"Soft freeze" and 410(b)

[AndyH]

A DB plan is amended to close participation to employees who would enter or of after Date X.

Is anyone aware of/had a ruling on the IRS' view of whether the benefiting group in the plan would constitute a reasonable classification of employees for purposes of the NCT portion of the Average Benefit Test?

Or must such a group pass the ratio/percentage test?

[Guest GMP]

If you've shut down participation, but not accruals, then the group of all employees who are eligible to participate, or could have become eligible in the absence of the freeze, will have to pass coverage testing.

[AndyH]

Maybe my question was unclear, but I am asking a specific technical question about coverage testing.

[J Simmons]

I am not aware of such a ruling on a soft freeze being a NCT. I would not chance it without getting a ruling, or doing the ratio percentage testing and hard freezing as of the day before the first plan year it appears likely the testing would fail.

As a policy matter, the IRS might want to deem soft freezes to be NCTs so that it wouldn't inevitably lead to a hard freeze as those in the DB plan before the soft freeze go up the earnings scale and passed the HCE earnings threshold in disproportionate numbers.

Some employers might actually be 'looking for cover' from the otherwise inevitable ratio percentage test failure some plan year, to then hard freeze the plan in the face of employee pushback.

[John Feldt ERPA CPC QPA]

I also have not seen or heard of such a ruling yet. I prefer the cautious approach of explaining to the client that the plan will need to pass ratio percent each year.

We kind of discussed this here:

http://benefitslink.com/boards/index.php?a...st&p=144256

[AndyH]

Thanks for the comments and the link.

A major difference between the two situations is that my current situation involves close to 200 actives so 401(a)(26) will not be a problem for a while. Contrast this with 32 actives where the 50 employee rule is unavailable.

With 200 people and also a 401(k) plan that I can cross test, I am confident of passing the Average Benefit Test for quite some time, if it is available.

It all comes down to the reasonable classification question. I've always wondered how the IRS would view this within the context of a soft freeze or also in the case of "employee choice" elections, which I have never advocated. There must be rulings out there.

[Mike Preston]

I vote strongly for it being a reasonable classification. That, and $4.95 might get you a frappucino.

I believe the regs have an example indicating that one of the acceptable criteria for determination of a reasonable group is hire date. It would seem to me that in the case of a soft freeze the effect is to demark on the basis of hire date. QED.

[AndyH]

I have a variation of the old question started eons ago.

Sponsor wants to give DB participants choice of opting out of existing DB plan and into DC plan. Do the people who opt to stay in the DB plan constitute a reasonable classification for 410(b) purposes?

Has anyone obtained a ruling on this issue?