Cash Balance Plan in trouble, Please Help

[jshah9]

I am a radiologist in an 11 partner group that began a cash balance plan 4 years ago. Everything was going well until earlier this year when we found out we weren't in compliance and have to terminate the plan. Now I need help and advice in what to do with the money that is in the plan.

Without getting into to much detail two years after we started the plan we merged with 8 other hospital groups in the same hospital system to increase our bargaining power and formed a mega group. In doing that we inadvertently became an affiliated service group and apparently all benefits and plans have to meet compliance testing over all the groups. This was discovered just recently and because the other hospital groups don't have cash balance plans we don't meet the numbers and have not been in compliance for the last two years.

It was recommended to us to terminate the plan and to roll the money over into an IRA. We were told to keep that IRA separate from all other investments as it is "tainted" money.  My issue is I do a back door roth every year and now if I roll the 200K I have in this plan into an IRA I won't be able to continue my back door contributions.

So what do people think of this situation? Would you consider rolling the money into my 401K profit sharing account realizing it is tainted? Should I roll it into an IRA and just stop doing the back door roth? Should I roll it into an IRA and then pay taxes on the amount to convert it into a roth? Not sure if I can even do that.  Any other thoughts on how to deal with this money while still being able to continue with the back door roth. I am 38 and still have many years of contributing ahead of me.

Thanks in advance for your help and advice.

[jacoavlu]

an affiliated service group issue may / would also apply to your 401k-profit sharing plan. And qualified plans of the other affiliated service groups. Hopefully you have a legal professional with expertise on these matters to advise you as to what to do.

[ZZZ]

Who advised on your merger? I'd go after whatever clowns made a bunch of money of you guys for the merger but didn't clue you in on this.

[caprivenky]

Jshah

‘roll over this money and wait for the irs to give you a final decision

this situation does need  an expert benefits manager advice .

you will have to pay taxes on this amount

but what about a fine from irs ?

did the plan have an insurance policy ?

keep us posted about the outcome

I hope they dont force you to fund all the new partners retroactively for the last two years they were eligible and did not know about the plan

[VagabondMD]

The biggest problem is not that you won't be able to do a backdoor Roth next year. The biggest problem is that you might owe a lot of money in taxes and penalties. You need real professional help for this, not some curbsides from wisecrackers on an Internet forum.

[litovskyassetmanagement]

jshah9 wrote:

I am a radiologist in an 11 partner group that began a cash balance plan 4 years ago. Everything was going well until earlier this year when we found out we weren’t in compliance and have to terminate the plan. Now I need help and advice in what to do with the money that is in the plan.

Without getting into to much detail two years after we started the plan we merged with 8 other hospital groups in the same hospital system to increase our bargaining power and formed a mega group. In doing that we inadvertently became an affiliated service group and apparently all benefits and plans have to meet compliance testing over all the groups. This was discovered just recently and because the other hospital groups don’t have cash balance plans we don’t meet the numbers and have not been in compliance for the last two years.

It was recommended to us to terminate the plan and to roll the money over into an IRA. We were told to keep that IRA separate from all other investments as it is “tainted” money.  My issue is I do a back door roth every year and now if I roll the 200K I have in this plan into an IRA I won’t be able to continue my back door contributions.

So what do people think of this situation? Would you consider rolling the money into my 401K profit sharing account realizing it is tainted? Should I roll it into an IRA and just stop doing the back door roth? Should I roll it into an IRA and then pay taxes on the amount to convert it into a roth? Not sure if I can even do that.  Any other thoughts on how to deal with this money while still being able to continue with the back door roth. I am 38 and still have many years of contributing ahead of me.

Thanks in advance for your help and advice.

Click to expand...

Yes indeed, retirement plan is the first thing that has to be looked at during any merger, that's why groups should hire ERISA 3(38) fiduciaries to manage their plans, because this is really basic stuff that can cost you money and effort to correct if not done properly.  Terminating is not going to solve your issues. You will of course need to terminate the CB plan, but not before some cleanup is done. Just like with a tax return, filing and forgetting is a strategy, but I wouldn't want to play that game if the plan has errors on its books. The group is on the hook, and so are the other groups that are part of the affiliated service group, most likely.  What has to be done is a voluntary compliance filing by a competent compliance expert/TPA. What might happen is you would have to pay taxes on the money contributed into a CB plan, among other things, possibly penalties, or provide a corrective employer contribution to all of the staff that was eligible. So you can't just close this plan and hope for the best without doing some type of correction. And whoever is providing advice to you at this point, or whoever your adviser was for the plan that did not tell you about affiliated service group - I would think they are liable for breach of fiduciary duty because controlled/affiliated service groups is probably the most basic thing that an ERISA fiduciary working with doctors and dentists should know about, unless of course they are not a fiduciary in the first place. And the same goes for the TPA/actuary providing services to the plan.  Any competent TPA/actuary would see this a mile away, so I'm assuming the plan is serviced by a big company (possibly with high fees and very little service).  Another reason why any group practice plan should have an independent TPA/actuary and independent ERISA 3(38) at the very least, so that issues like this can be avoided in the first place.

[jacoavlu]

Our small group 401k-PS plan uses a regional TPA and we don’t have a fiduciary. Each year we get a questionnaire from our TPA after the plan year closes, but before plan testing and valuation. There are questions about any business changes, acquisitions, mergers. Among other things. I would wonder if such occurred with OPs plan and if so, it would be interesting to review for content, and to see who completed it.

With regards to the OP and what to do next, I would not move any money until specifically instructed to do so by a competent legal professional as part of a greater plan. No point in getting ones IRA wrapped up in a mess unnecessarily.

[The White Coat Investor]

jshah9 wrote:

I am a radiologist in an 11 partner group that began a cash balance plan 4 years ago. Everything was going well until earlier this year when we found out we weren’t in compliance and have to terminate the plan. Now I need help and advice in what to do with the money that is in the plan.

Without getting into to much detail two years after we started the plan we merged with 8 other hospital groups in the same hospital system to increase our bargaining power and formed a mega group. In doing that we inadvertently became an affiliated service group and apparently all benefits and plans have to meet compliance testing over all the groups. This was discovered just recently and because the other hospital groups don’t have cash balance plans we don’t meet the numbers and have not been in compliance for the last two years.

It was recommended to us to terminate the plan and to roll the money over into an IRA. We were told to keep that IRA separate from all other investments as it is “tainted” money.  My issue is I do a back door roth every year and now if I roll the 200K I have in this plan into an IRA I won’t be able to continue my back door contributions.

So what do people think of this situation? Would you consider rolling the money into my 401K profit sharing account realizing it is tainted? Should I roll it into an IRA and just stop doing the back door roth? Should I roll it into an IRA and then pay taxes on the amount to convert it into a roth? Not sure if I can even do that.  Any other thoughts on how to deal with this money while still being able to continue with the back door roth. I am 38 and still have many years of contributing ahead of me.

Thanks in advance for your help and advice.

Click to expand...

The solution here doesn't seem so complicated to me.

# 1 Terminate the plan

# 2 Roll money into a separate IRA and leave it there.

# 3 Get mess cleaned up with professional help.

# 4 Continue making contribution step of Backdoor Roth IRA into a separate IRA. Don't do any conversions. Maybe this adds up to $10-20K by the time the mess is cleaned up.

# 5 When mess is cleaned up, roll IRA from CBP into a 401(k).

# 6 Convert the mostly non-deductible IRA to a Roth IRA paying taxes on any gains.

[litovskyassetmanagement]

The White Coat Investor wrote:

jshah9 wrote:

I am a radiologist in an 11 partner group that began a cash balance plan 4 years ago. Everything was going well until earlier this year when we found out we weren’t in compliance and have to terminate the plan. Now I need help and advice in what to do with the money that is in the plan.

Without getting into to much detail two years after we started the plan we merged with 8 other hospital groups in the same hospital system to increase our bargaining power and formed a mega group. In doing that we inadvertently became an affiliated service group and apparently all benefits and plans have to meet compliance testing over all the groups. This was discovered just recently and because the other hospital groups don’t have cash balance plans we don’t meet the numbers and have not been in compliance for the last two years.

It was recommended to us to terminate the plan and to roll the money over into an IRA. We were told to keep that IRA separate from all other investments as it is “tainted” money.  My issue is I do a back door roth every year and now if I roll the 200K I have in this plan into an IRA I won’t be able to continue my back door contributions.

So what do people think of this situation? Would you consider rolling the money into my 401K profit sharing account realizing it is tainted? Should I roll it into an IRA and just stop doing the back door roth? Should I roll it into an IRA and then pay taxes on the amount to convert it into a roth? Not sure if I can even do that.  Any other thoughts on how to deal with this money while still being able to continue with the back door roth. I am 38 and still have many years of contributing ahead of me.

Thanks in advance for your help and advice.

Click to expand…

The solution here doesn’t seem so complicated to me.

# 1 Terminate the plan

# 2 Roll money into a separate IRA and leave it there.

# 3 Get mess cleaned up with professional help.

# 4 Continue making contribution step of Backdoor Roth IRA into a separate IRA. Don’t do any conversions. Maybe this adds up to $10-20K by the time the mess is cleaned up.

# 5 When mess is cleaned up, roll IRA from CBP into a 401(k).

# 6 Convert the mostly non-deductible IRA to a Roth IRA paying taxes on any gains.

Click to expand...

You can't terminate the plan until it is cleaned up.  That would really mess things up.  It also takes a while to terminate it, so in any case the termination timing and procedure would depend on what the voluntary compliance filing results are.  So you wouldn't begin the termination process until there is a final word from the IRS as far as what should be done with the plan as far as contributions.

[jacoavlu]

Regarding WCIs post

 

^^^ clearly I’m just a novice but problem with above plan is the what if scenario where you never get to step 5. But rather the funds are deemed taxable. Or some portion is. So then you’re going to have to remove from the IRA. And whether or not CBP rollover funds and nondeductibe contributions are in separate IRA accounts at separate brokerages, really you only have one IRA. The funds are aggregated as far as the IRS is concerned. So in the case of a necessary removal from the IRA where the CBP funds are deemed taxable, can you segregate the rollover funds from the nondeductibe contributions? I have no clue. Just my thoughts.

[litovskyassetmanagement]

jacoavlu wrote:

Regarding WCIs post

 

^^^ clearly I’m just a novice but problem with above plan is the what if scenario where you never get to step 5. But rather the funds are deemed taxable. Or some portion is. So then you’re going to have to remove from the IRA. And whether or not CBP rollover funds and nondeductibe contributions are in separate IRA accounts at separate brokerages, really you only have one IRA. The funds are aggregated as far as the IRS is concerned. So in the case of a necessary removal from the IRA where the CBP funds are deemed taxable, can you segregate the rollover funds from the nondeductibe contributions? I have no clue. Just my thoughts.

Click to expand...

That's right, before there is a final determination, you don't do anything.  If CB is taxable, you have to undo a lot of things.  Ideally though you just make an employer contribution to the staff that was eligible, but this can get costly, so I'm not sure what to do.  I bet that in most cases people just pretend that nothing happened and go about doing everything assuming they won't get caught.  The right thing to do is nothing until the plan gets a determination from the IRS.

Also, I would get affiliated service group determination in writing as well.  People can be wrong about things either way.  Some situations are very tricky, so facts do matter.

[The White Coat Investor]

jacoavlu wrote:

Regarding WCIs post

 

^^^ clearly I’m just a novice but problem with above plan is the what if scenario where you never get to step 5. But rather the funds are deemed taxable. Or some portion is. So then you’re going to have to remove from the IRA. And whether or not CBP rollover funds and nondeductibe contributions are in separate IRA accounts at separate brokerages, really you only have one IRA. The funds are aggregated as far as the IRS is concerned. So in the case of a necessary removal from the IRA where the CBP funds are deemed taxable, can you segregate the rollover funds from the nondeductibe contributions? I have no clue. Just my thoughts.

Click to expand...

While that's true for Form 8606, I don't know that it is true in this situation.

[DMFA]

IDK about how to go about cleaning this whole thing up.  Excess employer contributions to qualified plans can be very difficult, and an employer can't simply return the contribution or distribute the contribution to the participant (you).

jshah9 wrote:

It was recommended to us to terminate the plan and to roll the money over into an IRA. We were told to keep that IRA separate from all other investments as it is “tainted” money.  My issue is I do a back door roth every year and now if I roll the 200K I have in this plan into an IRA I won’t be able to continue my back door contributions.

Click to expand...

I don't see how you can do this.  You don't get to terminate the plan, the employer does, and it's got excess contributions in it that need to be carried over on taxes and either have excise tax paid and either be brought to meet qualification or whatever the IRS decides...this is not nearly as simple as what is being proposed.  DBPs are not just a big IRA or even a 401(k), although excess employer contributions to 401(k) are a major headache as well.

At any rate, continuing to do Backdoor Roth IRA is kind of the least of your worries at this point, but I don't see why you couldn't continue to do so.  Should this DBP money ever end up in a Traditional IRA for you in a sanctioned manner, then just rollover that to a 401(k) or stop doing backdoor Roth (not the end of the world).  If you want to continue to make non-deductible contributions, and not convert them while you have a Traditional IRA balance you can't rollover, that's fine, too.

[jacoavlu]

The White Coat Investor wrote:

jacoavlu wrote:

Regarding WCIs post

 

^^^ clearly I’m just a novice but problem with above plan is the what if scenario where you never get to step 5. But rather the funds are deemed taxable. Or some portion is. So then you’re going to have to remove from the IRA. And whether or not CBP rollover funds and nondeductibe contributions are in separate IRA accounts at separate brokerages, really you only have one IRA. The funds are aggregated as far as the IRS is concerned. So in the case of a necessary removal from the IRA where the CBP funds are deemed taxable, can you segregate the rollover funds from the nondeductibe contributions? I have no clue. Just my thoughts.

Click to expand…

While that’s true for Form 8606, I don’t know that it is true in this situation.

I don’t know either. That’s why I would err on the side of doing nothing until someone with expertise in the precise matter told me what to do. I’m not yet sure the OP has such a person advising them.

[The White Coat Investor]

jacoavlu wrote:

The White Coat Investor wrote:

jacoavlu wrote:

Regarding WCIs post

 

^^^ clearly I’m just a novice but problem with above plan is the what if scenario where you never get to step 5. But rather the funds are deemed taxable. Or some portion is. So then you’re going to have to remove from the IRA. And whether or not CBP rollover funds and nondeductibe contributions are in separate IRA accounts at separate brokerages, really you only have one IRA. The funds are aggregated as far as the IRS is concerned. So in the case of a necessary removal from the IRA where the CBP funds are deemed taxable, can you segregate the rollover funds from the nondeductibe contributions? I have no clue. Just my thoughts.

Click to expand…

While that’s true for Form 8606, I don’t know that it is true in this situation.

I don’t know either. That’s why I would err on the side of doing nothing until someone with expertise in the precise matter told me what to do. I’m not yet sure the OP has such a person advising them.

Click to expand...

Excellent advice. I guess my main point is that the OP can probably still do Backdoor Roth IRAs because this IRA is likely eventually going to be able to go into a 401(k).