Consequences of retroactive reduction in accrued benefit

[Gary]

Say a one participant (owner) plan has a plan year from 8/1/08 through 7/31/09.

On 8/4/09 they decide to adopt a plan amendment to freeze plan accruals effective 8/1/08.

Of course we know that accrued benefits as of 8/4/09 cannot be reduced, so this would violate 411d6 and 412d2 for funding purposes.

What are the consequences of such an amendment?

Plan disqualification? Other?

I always read that it is not allowed, but never do I see anything reporting on the consequences.

Thanks.

[Andy the Actuary]

In the highly fictionalized MGM 1950 biopic of tunesmiths Bert Kalmar and Harry Ruby, Bert (Fred Astaire) keeps asking Harry (Red Skelton) if he has any new tunes. Each time Harry plays the old standard "Three Little Words" even if Bert has asked for a Chinese tune. Analagously, you can keep asking your question about your client who doesn't want to fund his plan in different ways, but the answer is likely going to be "Three Little Words": "No can do." Do you really believe it is respectful of the EA profession, professional standards, and your Enrolled Actuary's designation to be any part of a client intentionally taking action to disqualify his plan?

[David MacLennan]

I beg to differ - or at least I will play devil's advocate. There is nothing more ambiguous and perhaps meaningless as the word "effective" in a plan amendment. It does not necessarily follow that the word "effective" in this context implies a reduction of benefits. In fact, the plan document probably already has a provision that prevents a reduction of benefits once accrued.

[david rigby]

The obvious "other" is plan termination. Distribution will occur to the extent funded.

But there may be other reasons to argue against this "solution".

[Gary]

It seems the concensus is that the plan would be disqualified nullifying all prior deductions.

Yes, plan termination is always an option.

Thanks.