to associates. None of this means that the associates would not be HCEs... that's a whole different story and most associates WOULD be HCEs by the time they reach their second, or maybe third year.

[lkpittman]

pax:

Rev Rul 80-314 and Reg. 1.416-1 QT-13 provide guidance on whether or not a non-owner employee can be considered "key." The answer revolves around whether or not they can be considered an "officer." Partnerships can have officers, too. Another problem, however, is that the number of employees that can be considered officers is equal to 10 percent of all employees, or three, whichever is greater. In no case, however, can the total number of officers exceed 50.

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LKP

[Guest susand]

Thanks, LKP.. you are absolutely right. That doesn't apply to my firm however for a couple of reasons. An associate of ours would never be considered to be an "officer" for these purposes as they are generally new attorneys. Also, with the size of our firm, we have more than 50 partners and our partnership also exceeds 10% of the total "employees". I appreciate the correction however! Thanks

[Guest Dan Ashley]

Susand:

In the midwest, we work with several large law firms which exclude all associates from matching or other contributions. The idea is they would rather have it on their paycheck to help repay student loans, show the highest possible income to qualify for a mortgage, etc. Some firms give a bonus equal to what they would have provided as a match, and the associates who desire to save for retirement may do so.

lkpittman: If there is a problem with non-HCE associates becoming entitled to top heavy minimums, you may wish to consider solving the problem by segregating associates into their own 401(k) plan. This may be a viable solution if both plans meet 401(B).

[IRC401]

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My two underlying assumptions were that: (1) your firm has a different retirement plan (or benefit structure) for the partners (or shareholders) than the associates, which is a common practice, and (2) your second year associates earn enough to be HCEs. Are those assumptions wrong?

I don't have the statistics to back me up, but I'm reasonably confident that very few law firms are paying second year associates over $80,000. I'm not aware of any 500 attorney firms paying less than that (although it is possible that they exist) . Maybe your recruitment problem is with your salary scale.

If you change the benefits, it affects your nondiscrimination testing, maybe for better, maybe for worse. You shouldn't be looking to change the plan without considering the impact on the testing.

[IRC401]

<>

My two underlying assumptions were that: (1) your firm has a different retirement plan (or benefit structure) for the partners (or shareholders) than the associates, which is a common practice, and (2) your second year associates earn enough to be HCEs. Are those assumptions wrong?

I don't have the statistics to back me up, but I'm reasonably confident that very few law firms are paying second year associates over $80,000. I'm not aware of any 500 attorney firms paying less than that (although it is possible that they exist) . Maybe your recruitment problem is with your salary scale.

If you change the benefits, it affects your nondiscrimination testing, maybe for better, maybe for worse. You shouldn't be looking to change the plan without considering the impact on the testing.