Control Group and PBGC Coverage

Husband owns 100% of a real estate agency (single-member LLC) with one employee who is eligible for benefits.  Wife owns 100% of a law firm (single-member LLC) with no employees.  Husband and wife have two minor children so this is a control group.  Husband received a 401(k)/Cash Balance illustration just for him and his employee - these will be start-up plans - that assumed no PBGC coverage (the illustration was from some "online" 401(k) company).  Husband wants this plan design but has wisely chosen to use a local TPA and financial advisor.

This guy definitely does not want to deal with PBGC insurance premiums because the illustration and quote he received from that "online" company assumed there would be no PBGC.  Can the wife's law firm sponsor the Cash Balance Plan, give her a 0% benefit in the Cash Balance plan, and have the plan exempt from PBGC?  Testing is fine and I haven't found anything that would prevent this but I don't know that I'm 100% comfortable with it either.  I would really like to hear other opinions and hopefully someone has come across a similar situation in the past.

I'd say no, because a 0% benefit for the wife means you only have one out of a total of three people benefiting.  Throw her in at a 401(a)(26) minimum and you're probably good to go on that.  2 out of 3 participating, then do the rest of the numerical fun to exclude the employee from the DB completely (to avoid PBGC) but benefit him/her enough in the PS plan for testing.

The husband and his employee will both be benefiting under the cash balance plan.  The idea is to not give the wife a cash balance benefit but have her law firm sponsor the plan.  We would have 50% of HCE benefiting and 100% NHCE benefiting.

What's the exemption from the PBGC coverage if it's the employee as the second person covered?  At least if you had just the owners of the husband/wife firms as the participants, that would be pretty straightforward.  But I've not typically seen real estate agents as exempt/professional employers.

I would actually want to be covered by PBGC. For a really small PBGC premium payment, you get full 401k/PS/CB deduction.

Agree with Calavera, and think that the RE company is not prof svcs and as participating ER there is no PBGC exemption.

Well in that case there's no need for the wife's business to adopt the plan, I suppose.  They're either getting PBGC premiums and the 25% DC limitation, or they're not, so it may come down to their real preference!

They aren't interested in the 25% deduction for the DC plan and want to avoid PBGC filings and premiums. The hope was that having a law firm as the plan sponsor, and the real estate company as a participating employer, there would be no PBGC premiums and filings.

CuseFan - are you saying that in a control group or ASG situation the plan is covered under PBGC if one participating employer is not a professional service employer (PSE) even if all of the other participating employers meet the PSE definition?  I couldn't find that on the PBGC website or anywhere else.

I appreciate everyone's input!

Even if the law firm is the sponsor it would not be exempt from PBGC coverage.  Here is a quote from the PBGC Coverage page:

"Lastly, to qualify for the small professional service plan exemption, the professional individual(s) must be engaged in the same professional service as the principal business of the plan sponsor. For example, consider a situation where:

• Company X is owned by an attorney, John Smith.
• Company X sponsors a defined benefit plan that has never had more than 25 participants.
• Company X’s primary business is the sale of insurance products.

In this scenario, despite the fact that the company’s owner is an attorney (a profession that’s on the statutory list of professional individuals), Company X’s defined benefit plan would not qualify for the professional service plan coverage exception."