415 application after plan freeze revisited

[Gary]

I am trying to establish an approach to administering a db plan after a plan freeze where the doument is silent re: 415 application after plan freeze.

In other words let's say a plan sponsor freezes a plan's benefit accruals and makes no mention as to how 415 will apply after the plan freeze.

So, essentially, the plan would have to handle 415 limits in accordance with statutory requirements. That is, the plan provisions has the basic 415 statutory language in place.

With that said, I make the following interpretations as reasonable (or at least not unreasonable) with regard to application of various aspects of 415 benefits for plan admin purposes:

1. service credit and participation credit continue for 415 purposes (of course participant must work requisite hours in plan year)

2. hi 3 avg comp continues and thus a participant's hi 3 avg can increase after plan freeze

3. cost of living dollar limit increases still apply

Of course the accrued benefit is frozen and if such benefit is below the 415 limit at time of freeze then the 415 limits may have no effect on such benefit. However, if act equiv is say 5% and participant chooses lump sum, then the increase in 415 benefit can enable participant who has annual benefit below 415 to receive a higher lump sum that might have otherwise been limited by 415 lump sum limit.

So, if it is desired to have 415 freeze at time of plan freeze as well, than drafting the amendment to freeze accruals and freeze 415 benefits would be the suggested approach. That is, explicitly address the matter.

Thanks and welcome other views.

[SoCalActuary]

By your hard freeze of the benefit, test it against 415 limit for funding and for payout. Don't issue a statement to the participant for any benefit that would exceed their 415 limit for benefit payable at normal retirement age.

If an election is made to take a distribution, you test the distribution using the two or three assumption sets needed to determine compliance.

But the IRS does not expect to see any increase in the plan benefit under a hard freeze, nor do you add cola's to the limit, pay increases, nor increased service. Otherwise, you have continuing benefit accrual and required compliance testing, top-heavy, etc.

Now a lump sum benefit can vary year by year as 417 rates move. And any particular lump sum available at any time might be constrained by the IRS 5.5% interest rate limit.

[frizzyguy]

If you allow increases, do you need to test the plan? No one gets an increase in accrued benefit except the probable HCEs.

[david rigby]

...a plan sponsor freezes a plan's benefit accruals and makes no mention as to how 415 will apply after the plan freeze.

IMHO, this means the plan must not apply any 415-related increases. To apply increases (using administrative procedure?) is a failure to follow the document.

[Guest Quagmire]

...a plan sponsor freezes a plan's benefit accruals and makes no mention as to how 415 will apply after the plan freeze.

IMHO, this means the plan must not apply any 415-related increases. To apply increases (using administrative procedure?) is a failure to follow the document.

I agree. The IRS treats § 1.415(b)-1(a)(1) as a limitation on the accrued benefit because of the wording "payable to a participant at any time". As a logical result, increases in the limit are treated as additional accrual, so when a plan freezes the applicable 415 limit also freezes. Failure to do so will violate § 1.401(a)(4)-1(a).