Cash Balance 401(k) Law Firm Case StudyThis law firm wanted to implement a cash balance plan to maximize tax deductions for the founding partners and give larger contributions to the junior partners using an advanced profit sharing design. We worked with the firm to maximize each founding partner’s profit sharing and cash balance contributions while providing larger contributions for the junior partners.

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. When utilizing a plan design that consists of a 401(k) with advanced profit sharing and a cash balance plan, the plan must pass the following tests:

  1. IRC 401(a)(26) Minimum Participation Test – applies to Defined Benefit Plans
  2. IRC 410(b) Test – all plans are subject to this test and must satisfy either the Ratio Test or Average Benefits Test in order to satisfy the minimum coverage requirement
  3. IRC 416 Minimum Top Heavy Test – all plans are subject to this test, and if a plan is top heavy, then a minimum defined benefit or a minimum % of compensation is to be provided to all eligible non-highly compensated employees (NHCEs) as defined by annual IRS limits
  4. Special Gateway Rules Under 1.401(a)(4)-9(b)(2)(v) – applies when one or more DC (defined contribution) plans are aggregated for testing with one or more DB (defined benefit) plans
  5. IRC 401(a)(4) Accrual Rate Test – applies to all plans and compares the benefit being provided to each highly compensated employee (HCE) as defined by annual IRS limits to the benefits being provided to the NHCEs
Employee NameAnnual Salary401(k)Profit SharingCash BalanceTotal Contribution
Founding Partner$265,000.00$24,000.00$35,000.00$117,000.00$176,000.00
Founding Partner$265,000.00$24,000.00$35,000.00$123,000.00$182,000.00
Junior Partner$265,000.00$18,000.00$7,950.00$0.00$25,950.00
Junior Partner$265,000.00$18,000.00$7,950.00$0.00$25,950.00
Junior Partner$260,000.00$18,000.00$7,800.00$0.00$25,800.00
Junior Partner$265,000.00$18,000.00$7,950.00$0.00$25,950.00
Junior Partner$265,000.00$18,000.00$7,950.00$0.00$25,950.00
HCE Subtotals$1,850,000.00$138,000.00$109,600.00$240,000.00$487,600.00
Employee 1$255,000.00$6,000.00$17,850.00$0.00$23,850.00
Employee 2$139,191.00$12,419.00$6,959.55$9,800.00$29,178.55
Employee 3$21,632.84$0.00$0.00$0.00$0.00
Employee 4$101,728.77$18,000.00$7,121.01$0.00$25,121.01
Employee 5$83,480.10$3,000.00$4,174.01$9,090.98$16,264.99
Employee 6$117,882.62$16,512.00$8,251.78$0.00$24,763.78
Employee 7$50,309.10$900.00$3,521.64$0.00$4,421.64
NHCE Subtotals$769,225.00$56,831.00$47,879.00$18,891.00$123,601.00
Grand Totals$2,619,225.00$194,831.00$157,479.00$258,891.00$611,201.00
% to HCE70.8306%69.5966%92.7031%79.7774%