Attorney objects to each physician setting his own annual profit sharing

[CharlesLeggette]

I had a client meeting today – 40 owner docs , 300 non-highly comp employees…they wanted to adopt a New comp 401(k) plan and allow employees to make deferrals but they themselves would make only catchup and profit sharing contributions at the end of the year, no match. They have had an integrated Plan and will contribute around 8% of pay to nHCEs under the NewComp Plan. Passes all testing. Each employee is in his own rate group.

In the meeting the docs asked if they could vary their contributions from year to year. I said , of course, as long as they pass a(4) testing.

Well the atty went ballistic saying absolutely not --- that they had to agree to a certain amount for 3 years and the board made the contribution decisions and the individual docs[all of whom are on the Board] and the docs could make no decision about amounts….he said the suggested arrangement was a CODA. He finally agreed that the board could set the contribution at $53,000 for all owners and if an owner could not make the contribution, he would contact the benefit committee and request a reduction for a particular year, but he still said they must stick to that for 3 years.

Well, SBJPA repealed IRC401(a)(26) for DC Plans and every prototype today has ability for "every employee in their own Rate Group". Each Doc could have their own standalone PSP in which they would make contribution decisions. So what's the difference.

I reminded him that the board WAS the docs. He was adamant re the CODA and said the contributions must not change more than every 3 years and the individual docs could have NO say in the amount of the contributions [which I find ridiculous].

Does anyone know of any documentation, perhaps a Grey Book Q&A, or anything that speaks to this issue. I have dozens of New Comp plans and the docs/owners make annual decisions about their contributions….never has an atty raised a question about it.

I’d appreciate some insight here.

[Belgarath]

All 40 doctors are on the board of directors? That seems odd, but I don't deal with large medical practices, so maybe it is normal.

All of the following is just IMHO.

I have no idea where the "3 year" idea came from. But technically the attorney is correct that the individual doctors can't make the decision on employer contribution level - this is set at the "employer" level. If the "employer" - i.e. the board of directors - determines the contribution at the individual level for each doctor, I think this is perfectly acceptable, BUT, taking a conservative view, if there isn't some standardized or reasonable formula for determining that amount, and each doctor simply tells the "board" that they want "x" amount, and the board rubber stamps it, then it seems possible that the IRS could challenge this as in fact being a CODA. Haven't heard of this happening, but seems possible.

[Tom Poje]

The LRM from the IRS issued a few years ago sums it up this way

A. ( ) Participant Group Allocation
Each eligible employee is assigned to a participant allocation group, as follows:
(Describe the objective criteria for determining the make-up of each participant allocation group. Criteria may not be subject to employer discretion, which would cause the plan to fail to have a definite allocation formula.
In the case of self-employed individuals (i.e., sole proprietorships or partnerships), the requirements of §1.401(k)-1(a)(6) continue to apply, and the allocation method, including the determination of participant allocation groups, should not be such that a cash or deferred election is created for a self-employed individual as a result of application of the allocation method

.......

years ago at an ASPPA conference someone asked a similar question and the IRS response was simply

"We would know abuse when we see it".

but it is still a situation that may be hard to prove. each doctor could have set up his "own plan" and except for the inconvenience of having multiple plans it accomplishes the same thing

[CharlesLeggette]

Yes all 40 on the board.

OK, so the Board says the contribution for every owner allocation group is $53,000, but each year the Owner can request a reduction in that amount and the board votes to permit it.

Seems like that would cure the problem.

But I am still disturbed that his claim that any choice by the Doc would constitute a CODA.....if you apply this logic to a self employed taxpayer where net schedule C income can be diverted to a Deferral or a PS contribution [or a Cash Balance contribution], it seems to reflect a double standard.

[Belgarath]

More random musings...

If in fact it is a problem to start with, then I don't see how this cures it.

In the old days, owners could, under IRS approved documents, have a "waiver of compensation" to manipulate their contribution. Then the IRS said you couldn't do that, but they allowed "allocation abeyances." Then they said you couldn't do that either. Under the EGTRRA pre-approved prototypes, they limited the number of groups you could have, then under PPA they said it was ok to have everyone in own group in a prototype (or of course in a VS).

But the "deemed CODA" still remains an issue. I cannot say how closely this is scrutinized, but I'd think it does warrant a certain amount of caution.

As to the self-employed taxpayer, I seem to recall that the IRS fussed about this a little bit, but even they were forced to conclude that it simply isn't reasonable to try to shoehorn a sole prop into this "deemed CODA" box.

Boy, I'd hate to be at one of those Board meetings! 40 doctors in a room having to agree on financial matters? Yikes!

[CharlesLeggette]

Well, I assume that all your newcomp clients have a board mtg, decide on the PS contribution and proceed accordingly --- so if an individual HCE wants something different he must petition the Board for such a change. The Board then acts upon it....

I'm sorry, but I am not seeing this degree of strict adherence in the actuarial or TPA communities....I certainly have not seen any requirement in PSP's that things are locked down for 3 years as the atty suggests...

[Belgarath]

I agree that the 3-year requirement is out in left field, or beyond. As I said in first post - no idea where that came from, and I wouldn't hesitate to ask for a citation. I'm wondering if this is a twisted and incorrect interpretation of the 3-out-of-5 year IRS vesting rule for a "complete discontinuance" - see IRS Announcement 94-101, and 1.411(d)-2(d)(2). And that's a vesting issue anyway. Who knows...

As to the rest, I'm not in any way disagreeing that I've not seen this level of scrutiny/enforcement, merely that there is an argument for it, and it wouldn't be impossible for an auditor to make this argument. And in a plan of that size, getting nailed on that issue could be expensive.

[mphs77]

I agree that it is probably a 3 in 5 year interpretation that has gone amiss.

But I wonder if they are not losing themselves in the traditional problem of

contribution versus allocation. The Board may authorize a contribution amount

but the Plan describes the allocation.

[QDROphile]

This is a question of risk and the behavior and signals of administration either enhancing the risk or minimizing the risk that the IRS would go after the arrangement as a CODA and the success that the IRS might have. The consensus of greed is that the arrangements are safe enough to pursue and the question is how much acrobatics one wants for disguise or minimization of outside attention, if any.