Does reducing benefit formula to zero freeze plan?

[Trekker]

DBP (effective 1995) had a benefit formula of 10% Average Annual Comp times Years of Credited Service. (Average Annual Comp uses 3 highest years- from date of hire to date of employment termination.) The Plan was amended effective 1/1/03 to reduce the benefit to zero% of Average Annual Comp.

Question 1 - does this effectively freeze the Plan? No other language relative to freeze was used.

Question 2 - in determining the highest 3 years, do you look at comp earned in the years after the freeze? The Plan has not terminated, but soon will be.

Question 3 - 204(h) notice was not given for the reduction to 0%, but an SPD containing the change was provided approximately 7/1/03. Would failure to provide 204(h) notice render the change void, or would the reduction to zero% be effective with the issuance of the SPD?

This is a takeover plan. Thanks for all insights.

[Andy the Actuary]

1. IMHO, NO.

2. Immaterial if the Plan was effectively frozen.

3. IMHO, appropriate notification was not given. A legal opinion would need to be obtained to determine if giving the SPD could be construed as adequate notice that the Plan was frozen 7/1/2003. I'd love to take the plaintiff's position that the Plan was never frozen. Then, again, I'm not an attorney!

4. There may be others who entered the Plan after the freeze date.

5. If the Plan was not frozen, there's gonna be a lot of fixin' required !!! There may be funding deficiencies, PBGC premiums owed, additional benefits payable, and 5500s to be amended.

[david rigby]

Agree, mostly.

1. No.

2. It depends. When you say "zero% of Average Annual Comp", are you referring to the accrual rate for future years, or to the entire accrued benefit?

3. Agree. Note that the possbility that the SPD might be deemed 204(h) adequate, but not retroactive, thus effective at 07/01/2003. This might change the accrued benefit.

4. Does the plan have any kind of minimum ($25, for example)? If not frozen, then new EEs may have entered the plan and receive the min.

[Effen]

Definitely need to get a lawyer involved. These are signifant issues.

3. At the very least your client you client owes an excise tax of $100/day/effected participant, plus, probably interest and penalties for late filing. (4980F)

Regarding if the amendment can even take effect, 204(h) states that if there is an "egregious" failure to provide the notice, the participants are entitled to the greater of the benefit before or after the amendment. One of the "egregious" failures listed in the statute is that the failure is within the control of the plan sponsor and the failure is "...a failure to provide most of the individuals with most of the information they are entitled to receive..." That says to me that not providing the notice at all could lead to ignoring the freeze and having to pay the full benefits.

I'm not sure changing the SPD would meet this criteria because 204(h) requires a specific notice for one single purpose, to notify the participants of the reduction of accrual, but it might be an argument if they want to put together a CAP filing.

I think the facts and circumstances would be very important in determining how to proceed.

[Andy the Actuary]

Note, final 204(h) regs may not have been in effect.

[Trekker]

Agree, mostly.

1. No.

2. It depends. When you say "zero% of Average Annual Comp", are you referring to the accrual rate for future years, or to the entire accrued benefit?

3. Agree. Note that the possbility that the SPD might be deemed 204(h) adequate, but not retroactive, thus effective at 07/01/2003. This might change the accrued benefit.

4. Does the plan have any kind of minimum ($25, for example)? If not frozen, then new EEs may have entered the plan and receive the min.

To answer David's question at #2, the accrual rate for future years was reduced to zero%. And, #4, the plan did not provide any sort of minimum.

Thanks for all responses. I welcome others. An attorney will definitely be involved.

[Andy the Actuary]

To answer David's question at #2, the accrual rate for future years was reduced to zero%. And, #4, the plan did not provide any sort of minimum.

Then, if only the future accrual rate was reduced with no other verbiage, it sounds as if average compensation might still be growing and the benefit is not totally frozen.