Medium Size Law Firm Seeking a Custom Plan
(24 partners/30 Associates/108 staff)
The Perfect use of a Split Funded Cash Balance Plan
Twenty-four partners – class action litigation firm – were contributing a total of about $1,080,000 for themselves to a profit sharing/401(k) plan. Each partner earned between $600,000 and $1.2 million. With a $7.9 million dollar Associate/Staff payroll, the firm was spending 8% in the profit sharing plan ($632,000).
The partners were frustrated that the “leverage” in the existing plan was poor at 63% – (only 63 cents of every dollar was going to the partners, the balance to the employees). The partners wanted to make larger contributions to a qualified retirement plan and they did not want to increase employee cost. Asset protection was also a concern.
A new plan strategy which was agreed upon as follows: 1) maintain the existing profit sharing/401(k) plan; 2) layer a custom Split Funded Cash Balance Plan on top of the existing 401(k)/profit sharing plan.
The custom plan structure allowed the partners to increase their contributions from $1,080,000 to $3,552,000 (a $2,472,000 increase) – a partner avg. contribution of $148,000 – with NO increase in employee cost (cost remained at 8% of employee payroll).
Note: The above fact pattern is typical of many law firms and medical groups – the partners are spending a lot of money on their employees and each partner is limited in contribution under defined contribution rules – between $50,000 and $60,000.
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