valuing plan freeze

[Guest Kline28]

I have a plan with a 6/1 plan year, and they have decided they want to freeze the plan to try to avoid a contribution for the current plan year. Accrual is based on 1,000 hours. Assuming they use a freeze date of 11/15/02 (to keep anyone from accruing a benefit this year) and distribute the 204(h) notices by 11/1, can they run the valuation for the 6/1/02 plan year (beg. of the year val) with the frozen plan even though the amendment and freeze date are more than 2 1/2 months into the plan year?

[david rigby]

Yes.

the valuation can reflect any amendment that becomes effective during the plan year, as long as it is adopted prior to 2-1/2 months after the end of the plan year. But be careful to recognize the correct benefits. If the valuation does not include any normal cost, that is essentially assuming that no one will have 1000+ hours prior to the freeze. Is that a realistic assumption?

Another caution: the effective date of the freeze will be the later of the effective date in the amendment or 45 days after the distribution of the 204(h) notice.

Final caution: the IRS has stated informally that the use of the Aggregate Method is not appropriate for a frozen plan. Gray Book. Let me know if you need the specific cites.

[Blinky the 3-eyed Fish]

Pax, to clarify, only 15 days advance notice is required for a small plan (under 100 participants).

[AndyH]

1. Doesn't the normal cost need to be pro-rated for the year?

2. Is there a Kline27?

[Blinky the 3-eyed Fish]

Negative, prorating the normal cost and amortization bases occurs with a plan termination date or a short plan year (circumstances notwithstanding), not a benefit freeze.