Top Heavy Vesting In Frozen Plan

[mming]

After reading IRC Sec. 416©(1)©(iii) I understand that the TH min benefit stops accruing once a plan is frozen, but it also seems that vesting also stops since years of service are to be disregarded - is that correct?

Going on to 416©(1)(D), even though it appears that YOS may be disregarded under subsec. ©, comp from such disregarded years can still be used for the high-5 average. So, it would be possible for a frozen benefit to actually increase due to a new, larger high-5 that occurs after the plan's benefits are frozen? This can't be right, can it? All help is greatly appreciated.

[AndyH]

If you soak a plan document in water and put it in the freezer for a few hours you will have a frozen plan.

But that does not mean that top heavy accruals cease. I believe the condition preventing such a top heavy minimum is one in which no Key (or former Key) Employee benefits for the year within the meaning of section 410(b). And that means no increase in the accrued benefit.

[mming]

AndyH, thank you for your response. If a participant is 40% vested at the time the plan is frozen, keeps working full time afterwards while no key employee benefits, does the participant's vesting keep increasing or is it frozen at 40%? I always thought vesting keeps increasing but 416© seems to contradict that.

[david rigby]

... but 416© seems to contradict that.

Disagree.

If vesting service were frozen (in this case), how does that square with 411(a)(4)?

[dmb]

... but 416© seems to contradict that.

Disagree.

If vesting service were frozen (in this case), how does that square with 411(a)(4)?

This topic came up today and i just want to be clear. I understand that vesting service continues beyond the freeze date, but since there are no TH minimum benefits (due to no key employee accrueing a benefit) can we only look at the plan vesting schedule and not the TH vesting schedule or would the TH vesting schedule still apply for years where the plan was TH?? Thanks.

[SoCalActuary]

... but 416© seems to contradict that.

Disagree.

If vesting service were frozen (in this case), how does that square with 411(a)(4)?

This topic came up today and i just want to be clear. I understand that vesting service continues beyond the freeze date, but since there are no TH minimum benefits (due to no key employee accrueing a benefit) can we only look at the plan vesting schedule and not the TH vesting schedule or would the TH vesting schedule still apply for years where the plan was TH?? Thanks.

If the plan remains top-heavy after the freeze, it is due to the 60% concentration for keys. The TH vest schedule would still apply.

[rcline46]

Read The Fine Document - in most cases you will find that once TH vesting kicks in, it STAYS in.

[My 2 cents]

My understanding is that (a) keeping the top heavy vesting schedule after a plan stops being top heavy is permitted but not required (depends on language of plan), and that if the schedule reverts then certain protections are required (no backsliding on vesting percentage and some participants would have to be given the opportunity to elect to stay on the old schedule and (b) if a plan ceases to be top heavy it doesn't really matter whether it does so because the concentration goes down or the key employees stop benefitting.

We normally encourage those clients, top heavy or otherwise, who are freezing their plans to concede full vesting (in order to eliminate the possibility that the freeze results in a partial termination that is not properly recognized), but they don't always choose to do so. Since a sponsor considering freezing accruals is almost certainly maintaining a plan without enough funds to cover all vested benefits, let alone unvested benefits, it is possible that, even if it were subsequently determined that a partial termination had occurred, it would not result in any of the non-vested people getting any extra benefits anyway ("...to the extent funded...").

Concerning the language of the original post, I think it would be a bit more accurate to say that after a plan has frozen accruals, it will cease to be considered top heavy in subsequent plan years. The cessation of top heavy accruals goes hand in hand with the plan not being top heavy.

[SoCalActuary]

2 c - I believe the plan is still top-heavy. You are simply excused from providing TH minimum accruals.