Frozen Plan, increasing benefits

[abanky]

I have a traditional DB plan that has been frozen for several years. currently there is 1 hce and 3 actives with vested benefits. The plan sponsor wants to increase the benefits of the HCE about 20%. Would the plan violate anything by increasing the benefits to all participants by 20%? or would the plan have to unfreeze, let everyone who was not in the plan in and increase the benefits that way?

[Andy the Actuary]

Would have to satisfy 410(b), 401(a)(4) (in particular, grants of past service), and the AFTAP would have to be at least 80% after increase. Benefits could remain frozen but would not longer get the free pass (if the Plan ever had it) of not being subject to the 436 stuff.

[abanky]

Would have to satisfy 410(b), 401(a)(4) (in particular, grants of past service), and the AFTAP would have to be at least 80% after increase. Benefits could remain frozen but would not longer get the free pass (if the Plan ever had it) of not being subject to the 436 stuff.

The plan has a 2011 aftap of 104%. They would also contribute to the 2010 plan year in an amount to make up increase to all participants.

So basically, I would have to do a 401a4 test for the plan on the new increases in accruals, but could get away without inviting any employees who were not in the plan because of the freeze (assuming i could pass the test).

[Andy the Actuary]

Yes, but in looking at your 401(a)(4) test, you would somehow have to consider all employees past.

[abanky]

Yes, but in looking at your 401(a)(4) test, you would somehow have to consider all employees past.

Would the same situation apply if we decided to terminate the plan and increase benefits at that time to deal with overfunding?

[abanky]

Yes, but in looking at your 401(a)(4) test, you would somehow have to consider all employees past.

And when you say "all employees past" do you mean all employees since the freeze or the past service of all active employees?

[Andy the Actuary]

Yes, but in looking at your 401(a)(4) test, you would somehow have to consider all employees past.

And when you say "all employees past" do you mean all employees since the freeze or the past service of all active employees?

Well, I truly mean all employees forever since the inception of the business. That said, do not ask me how I would conduct such a test because I have no idea. if somehow you could tie the 20% to past-service limited to 5 years of service prior to the Plan Amendment, then I believe you would then only have to look at the current active employees (including those not covered by the Plan). This is covered in 1.401(a)(4)-5(a)(3). This safe-harbor on past-service is for 401(a)(4) and does not give you as pass on 410(b).

I also failed to mention it would appear that 401(a)(26) applies if the Plan is reopened.

[AndyH]

i don't think you can just disregard people who would have become eligible if not for the freeze. In that case I would think you have a 410(A) issue.

And you might also have a 401(a)(26) issue in addition to an obvious 401(a)(4) issue. But, having said that, this prorata increase is common at plan termination. I guess these issues should be taken into account then.