use of EGTRRA 401(a)(17) limit in frozen DB Plan

[EGB]

DB Plan is frozen - would anything prohibit a frozen db plan from stating that the compensation used under the plan for determining benefits will be the current 401(a)(17) limit (ie, 200,000 for 2002) for all years considered? It seems clear you can do this in an on-going plan (see Notice 2001-56), but I am not as clear about a frozen plan, though it seems you can still do it.

For example, plan was frozen 12-31-99. Participant terminates employment 1-1-00 and is a vested term. Vested term. is now due to be paid his benefit, which is calculated at 1.3% of average monthly earnings (looking at last five years prior to termination of employment) times years of service. We want to define earnings to include up to 200,000, rather than the limits in place during the last five years of his employment.

I believe this is ok, even if the plan is frozen??

[Guest Keith N]

Does 1.401(a)(4)-5 give you any problems? It's a facts and circumstances determination, but it's something you may want to consider.

For some reason I think the IRS has a stated position on this issue, but I couldn't find anything in my quick look. If it's out there, I'm sure someone on this Board knows it.

[EGB]

Keith - thanks for your comment - I agree that such an amendment would certainly favor HCEs and could cause a problem under 1.401(a)(4)-5. However, Notice 2001-56 seems to specifically allow retroactive use of the 200,000 limit, which, it seems to me, would always favor HCEs. I suppose Notice 2001-56 does not specifically grant any relief from the provisions of 1.401(a)(4)-5, but applying 1.401(a)(4)-5 would certainly greatly hamper the ability to apply the 200,000 limit retroactively.

I would appreciate other comments on this 1.401(a)(4)-5 issue raised by Kevin (which would apply in both a frozen and non-frozen plan context) as well as on the issue of whether the 200,000 compensation limit can be applied retroctively in a frozen plan, as described in my original post.

[AndyH]

I have to believe there would be problems under 401(a)(26) or 410(B) with this "indexing". I haven't researched it; just my gut reaction-either it's frozen or it's not. Wouldn't these people at $200K be benefitting under 410(B) and/or 401(a)(26)?

Also, what is the justification for giving selective credit for post-freeze changes?

[david rigby]

I'm skeptical also. Sounds to me like a plan amendment, which means the plan is not frozen. Or perhaps it is frozen, then amended, and frozen again.

[EGB]

Andy- I don't see this as giving "selective credit for post-freeze changes." First, it seems to me that the "selective credit" issue would potentially apply to both frozen and non-frozen plans. Second, it seems that Notice 2001-56 has given the go ahead to apply the comp. limit retroactively, at least in the context of a non-frozen plan.

401(a)(26) and 410(B) - any comments on this would also be appreciated.

All defined benefit plans out there have to be dealing with most of these issues in deciding whether to implement the 200,000 limit, and if so, how to implement it.

[EGB]

pax - a frozen plan can be amended - for example, it must be amended for required tax law changes; maybe optional changes, like you said, would have to be considered frozen, amended, and frozen again, to pass muster.