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Vesting upon soft freeze

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IF a plan freezes accruals for participants whose age plus service are less than 50 and freezes accrual service for those whose age plus service is at least 50 (but recognizes compensastion increases), must that plan fully vest the under 50 group?? Thanks.

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Guest Steve C

I disagree, Effen. A freeze would constitute a partial termination, requiring full vesting "to the extent funded" under IRC 411(d)(3).

If the plan is underfunded, with assets less than the present value of vested benefits, the plan is not required to fully vest. On the other hand, if assets exceed the value of accrued benefits, full vesting should be provided to affected particants.

If assets fall between PVVB and PVAB, then arguably you need to provide some increased vesting to satisfy the "to the extent funded" language. It may be more practical, though, to simply grant the full vesting.

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1.401-6(b)(2)

(2) For purposes of this section, the term termination includes both a partial termination and a complete termination of a plan. Whether or not a partial termination of a qualified plan occurs when a group of employees who have been covered by the plan are subsequently excluded from such coverage either by reason of an amendment to the plan, or by reason of being discharged by the employer, will be determined on the basis of all the facts and circumstances. Similarly, whether or not a partial termination occurs when benefits or employer contributions are reduced, or the eligibility or vesting requirements under the plan are made less liberal, will be determined on the basis of all the facts and circumstances. However, if a partial termination of a qualified plan occurs, the provisions of section 401(a)(7) and this section apply only to the part of the plan that is terminated.

[emphasis added]

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I agree 100% vesting is required for a partial termination, but I don't agree that freezing of benefit accruals automatically results in a partial termination. However, my answer was too specific and ignored that important consideration. Thanks for the clarification.

dmb: You need to look at the specifics of your situation. I assume you have CCH or RIA or whatever and you should research this as it applies to your client.

Partial Plan Termination Defined (From CCH)

In addition to requiring vesting on full plan termination, the Tax Code calls for vesting upon the partial termination of a plan (.03 ).

Code Sec. 411(d)(3) does not define partial termination. Whether or not a partial termination occurs is, under the governing regulations to be determined on the basis of all of the facts and circumstances of a particular case. For example, a partial termination may occur when a group of employees is excluded from coverage through amendment or discharge, when benefits or employer contributions are reduced, or when eligibility or vesting requirements are made less liberal (.06 ). In addition, plan amendments that adversely affect the rights of employees to vest in benefits under the plan may also be determinative.

A special rule applies in the case of defined benefit plans. If the plan ceases or decreases future benefit accruals, a partial termination occurs if it results in a potential reversion to the employer maintaining the plan. The determination of whether a defined benefit plan ceases or decreases future benefit accruals must be made by reference to the plan as a whole and not to a part of the plan. Thus, even though a plan amendment resulted in decreased benefit accruals for 29 to 39 percent of all plan participants, it did not cause a partial termination because the amendment effectively increased future benefit accrual in the aggregate for all plan participants.

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Guest Kabert

Take a look also at the IRS's Plan Termination Guidelines, which I think is part of the IRM. The guidelines are also included at the back of the TMP for Plan Terminations. I think the language used in the guidelines is whether the freeze increases the likelihood of a reversion to the plan sponsor (which could be the case if the plan being frozen is overfunded).

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