April 17, 2018 - "Whether 'tis nobler in the mind to suffer the slings and arrows" of a defined benefit (DB) plan, or to structure attorney fees on a regular basis is something the Bard of Avon can't help us much with.
But for personal injury attorneys who often ask us why they should consider structuring their fees when they could "simply" establish a defined benefit (DB) plan instead, we hope this primer on the subject will prove helpful if not very Shakespearean.
Pensions
Once upon a time (though more recently than the first printing of
Hamlet), people worked for companies that offered employees traditional pensions providing them with predictable, guaranteed lifetime income upon retirement. These DB plans were great motivators for employee recruitment and retention.
In those days of yore, the employer shouldered full responsibility for ensuring the company investment experience was sufficient to meet its fixed future financial commitments made to retirees. This became an obligation many employers were ultimately only too happy to eliminate.
As desire to transfer responsibility for retirement income to its employees grew, a gradual shift toward defined contribution (DC) plans, like 401(k)s and 403(b)s, began to emerge in the late 1970s. Many DB plans were eventually closed or folded into DC plans.
While both options are still in use today, DC plans are far more common than DB plans.
DB and DC Plan Limitations
There are still many good reasons an attorney or law firm may wish to establish a formal DB or DC plan, but flexibility isn't one of them.
On its website, the IRS lists
21 Common Qualified Plan Requirements which give a clear indication establishing and maintaining one of these plans is not for the faint of heart. Some very unyielding issues to deal with here.
Since individual compensation can fluctuate with verdict values and case volume, personal injury attorneys can't always accurately predict income from one year to the next making the ongoing commitment of funding a DB plan challenging.
In addition to limiting contributions to the lesser of
a) 100% of the participant's average compensation for his or her highest 3 consecutive calendar years or b) $220,000 (2018),
DB plans are the "most costly type of plan" and the "most administratively complex" according to the IRS.
Because lawsuits, which may take years to develop, don't always resolve according to the attorney's cash flow preferences, timing of income is uncertain and funds for retirement planning purposes not always readily available.
Wouldn't it be great if there were a simpler solution?
From Our Archives:
Check out our handy E-Guide on Structured Attorney Fees
at our companion Website; MyStructuredFee.com
When Congress passed the
American Jobs Creation Act of 2004, it included a nice little gift to contingency fee-based lawyers looking for a simpler way to distribute their income over several years on a tax-advantaged basis.
AJCA2004 created
Section 409A of the Internal Revenue Code to regulate
nonqualified deferred compensation between service providers and service recipients. The law's final regulations (2005-1) included clarification that most contingency fee-based attorneys met the definition necessary to exempt them from the service provider limitations of the law.
Structuring of legal fees had been popular for years, but once 409A became law activity increased and market availability improved. While partnership agreements might prevent some attorneys from doing so, structured attorney fees are one of the simplest and most cost-effective ways for plaintiff attorneys to secure their financial futures.
