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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Any guesses? Date: 8/27/1998 8:51 PM
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Our retirement plan is changing soon. We are told that the changes are required to maintain qualified status (in light of other changes that are to be made), but for the life of me, I can't figure out why. The details follow:

I'm an employee of a law firm that's structured as a limited liability partnership, with both equity and non-equity partners. The statute says I'm a "highly compensated employee," although my wife might disagree. We have a 401(k) plan to which we can contribute 10% or $10k, which I understand to be the statutory maximum. In addition, for the moment, we have an additional, mandatory, 3% contribution, which permits us to exceed what would otherwise be the limit.

That additional, mandatory, contribution is going away next year. We are told that this is a consequence of a change being made to the partnership's retirement plan, and I've tried to figure out how the one could affect the other, but it's a pozzlement to me. Any (educated) guesses? --Bob
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5235 of 74759
Subject: Re: Any guesses? Date: 8/30/1998 10:22 AM
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Greetings, Bob, and welcome. You asked:

Our retirement plan is changing soon. We are told that the changes are required to maintain qualified status (in light of other changes that are to be made), but for the life of me, I can't figure out why. The details follow:

I'm an employee of a law firm that's structured as a limited liability partnership, with both equity and non-equity partners. The statute says I'm a "highly compensated employee," although my wife might disagree. We have a 401(k) plan to which we can contribute 10% or $10k, which I understand to be the statutory maximum. In addition, for the moment, we have an additional, mandatory, 3% contribution, which permits us to exceed what would otherwise be the limit.

That additional, mandatory, contribution is going away next year. We are told that this is a consequence of a change being made to the partnership's retirement plan, and I've tried to figure out how the one could affect the other, but it's a pozzlement to me. Any (educated) guesses?


That 3% mandatory contribution is probably one the firm must make because your plan is considered "top heavy". A plan becomes top heavy when more than 60% of the benefits go to key employees. When that happens, the firm must make that 3% mandatory contribution to all the other employees. That gets expensive, so that's almost certainly why your firm is changing the plan. By changing the plan, the firm can ensure it's no longer top heavy and the 3% mandatory contribution will disappear.

Regards……..Pixy


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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5252 of 74759
Subject: Re: Any guesses? Date: 8/31/1998 12:07 AM
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In response to my question, TMFPixy replied:

That 3% mandatory contribution is probably one the firm must make because your plan is considered "top heavy". A plan becomes top heavy when more than 60% of the benefits go to key employees. When that happens, the firm must make that 3% mandatory contribution to all the other employees. That gets expensive, so that's almost certainly why your firm is changing the plan. By changing the plan, the firm can ensure it's no longer top heavy and the 3% mandatory contribution will disappear.

I continue:

I assume that "key employees" is (at least roughly) synonymous with "highly compensated employees," as that term is used in the Code. This explanation makes sense to me under two conditions. First, I assume the partnership is increasing its own benefits. Second, I must also assume that benefits going to partners (who are owners, rather than employees, of the firm) are included within the 60% cutoff. If both assumptions are correct, and the former plan was "almost" top heavy, then the only way for the partnership to increase its own benefits is to decrease benefits to other key employees (such as my peer group!). Is my second assumption correct? Thanks. --Bob

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5257 of 74759
Subject: Re: Any guesses? Date: 8/31/1998 8:40 AM
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Bob, you said:

I assume that "key employees" is (at least roughly) synonymous with "highly compensated employees," as that term is used in the Code. This explanation makes sense to me under two conditions. First, I assume the partnership is increasing its own benefits. Second, I must also assume that benefits going to partners (who are owners, rather than employees, of the firm) are included within the 60% cutoff. If both assumptions are correct, and the former plan was "almost" top heavy, then the only way for the partnership to increase its own benefits is to decrease benefits to other key employees (such as my peer group!). Is my second assumption correct?

The term "key employees" generally applies to owners/officers, but that is usually roughly comparable to "highly compensated." As to your second assumption, in the sense a revision will eliminate a mandatory 3% contribution to all other employees (thus causing less of an out-of-pocket expense), then the benefits to the partnership may increase. Due to other discrimination testing that may severely limit contributions of highly compensated employees, the partners may not benefit to the degree you think they will. It all depends on the participation rate of the non-highly compensated employees.

Regards…..Pixy



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