Case Studies

Here is just a sample of the ways in which Pension Review Services is able to meet client needs. We look at each client’s situation individually. Then we present the options available to help them decide on the best solution to meet their specific needs and objectives. Contact us if you have any questions, or a particular situation you need to address.

More Bang for Your Pension Buck

We were asked to try to improve on the design of a law firm’s Profit Sharing Plan which had a new comparability contribution formula with three allocation groups: Partners, Highly Compensated Non-Partners and Non-Highly Compensated Employees. At first blush, one may think that such a contribution formula is cutting edge and would satisfy the individual partners’ savings objectives. However, the current needs of individual partners and the employee demographics of the firm made such a formula obsolete. The Partnership had partners ranging from ages 37 to 62. With three rigid allocation groups and with partners of different ages, each with different personal cash flow priorities, it was virtually impossible to allocate a profit sharing contribution that was agreeable to all the partners and not overly generous to the staff.

Read what PRS Proposed >

Converting the plan to a safe harbor 401(k) plan with an amended new comparability formula and placing each participant in a separate allocation group allowed each partner’s profit sharing contribution to be independent, within limits, of the other partners’ contributions, thereby tailoring their contributions to their immediate cash flow needs. These limits were determined based on satisfying the non-discrimination testing requirements.

While the old plan design required the partners to make profit sharing contributions that always resulted in a contribution of well above 5% of pay to the staff, converting the plan to a safe harbor 401(k) plan enabled the firm to make only a 3.42%-of-pay contribution to the staff. The safe harbor aspect of the plan eliminated the need for non-discrimination testing of the 401(k) contributions.

With separate allocation groups, if a partner with net pay of at least $245,000 wanted a total contribution (401(k), safe harbor and profit sharing) of $49,000 or $54,500 (for participants age 50 and over), then the maximum profit sharing contribution (in addition to a 401(k) contribution of $16,500 or $22,000 if over age 50 and a safe harbor contribution of $7,350) for such a partner would now be $25,150 instead of $49,000 under the old scenario, providing additional flexibility in contributions.

After adopting our recommendations, in the first year of operation as a safe harbor 401(k) plan, the partners more than doubled the contributions to themselves and halved the contributions made to the staff. Total partner contributions (including partners’ 401(k) contributions) as a percent of total employer contributions increased from 57% to 89% and could have been higher had the partners decided to contribute more for themselves. Just as important, each partner was able to elect a contribution that he or she was comfortable with. The employee demographics were such that the plan satisfied the non-discrimination requirements with flying colors.

Pension Review Services was able to find a creative solution to tailor the plan to the company’s objectives. We can do the same for you.

OH NO! An employee was permitted to make 401(k) contributions prior to meeting the plan’s eligibility requirements…

If a qualified plan is not administered in accordance with the plan
provisions written in the document, an operational failure has occurred.
If left “uncorrected” it could lead to plan disqualification.

Read what PRS Proposed >

than risk disqualification upon audit, or perhaps a more expensive
resolution to the problem, the plan sponsor was able to utilize the
Employee Plans Compliance Resolution System (EPCRS). A retroactive
corrective amendment was drafted by PRS to allow for the participant to
join and participate in the plan “early”. Satisfying the other
requirements of EPCRS, the plan was later submitted to the IRS to
request a favorable determination letter, along with an explanation of
the amendment and correction procedures. With IRS approval, the mistake
was rectified.

Plan mistakes can be costly. Utilizing IRS
“fix-it” programs, such as the EPCRS program, can limit those costs. PRS
can guide you through the proper steps to take to have a successful

Owners do not have the same savings objectives…but all can be met!

A medical practice needed to provide a program for additional tax
deferrals for some of its doctors. The 401(k) Profit Sharing
contributions of $49,000 per individual per year were just not enough.

Read what PRS Proposed >

PRS designed a Cash Balance Plan for this practice to add on to the retirement program they already had in place with the 401(k) plan. For the first year of the Cash Balance Plan, the practice contributed approximately $700,000 to the plan, with many of the doctors receiving contributions ranging from $50,000 to $150,000 in addition to the current 401(k). The cost to the staff was less than 10% of payroll. Some of the doctors chose not to participate and that works out fine. Generally, a doctor (Highly Compensated Employee) can be excluded from the plan if he or she so chooses.

The tax savings from the increased deductible contributions more than paid for the staff’s contribution and even covered the administrative start up costs. The Doctors gave the go ahead when they realized one of the highest payroll items was the IRS!

Lower taxes while saving for retirement…

Doug’s CPA wanted to review his company’s retirement plan. Most tax
professionals agree that IRS tax-qualified retirement plans are one of
the best tax-savings tools available. Every dollar invested into the
plan escapes current taxation. And tax deferral is one of the pillars of
smart tax planning.

Doug’s company had a basic 401(k) plan with a good employer match and
good participation. The plan was several years old and had not grown or
changed with the company. At the time the company adopted the current
plan, saving taxes was not an important issue to Doug, and retirement
savings was not vital to Doug’s young employees. But times have changed.
Doug now needs tax help and his employees are more interested in
retirement benefits-a very common situation in growing companies.

We advised Doug to do two things:

Read what PRS Proposed >

1. Keep his 401(k) plan.
2. Adopt a new Cash Balance Plan. Make a 6%-of-pay contribution for the employees. For Doug’s company, this is a $32,000 annual contribution. This contribution for employees will allow $140,000 to be contributed just for Doug. (We performed a series of nondiscrimination tests to determine the appropriate level of employee contributions required to allow $140,000 to be contributed to Doug.)

Overall his company will contribute $172,000 to the retirement program, with 81% going to Doug’s account. If Doug had taken this $172,000 as income, his tax bite on that amount would have been about $75,000. But instead of going to Uncle Sam, $32,000 went into his employees’ accounts and $43,000 of the tax savings went to Doug’s account in the new Cash Balance plan. The employees will also benefit significantly from the generous plan – a win-win.

Privacy Concerns for Small Business Owners...

In 2010, Dr. K, a physician with a small private practice which has five full-time employees vented to us about the EFAST electronic filing requirements and the general lack of privacy in today’s society, extending to the world of pension plans as well. After all, in any small practice which sponsors a Profit Sharing Plan, employees come and go, with the exception of a few “lifers.” However, the one constant over time is the owner of the medical practice, who manages to accumulate over the course of a number of years an account balance in the hundreds of thousands if not millions of dollars.

Read what PRS Proposed >

In such a scenario, it’s clear as day that the bulk of the profit sharing assets belong to the owner. How frustrating it was to Dr. K that anybody from financial advisors to scam artists could search the Department of Labor’s EFAST website and mine it for information such as the amount of assets in Dr. K’s Profit Sharing Plan, knowing full well that the overwhelming bulk of them belong to Dr. K.

It was with great relief that Dr. K learned from us that he could establish a spin-off Profit Sharing Plan for only himself (for testing purposes both Plans are combined) that would not be subject to the EFAST mandatory electronic filing rules. Form 5500EZ filed for the owner-only plan does not have to be electronically filed. We would carve out his account balance and transfer it to the separate plan. The assets of the original plan would then be reduced by the amount of Dr. K’s account balance which would be transferred to a one-person Profit Sharing Plan.

No longer would Dr. K have privacy concerns about his pension account. His employees would no longer receive a Summary Annual Report which would report assets that included the doctor’s account balance and no longer would his account balance be public information on the Department of Labor website.

Dr. K leapt at the opportunity to establish the new spin-off plan. The cost of administering and maintaining two plans was worth the peace of mind he gained by keeping his personal information private.