Plan Freeze

[Gary]

This arrogant attorney makes the statement that a DB plan can be frozen and thus have no funding requirement.

My understanding, is that while future plan accruals can be frozen, a minimum required contribution calculation must be performed and may still result in a contribution greater than $0.

Seems pretty straightforward to me.

Any comments on the above?

[Andy the Actuary]

This arrogant attorney makes the statement that a DB plan can be frozen and thus have no funding requirement.

My understanding, is that while future plan accruals can be frozen, a minimum required contribution calculation must be performed and may still result in a contribution greater than $0.

Seems pretty straightforward to me.

Any comments on the above?

This is a rugged business, especially in times of lengthy confusing, conflicting, and misleading laws, each paragraph of which refers to several other paragraphs. On this particular issue, there is no doubt you are unequivocably 100% without a doubt in no uncertain terms correct so don't even think of questioning your instincts. It is possible that while the plan may have no funding requirement, it has nothing to do with it being frozen but rather its being well-funded.

You may wish to take the Missouri approach and offer, "This is not my understanding nor the understanding of other practitioners I've talked to. Perhaps, there is some section of the IRC or IRS regulations or other federal guidance that have been overlooked and would appreciate your providing citations. Oh, and by the way, you are a . . ."

[AndyH]

What if it is a 412(i) plan, Ned's favorite? Same answer?

[mwyatt]

Given that the correlation between freezing and underfunded seem to be pretty high (and just wait until you crank out the 2009 numbers), seems a dim hope under PPA that you will end up with $0 minimum funding. Have yet to see an example when the 100% vesting kicks in on freeze situation, since usually the freeze is a result of things not doing so well, to say the least.

Stand your ground with the attorney.

[Belgarath]

I don't believe you can "freeze" a 412(e)(3) (formerly 412(i)) plan. As soon as you do, it no longer satisifes the level premium requirement, and drops out of 412(e)(3) status, and is then subject to the normal minimum funding requirements.

This brings up another issue, somewhat related. Those of you familiar with my posts know that I'm not an actuary, so sometimes I don't ask these DB questions quite "right" but I'll give it a shot. Suppose you have a plan that had a NRA of 58, which due to the recent guidance changed to age 62. The plan was frozen prior to the change. The participant's benefit was reduced for 415 due to less than 10 years of service. Now, if the participant keeps on working, does the benefit increase for each year until the 10 years of service are attained, or is it truly "frozen" at the reduced level at the time of the freeze? I think it is the former, but I'd love to hear from someone who actually knows!

[david rigby]

I think that depends on the precise wording of the freeze amendment.

[FAPInJax]

I believe the IRS took the position that the freeze was absolute. No creeping 415 issues <G>.

[SoCalActuary]

This brings up another issue, somewhat related. Those of you familiar with my posts know that I'm not an actuary, so sometimes I don't ask these DB questions quite "right" but I'll give it a shot. Suppose you have a plan that had a NRA of 58, which due to the recent guidance changed to age 62. The plan was frozen prior to the change. The participant's benefit was reduced for 415 due to less than 10 years of service. Now, if the participant keeps on working, does the benefit increase for each year until the 10 years of service are attained, or is it truly "frozen" at the reduced level at the time of the freeze? I think it is the former, but I'd love to hear from someone who actually knows!

Your participant still has the right to receive their accrued benefit payable at age 58. At the point in time where the actuarial equivalent of the age 58 benefit exceeds the 415 limit, you cannot increase the monthly equivalent of the age 58 benefit. From that point forward, the participant is forfeiting their benefit, so you must give a notice of suspension of benefits.

In essence, the change of the allowable age 58 benefit to the excessive age 62 benefit is a reduction in value to the participant. Further, it produces an actuarial gain because it assumes that the participant will forfeit a portion of their accrued benefit.

[Belgarath]

SoCal - can you elaborate a bit on your penultimate sentence? When it comes to DBspeak, I'm one of the unwashed masses, so these things sometimes fly right by me. How is the increase a reduction in value? Or I probably asked the question wrong to start with, so let me try some wildly stupid numbers just for sake of illustration. Suppose at age 58 the accrued benefit was $6,000/month. But due to less than 10 years, 415 limited it to $4,500/month. Benefit formula is then frozen. Now you change NRA to 62, and at 62 the participant will have the full 10 years. So if I'm understanding correctly, in spite of the freeze, the participant's benefit that can now be paid will be $6,000.

First, is that right? Second, if it is, can you explain where a reduction in value comes in? (if this requires a lot of actuarial background in order to understand it, then please don't waste your time trying to explain it to me, I'll just take your word for it!)

Thanks again.

[SoCalActuary]

SoCal - can you elaborate a bit on your penultimate sentence? When it comes to DBspeak, I'm one of the unwashed masses, so these things sometimes fly right by me. How is the increase a reduction in value? Or I probably asked the question wrong to start with, so let me try some wildly stupid numbers just for sake of illustration. Suppose at age 58 the accrued benefit was $6,000/month. But due to less than 10 years, 415 limited it to $4,500/month. Benefit formula is then frozen. Now you change NRA to 62, and at 62 the participant will have the full 10 years. So if I'm understanding correctly, in spite of the freeze, the participant's benefit that can now be paid will be $6,000.

First, is that right? Second, if it is, can you explain where a reduction in value comes in? (if this requires a lot of actuarial background in order to understand it, then please don't waste your time trying to explain it to me, I'll just take your word for it!)

Thanks again.

In your example, an accrued benefit payable at age 58 is $6,000. But the plan limited the accrued benefit to $4,500, presumably because of the 100% salary limit.

But in the earlier discussion, you discussed an accrued benefit payable at age 58, which is then converted into an equivalent benefit payable at age 62. Please clarify which fact pattern you are using.

Also, remember that future years of service have not been earned yet. Until the year has elapsed, the service does not count.

[AndyH]

I think that is it, B, you seem to be somehow crediting service or participation that will never get credited if the plan is "frozen". So the age 58 service or participation limit will remain forever applied as long as the plan is frozen.

[Belgarath]

Ok, it sounds like I've been mixing apples and oranges.

"In your example, an accrued benefit payable at age 58 is $6,000. But the plan limited the accrued benefit to $4,500, presumably because of the 100% salary limit.

But in the earlier discussion, you discussed an accrued benefit payable at age 58, which is then converted into an equivalent benefit payable at age 62. Please clarify which fact pattern you are using."

SoCal - I was using the former. So I guess what I'm trying to confirm is that if the participant keeps working to the new NRA of 62, and gets to the 10 years of SERVICE, the $6,000 benefit would be payable in spite of the freeze that occurred at age 58. Or, is the benefit payble still stuck at $4,500?

Thanks again!

[Guest RBlaine]

Ok, it sounds like I've been mixing apples and oranges.

"In your example, an accrued benefit payable at age 58 is $6,000. But the plan limited the accrued benefit to $4,500, presumably because of the 100% salary limit.

But in the earlier discussion, you discussed an accrued benefit payable at age 58, which is then converted into an equivalent benefit payable at age 62. Please clarify which fact pattern you are using."

SoCal - I was using the former. So I guess what I'm trying to confirm is that if the participant keeps working to the new NRA of 62, and gets to the 10 years of SERVICE, the $6,000 benefit would be payable in spite of the freeze that occurred at age 58. Or, is the benefit payble still stuck at $4,500?

Thanks again!

I've kept service at the freeze date because of the language in Section 5.18 of the LRM:

Section 5.18. Year of Participation: The participant

shall be credited with a Year of Participation (computed to

fractional parts of a year) for each accrual computation

period for which the following conditions are met: (1) The

participant is credited with at least the number of hours

of service (or period of service if the elapsed time method

is used) for benefit accrual purposes, required under the

terms of the plan in order to accrue a benefit for the

accrual computation period, and (2) the participant is

included as a participant under the eligibility provisions

of the plan for at least one day of the accrual computation

period. If these two conditions are met, the portion of a

year of participation credited to the participant shall

equal the amount of benefit accrual service credited to the

participant for such accrual computation period.

IMO, if he/she is not credited with a year of benefit accrual service, then they don't get the YoP for 415 purposes.

[SoCalActuary]

IMO, if he/she is not credited with a year of benefit accrual service, then they don't get the YoP for 415 purposes.

The analysis makes sense for the dollar limit adjustments to 415 benefits. But the salary limit to 415 is based on years of employment service. So an employee who works after the freeze of benefits continues to get years of service, but not years of participation.

But back to the original issue: If an employee has an accrued benefit payable at age 58 that would turn into a larger benefit at a later age, would that larger benefit exceed their 415 salary limit? If so, you are faced with two choices. When the benefit exceeds the salary limit, then you must either pay benefits or issue a suspension of benefits notice.

Further, I believe it is an unreasonable actuarial assumption that participants will voluntarily forfeit a future benefit.

Take an extreme example. Participant has average pay of $2,000 per month, with 6 years of service. Max monthly benefit is $1,200 as 415 salary limit. Accrued benefit payable at age 55 is $800. By age 60, the actuarial equivalent of 800 at 55 is 1200 at 60. It is unreasonable to assume that the 1200 will be payable at age 65, because that assumes the participant gave up 5 years of payments from 60 to 65.

Bel's argument is that the person will have more years of service by that date, so the maximum benefit might be $2,000.

But that argument relies on future service which has not yet happened. The net result of this scenario is that the participant has not yet given up any rights to a benefit at 55 of 800. But the funding calculation purposely understates the liability if it assumes 1200 at age 65. This is just a clever scheme to get around the PPA funding rules.

[Guest saeissler]

IMO, if he/she is not credited with a year of benefit accrual service, then they don't get the YoP for 415 purposes.

The analysis makes sense for the dollar limit adjustments to 415 benefits. But the salary limit to 415 is based on years of employment service. So an employee who works after the freeze of benefits continues to get years of service, but not years of participation.

But back to the original issue: If an employee has an accrued benefit payable at age 58 that would turn into a larger benefit at a later age, would that larger benefit exceed their 415 salary limit? If so, you are faced with two choices. When the benefit exceeds the salary limit, then you must either pay benefits or issue a suspension of benefits notice.

Further, I believe it is an unreasonable actuarial assumption that participants will voluntarily forfeit a future benefit.

Take an extreme example. Participant has average pay of $2,000 per month, with 6 years of service. Max monthly benefit is $1,200 as 415 salary limit. Accrued benefit payable at age 55 is $800. By age 60, the actuarial equivalent of 800 at 55 is 1200 at 60. It is unreasonable to assume that the 1200 will be payable at age 65, because that assumes the participant gave up 5 years of payments from 60 to 65.

Bel's argument is that the person will have more years of service by that date, so the maximum benefit might be $2,000.

But that argument relies on future service which has not yet happened. The net result of this scenario is that the participant has not yet given up any rights to a benefit at 55 of 800. But the funding calculation purposely understates the liability if it assumes 1200 at age 65. This is just a clever scheme to get around the PPA funding rules.