Frozen Benefit / Frozen Participants

[Penman2006]

I am taking over a DB plan on a nonstandardized prototype document and that document has, as part of the benefit provision choices, an election that "benefits are frozen as of blank date". There is nowhere to check a box that says "no new participants as of blank date". It seems silly that you would have new entrants with no ability to accrue a benefit, but in my mind freezing benefits and freezing new entrants are separate issues, yet I have seen more than a few instances upon takeover of all benefits being frozen but no amendment to freeze new participants. What am I missing here?

In this particular case benefits were frozen in 2006 and technically some new entrants have come in since then. Now I wonder, for this particular case, if I freeze new entrants, which I can't do within the prototype, would that take the plan out of prototype status?

Any input is appreciated.

[Andy the Actuary]

So long as there are attornies who have never performed an actuarial valuation, calculated a benefit, or prepared a 55500 or PBGC 1, there will always be frozen pension plans that admit new participants. Ditto, there will always be pension plans that hire employees after their normal retirement date (i.e., after age 65 and no 5 year from date of participation rule) so that the actuarial increase of their normal retirement benefit is $0. Actually, we witness the phenomenon where a participant can't retire at his/her normal retirement date.

While this doesn't answer your question, it comforting to know you are observing a common problem.

[tymesup]

Under Eligible Employees, could you exclude those hired after a particular date? That would probably preserve your prototype status. I think the Relius folks were OK with this idea.

[jpod]

I'm not taking sides, but from a lawyer's perspective, and based on Penman's description of the document, I would feel very comfortable taking the position nobody became a participant after Date X. To take the position that someone can become a "participant" in a plan that would provide them with zero benefits seems kind of pointless. What exactly are the problems vis a vis actuarial valuation, benefit calculation, Form 5500 and Form 1 preparation?

[Andy the Actuary]

The issue is, if not excluded, the Plan would be required to count such participant for 5500 census and pay PBGC premiums as well as include as a participant in the valuation. In addition, the Plan would need to provide all communications (SPD, SAR, etc.)

While I would defer to the attorney as the one who had to defend the plan to the IRS and PBGC, I would certainly want a legal opinion that such persons were not covered if I was preparing the 5500 and PBGC forms and advising the client not to provide communications. This, indeeds, seems like a pointless issue, but clearly there are those of us who were toilet trained too early that worry about stuff like this.

I can't tell you how many one-person pension plans I've terminated where before the IRS would opine on the 5310, wanted a 401(a)(26) demonstration. How pointless but I simply produce the superflous demo because otherwise the IRS cannot complete their checklist.

[jpod]

Andy: I could not agree with you more about avoiding these issues before the fact with better drafting. However, if you were in Penman's shoes, given the "cards" you were dealt, would you advise the client to pay the PBGC fees for the "phantom" participants, and include them on the 5500 as "participants," include them in the actuarial val. as such, and give them plan disclosures? Would you really demand a legal opinion to handle it differently? Would you recommend that the client go off prototpye, or find a better prototype, just for the sake of resolving this issue?

[Andy the Actuary]

If I had a Plan that was going to be frozen, I would recommend the client go off prototype. Such plan is preparing for eventual termination and I would prefer to have an attoney involved even if such attorney amends the prototype changing its character to an indivdually designed plan.

If the client wished to retain the prototype, that's fine. But, yes, I feel bound to follow the Plan document and if the document does not provide for exclusion of new participants, then new hires would not be excluded.

All this said, while I've been the actuary for a lot of DB plans that have been frozen, I've never (I mean never) been in the position of taking over a frozen plan where the problem existed. But if I did, the situation would have to be researched to determine if there is an easy out to my fundamentalist position (such as some plan provision that may circuitously achieve the exclusion). I certainly don't pretend to speak for all actuaries; I just don't feel comfortable making up my own law.

[tymesup]

I don't think you would have to pay PBGC premiums for participants with no accrued benefit. Also, you don't have to provide benefit statements unless they ask for them.

However, you're still stuck with providing SPDs, SARs, etc.

[Andy the Actuary]

Sounds like we will now have to thumb-wrestle to determine whether or not a zero accrued benefit constitutes benefits liabilities.

Note, if a Plan does not contain the deemed distribution rule and does not have a mandatory cashoout provision, terminated non-vested participants who have not incurred a one-year break in service are considered participants. In short, there is precedent for counting as participants persons who have no accrued benefits.

[tymesup]

From the 2001 Bluebook

www.pbgc.gov/docs/2001bluebook.pdf

QUESTION 9

Premiums — Floor Offset Plans

Under a floor-offset defined benefit plan, a participant’s benefit is reduced by the benefit

attributable to the participant’s account balance in a separate defined contribution plan. Suppose

that the benefit attributable to a floor-offset plan participant’s defined contribution plan account

balance completely offsets the participant’s benefit under the floor-offset plan as of the premium

snapshot date. In view of the change in the definition of “participant” for plan years beginning

after 2000 (under which an individual is counted as a participant only if the plan has benefit

liabilities with respect to the individual as of the snapshot date), must the plan pay premiums for

the participant?

RESPONSE:

For administrative convenience, the PBGC will accept a simplified test for excluding the

participant from the participant count in a floor-offset plan. Under the simplified test, the plan

administrator would determine whether, under the terms of the floor-offset plan, a benefit would

have been payable to the participant from the plan if, on the premium snapshot date, the

participant had been fully vested, had terminated employment, and had been eligible for a

distribution. If no benefit would have been payable, the participant may be excluded from the

count. In the case of a deceased participant with one or more living beneficiaries not in pay

status, the plan administrator would apply the same test to each beneficiary, assuming (for

purposes of the test) that the beneficiary was eligible for a distribution on the snapshot date.

Whether a participant’s benefit must be taken into account in computing unfunded vested

benefits for purposes of the variable-rate premium depends on whether the plan has a current

liability for vested benefits of the participant. A floor-offset plan has no vested current liability

for a participant if and only if the offset equals or exceeds the gross vested benefit from the flooroffset

plan at every decrement age for every type of decrement the actuary would use to value

vested current liability. Similar rules would apply for a deceased participant with a living

beneficiary not in pay status.

[Andy the Actuary]

Thank you for the reference. It would appear that you could extrapolate (and you did) from this discussion that the participants who sneak into the plan after it is frozen would be excluded from the PBGC premium process.

However, as you stated, this simply addresses the PBGC and not the IRS/DOL so would still have to count on 5500 and provide useless communication.

[AndyH]

I think this is a fairly recent change on the part of the PBGC to allow these people to be excluded.

Other than that, I would not "not count" such people without legal advice or affirmative informed client instruction.

I think this used to be a common "error" that is no longer as common, but I have seen it many many times.

[tymesup]

We have some floor/offset plans with interesting backgrounds. Paying flat-rate premiums for zeroes would be another large straw on a heavily laden camel.

Luckily, we don't get many of these frozen accrual plans.We do look to close the barn door before the newer horses get in.

[Larry M]

what happens if the plan becomes top heavy? Do new participants get the top heavy minimums?

[tymesup]

416©(1)©(iii) provides an exception to the minimum benefit if no Key Employee benefits for the Plan Year. Before 2002, there was no exception.

Note the top-heavy minimum vesting schedule does apply.

[Penman2006]

This has been helpful. Thanks to everyone that responded. Tymesup, thanks for your suggestion on the document. I think I can finagle it so I keep it within the prototype and exclude anyone going forward.

[Blinky the 3-eyed Fish]

Two things struck me about the prior posts:

1) I didn't realize some people had issues with whether or not a person with zero benefits constitutes a participant for PBGC premium payment purposes.

2) Even if a plan didn't freeze participants, they could always do so immediately, effectively kicking out those people with zero benefits from the plan. It's a correctable situation because eligiblility is not a protected benefit.

[Penman2006]

How would you amend out the participants with a $0 accrued benefit, simply by stating that in an amedment................"All participants with a zero accued benefit are no longer considered participants"? What about on a prototype plan adopting agreement wrt preserving the prototype status?

[AndyH]

Two things struck me about the prior posts:

1) I didn't realize some people had issues with whether or not a person with zero benefits constitutes a participant for PBGC premium payment purposes.

2) Even if a plan didn't freeze participants, they could always do so immediately, effectively kicking out those people with zero benefits from the plan. It's a correctable situation because eligiblility is not a protected benefit.

I don't think PBGC counting is any longer an issue. It is clear that zero accrued benefit people can now be excluded (I don't think this was true a few years ago). The participant count item is still an issue for other ERISA purposes. I don't think you can amend out their right to an SPD, to be counted for 412(l) purposes, for audit purposes, etc.

Pre-EGTRRA it was also a top heavy issue. So, yes, the importance is dwindling and the PBGC is sooo forward thinking.

[david rigby]

I suggest careful review w/r/t participants with a zero accreud benefit.

- If the plan is partially frozen (for example, frozen only to new entrants) then it does not get the free pass on top heavy minimums.

- Some plans have a minimum benefit that applies only at NRD. Unless that has been amended away, it could apply to one of these zero participants.

[Blinky the 3-eyed Fish]

In response to how you could amend out those that entered the plan after it was frozen, how about excluding "those participants who did not enter the plan before XX/XX/XXXX"? Then the $0 benefit people are no longer participants and don't have to receive SPD's, etc. It would be the same concept if a plan suddenly excluded a class of employees.