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Pension Question - Cessation of Employer Contributions


WR_Smith
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Hi, 

I have been with a large employer for several years that has had an employer-funded pension plan. 

The employer announced that at the end of this year (2022) it is going to stop adding contributions to that plan "because other companies don't do that anymore". 

I do not fully understand the possible impacts / implications for me personally.  This makes me nervous.  I cannot withdraw or roll over my pension proceeds without leaving the company, but it also seems me that the pension can only start to dissipate over time once further contributions are "frozen". 

My immediate problem is I do not even know what specific questions to ask, or what to monitor in deciding whether I should "take the money and run" or stay with the company.  From my point of view, anyway, the current sum involved is not insignificant - around $250K. 

In lieu of 401(k) contributions, over the years I have looked to the pension as a resource for future retirement.  I have a 401(k), but there is not much in it.  

Any thoughts / ideas / suggestions?

Thanks!

W.R. Smith

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You do not say what type of pension plan this is - there are a few possibilities and the answers vary depending on plan type.

If it is a defined benefit plan, including a cash balance plan, it is subject to ERISA minimum annual funding requirements. If the plan is frozen (no current benefits are being earned) then if the plan is well funded the employer may not need to physically contribute. My guess, by your comment that you have $250k, is that this is a cash balance pension plan. Your employer, saying they will stop contributing, was stating very generically (I assume) that they are freezing the plan and will stop adding contribution credits to your account. Your account will still be required to get credited with interest according to plan terms until it is distributed, whether after your termination of employment or the plan's termination. Regardless, the employer will need to fund the plan each year in accordance with ERISA requirements or be subject to excise taxes. Also note as a large plan (assuming over 100 employees) it is required to have an annual audit by qualified CPA. Finally, each year you are required to get an Annual Funding Notice that describes the relative health (funded status) of the plan.

If this is a money purchase pension plan, then it is like a profit sharing 401(k) except with required annual contribution obligations. Employers may amend these plans to cease future contributions but your account continues to be invested as before but w/o those future contributions.

I encourage you to review your Summary Plan Description(s), or request them if you can't locate.

The industry trend for larger companies has certainly been away from pension plans and emphasizing 401(k) plans. Regarding your individual retirement outlook, I suggest consulting a qualified and trusted advisor. Maybe your employer has resources (financial wellness plan?), the advisor to the 401(k) plan, your accountant?

Good luck.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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If you furnish the EXACT name of the Plan we can tell you what sort of Plan you have.   

A "ension" Plan to many of us is a term of art meaning a defined benefit plan where you retire after a certain number of years or service or at a certain age and receive a lifely annuity based on your years of service and income history, and when you die there is a survivor annuity for a spouse or former spouse.   Unless it's a cash balance plan you cannot look at a statement and know what the plan is worth. 

We use "retirement" plan is shorthand for a defined contribution plan like a 401(k) or a profit sharing plan or a 403(b) plan where there is a certain dollar amount in the plan that you can pay out to yourself when you leave the employ of the Plan Sponsor, for example, by rollover to an IRA account, or by direct taxable distribution, or in an annuitized payout.  You can look at a periodic statement and know exactly how much is in the Plan.   

Since you used the word "freezing" you likely have a defined benefit plan of some sort. 

Here is an article explaining how it works -

 https://www.thebalancemoney.com/what-is-a-pension-freeze-5080121#:~:text=When a company wants to,participants may no longer grow.

Here is another https://www.groom.com/wp-content/uploads/2017/09/33_FreezeArticle-PostPPA-Final.pdf

 

 

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WR_Smith, regardless of what type of plan this is, there are strong protections in the law for what is called your "accrued benefit," which is basically the amount you already had earned as of the date of the freeze and that you would have received at some point even if you had terminated employment on the same day as the freeze is effective. But assuming you are an employee of a business (public or private) or charity, and not a state or local government employee, the law does not protect your right to continue to earn the benefits you had an expectation of earning in the future if you had continued to work for this employer and it had not frozen your plan. So you will need to think about saving more in the company's 401(k) going forward or taking some other action, such as finding an employer that has a pension plan for which you would be eligible for the remainder of your working life, although depending on a variety of factors that may not be practical.

The only protection for future, expected benefit accruals under U.S. pension law for nongovernmental employers are procedural, i.e. something called a "204(h) notice" that is supposed to describe the freeze. Sometimes employers don't fully meet their procedural obligations, but that is not usually the case.

Some employers make higher matching or other contributions to employees' 401(k) accounts when they freeze their pensions.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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