Cash Balance 401(k) Medical Case StudyIn this case, the junior partner was looking to buy out the senior partner in a Medical Practice. The HCEs in this medical practice were the Partners and their spouses. HCEs include employees that have at least 5% ownership in the company during the current plan year or the prior plan year regardless of their annual compensation. Immediate family of the Owner(s) of the company, e.g., spouse and children, are also considered HCEs for plan purposes.

This case study utilizes an underlying 401(k) plan with an advanced profit sharing design. Assuming the key individuals want to contribute up to $60,000 for a plan year while minimizing employee contribution costs, an advanced profit sharing design is an appropriate strategy.

The Cash Balance Plan must pass the IRC 401(a)(26) Minimum Participation Test which requires a plan to benefit the lesser of 50 employees or 40% of the employees of the plan sponsor. In this case, the plan has less than 50 employees and 76.92% of the employees in the test benefit.

Employee NameAnnual Salary401(k)Profit SharingCash BalanceTotal Contribution
Senior Partner$484,500.00$24,000.00$36,000.00$180,000.00$150,000.00
Senior Partner Spouse$15,000.00$7,800.00$450.00$0.00$8,250.00
Partner Spouse$15,000.00$7,800.00$450.00$0.00$8,250.00
HCE Subtotals$1,020,000.00$63,600.00$72,900.00$180,000.00$316,500.00
Employee 1$29,656.32$1,300.00$2,224.22$1,186.25$4,710.48
Employee 2$35,591.72$1,040.00$2,669.38$1,423.67$5,133.05
Employee 3$13,959.40$0.00$1,046.96$558.38$1,605.33
Employee 4$59,400.00$3,120.00$4,455.00$2,376.00$9,951.00
Employee 5$52,200.00$0.00$3,915.00$2,088.00$6,003.00
Employee 6$33,218.99$1,040.00$2,491.42$1,328.76$4,860.18
Employee 7$43,350.00$1,410.00$3,251.25$1,734.00$6,395.25
Employee 8$40,000.00$0.00$3,000.00$1,600.00$4,600.00
Employee 9$23,784.73$0.00$1,783.85$951.39$2,735.24
NHCE Subtotals$331,161.00$7,910.00$24,836.00$13,246.00$45,992.00
Grand Totals$1,351,161.00$71,510.00$97,736.00$193,246.00$362,492.00
% to HCE88.9386%74.5887%93.1455%87.3123%