Cross Tested Plan for small Doctor group

[Tom Poje]

Things to consider:

if amount of contribution is never going to be a problem, the money purchase is probably the way to go.

Based on the comp figure provided, they could never get 30,000 a piece in a ps plan due to 15% limit.

since plan is top heavy anyway, consider a 3% Money purchase, and a profit sharing plan by group.

if doctors get 30,000 with 160000 in comp, they have received 18.75% of pay.

if you allocate 7% contribution to rank and file, a 10 year difference in ages between them and the docs is needed.

e.g. 1.085^10 = 2.26

2.26 * 7% = 15.827

with permitted disparity the value would come close to 18.75.

By the way, if you have a 20 year difference in ages, a 3% contribution usually works.

[Guest PAM]

I have a client - a medical PLLC with two doctors - both ages 38. They both make well in excess of $160000 each year. They have only 4 full-time employees ranging in age from 25 to 36. They have a "part-time" employee age 45. They are interested in putting in $30,000 for themselves, and minimizing what they can put in for everybody. (Is that a surprise?). The total eligible comp for 1999 is $365600.00 since only two of the other ees have met eligibility. Would they be better off with a money purchase cross tested plan. With total eligible comp being fairly low, would they be able to put in $30,000 each. The average salary for the others ranges from 18000 to 30000.00 Can someone help me with a starting point on which plan and what discretionary formula might work in a profit sharing plan. I can provide any other info needed. Thank you!!!!!

[Dave Baker]

Sounds like fun! Can you post a "census," like this:

Employee   Age   Compensation    Hire Date
A          38    $160,000        1997
B          38     160,000        1995
C          25      25,000        1998

etc.

In your post, type this at the start of the table: <pre> and typt this at the end of the table: </pre> -- that'll maintain the spacing you use when entering the table. Also, use your space bar, not the tab key. Thanks!

[Note: This message has been edited by Dave Baker]

[Guest PAM]

Dave, as requested.

Employee Age Comp H/D

A 38 160000 11/97

B 38 160000 11/97

c 26 30000 1/98

D 37 27600 12/97

E 30 18000 12/97

F 33 26400 9/98

G-IE 45 5280 11/97

--

[Guest ERead]

Wow - well - from what I see it looks like even if you were to use a 5% or 8% formula for the ee's - which is generous enough to encourage longterm service, yet conservative enough from a $ point of view, you'd be okay. Ideally, I'd wait until the 26 year old comes in, that would help tremendously. I like the idea of a 3% MP with the PS, however, if they are a small firm, and watch the expense, they may not want to have two plans, especially with the cost of Cross-tested plans. Just some more food for thought.

I'll leave the actual figures to the others, as it seems they're hungry to get in on that.

Good luck

[MWeddell]

If your client truly says "I don't care about equity among the nonhighly compensated employees" then you'll be better off to include G and exclude D from the plan's coverage. Measured in terms of dollars, not % of G's or D's compensation, it'll be cheaper to include G and exclude D which will still allow you to pass the 70% ratio percentage coverage test. Of course D might decide to quit on the day other employees receive their profit sharing plan statements! This extreme situation points out that you almost always have to discuss with the client to what extent they want to tolerate inequity among NHCEs just to improve the testing numbers.

Also, let's make sure these are new plans you're putting in, because otherwise you can't change eligibility and allocation conditions after the plan year ends.

Profit sharing plan should be written so that each cohort of NHCEs born in a particular year is allocated a different contribution. The IRS has loosened up on the definite allocation formula requirement so that this type of plan should be able to get a determination letter.

Putting 3% into a money purchase plan makes sense in the abstract, but raises administrative costs and probably is unnecessary. The 15% 404 limit applies to employees in the aggregate and probably won't limit you from putting in 18.75% for the two HCEs because you'll be able to put in a lesser amount for the NHCEs (who are younger). As a practical matter, put in a nominal amount, e.g. $50 for D, so you can use D's compensation when computing the 15% 404 limit.

[This message has been edited by MWeddell (edited 03-11-99).]

[Tom Poje]

Assuming ees A-F are all eligible,

you have 422,000 in compensation

15% is 63,300.

if the two doctors get 30,000 a piece, that leaves 3,300 to spend amongst the others.

that is 3.23% of pay, enough to cover top heavy, but won't be enough to pass nondisrim.

That is why I suggest a money purchase as well.

It will be tough (I think impossible) to get 30,000 to the owners without a second plan- at least at this time.

A $50 minimum contribution is a nice concept to employee D, but remember, it won't cover top heavy.

[MWeddell]

Tom Poje raises good points, that the client won't be able to get to $30,000 for each of the HCEs without a money purchase pension plan and that the minimum contribution to D won't work because of the top-heavy requirement. I'll retract my earlier suggestions along those lines.

There's still the issue about whether excluding D and including G is desirable.

[Guest PAM]

Thanks for all the good suggestions. I have run several scenarios for the docs. It's up to them now. Again, thanks.