For several years in the 1990s and early 2000s, a successful anesthesiology practice had been sponsoring a 401(k) profit sharing plan. Each year, the seven partners were able to maximize their 401(k) and profit sharing contributions, and were more than happy to provide the appropriate level of profit sharing contributions to their employees (consisting of two non-partner physicians and five administrative staff) to pass non-discrimination tests with respect to their own contributions.
Being forward-thinking, the partners began to seek out solutions for their ultimate retirement from the practice. They engaged a corporate attorney, who worked out a detailed buy-sell agreement, providing that when a partner retired, the remaining partners would buy his or her interest in the practice pursuant to a formula based on a multiple of the average compensation earned by the partner in the last three years of the partner’s employment. This agreement was entered into in 2000.
The practice continued to prosper, and in 2003, the partners recognized that under the terms of the buy-sell agreement, each of them would receive more than $1,000,000 from the remaining partners upon their retirement. Ordinarily, this sort of payout would be something to cheer, but a feeling of dread began to pervade the partnership. Limited by geography and population demographics, the practice, though extremely successful, was not expanding; the partners did not anticipate taking many more partners on in the next ten years. That year, the ages of the seven partners ranged from 47 to 55. It dawned on them that the retirement process was going to be a race to the door; as soon as the first doctor retired, there would be a stampede, with the last person left holding the bag for the obligations of all.
The practice’s accountant suggested that the doctors contact the MandMarblestone Group. Because of MMG’s extensive experience working with medical practices to solve their retirement issues, the CPA was certain that if there was a way out of this problem, MMG would find it.
After a review of the circumstances, MMG determined that a cash balance pension plan might be the answer to their dilemma. So, before the end of 2003, the practice implemented the plan, which provided for a cash balance contribution of $75,000 per year per partner (in addition to their contributions to the 401(k) profit sharing plan), with such contribution to be credited with interest of 4.5% per year.
Initially, the partners had some concerns. Wasn’t it going to be very expensive for the non-partner doctors and the rest of the staff to be included in the new plan? The answer: only the partners were going to be covered by the cash balance pension plan; other than the practice administrator, none of the other employees would even be made aware of its existence. Because the cash balance plan satisfied the “minimum participation” rules (at least 40% of the practice’s employees were covered), it did not have to be made generally available to everyone. The partners’ contributions to the cash balance plan were supported by modest increases to the employees’ profit sharing contributions, and the two plans were tested together for coverage and discrimination purposes.
In 2012, as the oldest of the doctors approaches retirement age, each partner has almost $1,000,000 accumulated in his/her cash balance account. By the time the youngest doctor is ready to close the doors of the practice, he will walk away with $2,000,000 from this plan (in addition to the amounts accumulated in the 401(k) profit sharing plan). The buy-sell agreement was rewritten to offset the original payment obligation by the amounts received under the cash balance pension plan, so that the practice and its partners are no longer burdened by a substantial financial obligation hanging over their heads.
The ticking time bomb that was represented by the buy-sell agreement was successfully disarmed by the retirement bomb disposal team at MMG. If your retirement program is a ticking time bomb, or a land mine poised to explode if it’s encountered by a disgruntled participant or IRS agent, perhaps you could benefit from a review by the MMG team.