DB Plan Freeze - After Eligibility but Before Entry Date

[Guest Chaffee]

I have a DB Plan Freeze Scenario, but can't find guidance which fits the fact pattern. Any references would be appreciated.

- Plan is a Defined Benefit Plan with a 12/31 Year End

- Eligibility is Age 21 and One Year of Service (1,000 Hours in Eligibility Computation Period - Anniversary Basis)

- Entry Dates are 1/1 and 7/1

- Accrual Computation Period is based on Plan Year (1,000 hours for 1 Year Credit)

The Plan implemented a hard freeze effective April 30, 2009. Eligibility and Vesting Service is still credited after the freeze, but no service or compensation after April 30, 2009 is considered.

Employee X is hired February 15, 2008 and works > 1,000 hours from February 15 - December 31, 2008 (Accrual Computation Period). As such, employee would seem to have accrued a year of Accrual Service by 12/31/08 (BEFORE FREEZE DATE).

Eligibility Computation Period ends February 15th, 2009, so Employee X does not enter Plan until July 1, 2009 (AFTER FREEZE DATE).

Plan Actuary advised the Plan Sponsor that these participants would have no Accrued Benefit under the Plan because they did not enter the Plan until AFTER April 30, 2009.

However, it appears to me that the employee satisfied the requirements to be credited with an Accrual Year of Service BEFORE the Freeze Date. As such, these benefits should probably be protected.

In essence, my question is whether the timing of the Entry Date is irrelevant to whether the Accrued Benefit had been earned prior to the Freeze Date.

The anti-cutback regulations in Section 411(d)(6) do not seem to address this specifically. They generally refer to protection of the "accrued benefit of a participant as of the applicable amendment date" - but does not clarify whether the earning of the accrued benefit can precede the Entry Date.

Further, once these employees do become participants in the Plan on July 1, 2009, would they get "retroactiove protection" of the benefit they clearly earned prior to April 30, 2009 (i.e. during the Accrual Computation Period ended December 31, 2008?).

Any thoughts on the issue would be greatly appreciated.

[Andy the Actuary]

I give - What is the purpose of allowing new participants after the freeze date?

Look at freeze date as if employee terminated employment on that date. What is employee's accrued benefit under the terms of the plan document?

This is blind avice given we haven't seen how the plan amendment is constructed. Can you provide it?

[WDIK]

Plan Actuary advised the Plan Sponsor that these participants would have no Accrued Benefit under the Plan because they did not enter the Plan until AFTER April 30, 2009.

Is there any particular reason to question the determination made by what should be a qualified individual who has all of the pertinent information available?

[Guest Chaffee]

I give - What is the purpose of allowing new participants after the freeze date?

Look at freeze date as if employee terminated employment on that date. What is employee's accrued benefit under the terms of the plan document?

This is blind avice given we haven't seen how the plan amendment is constructed. Can you provide it?

To your first question - Plan is still crediting service for Vesting and Eligibility purposes (in case Plan Sponsor wants to reinstate benefit accruals at some point in the future). Thus, I can't really treat this as if they "Termed" on the Freeze Date.

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I understand any advice here is limited - I'm trying to get more "conceptual" thoughts using this Plan as a real life example. In this case, when is a benefit "accrued"? At the end of the Accrual Computation Period (BEFORE FREEZE)? Or upon their Entry Date (AFTER FREEZE)?

Under the terms of the document, the Accrued Benefit is Accrual Service (from Date of Hire, not just from Date of Entry) x Average Compensation (again, for ALL employment history through April 2009, not just after Entry Date).

Thus, in the example of the Employee X, if there were no freeze implemented in April, this employee "normally" would have entered the Plan on July 1, 2009 already with One Year of Benefit Service Accrued (for the Accrual Computation Period ended December 31, 2008) and possibly even a Second Year of Benefit Service Accrued (if they had >1,000 hours by July 1, 2009 for the Accrual Comp Period ended December 31, 2009).

Which is basically why I am drawing a distinction between the Entry Date (July 1, 2009) and the period when the Benefit was Accrued (during the Accrual Comp Periods Feb 15, 2008 - December 31, 2008 and January 1, 2009 - December 31, 2009).

It doesn't make sense to conclude that Employee X "earned" their benefit on July 1, 2009 (POST FREEZE). Rather, it seems that the benefit was "accrued" at some point prior to that date. And if that's true, perhaps there's some type of protected benefit that was "earned" prior to the Freeze Date that can't be taken away quite so easily.

Problem is, I just can't find authoritative guidance which explicitly addresses the stuation where a Freeze is implemented between the end of an Accrual Computation Period (December 31, 2008) and the Initial Plan Entry Date (July 1, 2009). I was hoping some people had seen some guidance addressing this scenario (perhaps some interpretation of the anti-cutback rules).

[Andy the Actuary]

(1) Please provide the plan's definition of accrued benefit.

(2) It's still not clear why the frozen plan allows new entrants? The benefits are frozen. Even if I surmise (perhaps incorrectly) that the Plan is continuing to credit service for benefit calculation purposes (even though it is overridden by the plan freeze), why must you continue to let persons into the plan after the freeze date?

[Guest Chaffee]

Is there any particular reason to question the determination made by what should be a qualified individual who has all of the pertinent information available?

Conceptual curiosity on my part (see conceptual question above in my response to Andy). Also, given past experience with IRS / DOL, I've found subtle distinctions like "when benefit is accrued" vs. "Entry Date" often are overlooked at first glance.

But beyond this, I discussed general issue with an ERISA Attorney contact who recalled a similar issue where the "Entry Date" is essentially irrelevant in determining when the benefit is accrued. However, this ERISA Attorney could not recall the specific authoritative guidance, so I thought I'd see if anyone else had encountered a similar situation and had any ideas on published guidance.

[Guest Chaffee]

(1) Please provide the plan's definition of accrued benefit.

(2) It's still not clear why the frozen plan allows new entrants? The benefits are frozen. Even if I surmise (perhaps incorrectly) that the Plan is continuing to credit service for benefit calculation purposes (even though it is overridden by the plan freeze), why must you continue to let persons into the plan after the freeze date?

(1)

Accrued Benefit will be equal to the product of (a) and (b) below:

(a) An amount equal to 1% of his Average Compensation

(b) His Accrual Service (not to exceed 30 years)

Accrual Service - "One year of service for each Accrual Computation Period in which an Employee is credited with at least 1,000 Hours-of-Service

Average Compensation - "average of an Employee's Monthly Compensation for those five consecutive Compensation Years (all Compesnation Years, if less than five) which give the highest average out of the ten latest Compensation Years (all Compensation Years, if less than ten)

(2)

Again, they elected to still allow new participants in case they reinstate Plan in the future. Not sure why they elected this way, but there is no provision to "close" the plan to new employees (in essence, any new hires are entering the Plan but earning no new accrued benefit).

The freeze simply states that "all benefit accruals for all Participants are frozen as of April 30, 2009" and "pursuant to the freezing of benefit accruals under the Plan on April 30, 2009, no additional benefits shall accrue after such date."

This freeze language claims no "additional benefits shall accrue after April 30, 2009." But if the employee accrued the benefit before the freeze date, why would this amendment cause an employee to "lose" the service they provided simply because you were waiting for an Entry Date to arrive?

Employee X completed the eligibility requirements of the plan on February 15, 2009 (BEFORE FREEZE)

Employee X satisfied the requirements to earn an Accrual Year of Service by December 31, 2008 (BEFORE FREEZE)

Can this service be "eliminated" via amendment during the window of time waiting for an Entry Date? It seems counter-intuitive.

Think of the case where an employee terminates after they have completed their eligibility service but before their Entry Date. Most Plan Documents provide that this employee will immediately enter the Plan upon their rehire date. Doesn't this imply that the employee has satisfied the plan's "requirements" during the initial eligibility computation period, and that the period of time between the end of the ECP and the Entry Date is simply an administrative "convenience", not an additional period where anything additional is "earned"?

Regardless, the employee did become a participant on July 1, 2009. While I can understand that no benefits were earned after April 30, 2009, why would this employee lose the Accrual Year of Service earned from February 15, 2008 - April 30, 2009?

[Andy the Actuary]

One last whip to the horse:

As best as I understand, plan benefits are generally frozen and plan entry is stopped at the same date. In your case, plan entry was not stopped. Plans generally define accrued benefit as the benefit determined at any point in time. In this case, as of the benefit freeze date. Your question is how can a person have an accrued benefit if he entered the plan after the freeze date. My answer from what you've communicated: Because you let him.

[rcline46]

My take on the subject. Only a PARTICIPANT can have an accrued benefit. Any EMPLOYEE can earn accrual service without being a participant. Take a plan with an eligibility of age 21, with an employee hired at age 18. The employee can have 3 years of vesting and accrual service before ever entering the plan and becoming a participant. Yet, before they actually enter the plan, they have no vested percentage and no accrued benefit.

Should the plan be frozen, or the formula changed, before their entry date, they have no rights at all to what the old formula was. On entry to the plan, it is all calculated based on the then existing rules. They do not lose vesting and accrual service, but if the formula is now -0-, ie frozen, they have no benefit.

A cautionary note - if the plan described by the OP is letting people in with -0- benefits or, they need to watch out for 401(a)(26).

[Guest Chaffee]

rcline - thanks for the input.

My one thought is that there is a distinction between the 18 year old and Employee X in my situation.

In your example, the 18 year old never satisfied the initial eligibility requirements (i.e. by becoming age 21). Thus, the Plan Freeze was implemented before this person had ever satisfied the requirements.

However, in my example, Employee X has already satisfied the eligibility requirements (by virtue of working > 1,000 in ECP) BEFORE the Freeze Date. By February 15, 2009, this person had met all the requirements for Entry. The Freeze occurred during that "gap period" between completion of the Eligibility Requirements and the next available Entry Date.

Can you "close" the Plan to someone who has already satisfied the Eligibility Requirements? It just seems like there would be some type of restriction barring this (or some guidance which specifically addresses people in the "Entry Date Delay Period" when it comes to Plan Freezes).

I may just be overthinking this (no maybe about it), but discussions with ERISA Counsel lead me to believe there is some guidance on this - I just haven't had luck finding it yet.

[tuni88]

rcline - thanks for the input.

My one thought is that there is a distinction between the 18 year old and Employee X in my situation.

In your example, the 18 year old never satisfied the initial eligibility requirements (i.e. by becoming age 21). Thus, the Plan Freeze was implemented before this person had ever satisfied the requirements.

However, in my example, Employee X has already satisfied the eligibility requirements (by virtue of working > 1,000 in ECP) BEFORE the Freeze Date. By February 15, 2009, this person had met all the requirements for Entry. The Freeze occurred during that "gap period" between completion of the Eligibility Requirements and the next available Entry Date.

Can you "close" the Plan to someone who has already satisfied the Eligibility Requirements? It just seems like there would be some type of restriction barring this (or some guidance which specifically addresses people in the "Entry Date Delay Period" when it comes to Plan Freezes).

I may just be overthinking this (no maybe about it), but discussions with ERISA Counsel lead me to believe there is some guidance on this - I just haven't had luck finding it yet.

On 2/15 he hasn't yet satisfied the eligibility requirement to enter the Plan because July 1 hasn't happened yet. Ionly scanned this thread so maybe I'm missing something. Why would you not freeze the plan for new entrants?