Frozen Cash Balance?

[justanotheradmin]

Is there a discrimination issue with freezing a CB plan where the only HCE/Key has fully accrued benefits, and the other participants have not?

It is a small plan, just a handful of participants, and the owner won't receive any additional benefit accruals, so any contributions will really be going towards the other participants.

No accrued benefits would be cut back, but I feel like freezing the plan would disproportionately affect the NHCE since they would be the ones losing out on the possibility of future accruals. But I seem to think that it doesn't matter, since the plan could terminate, in which case the result would be the same.

I apologize in advance, my knowledge of cash balance plans is obviously very limited.

Thoughts?

[Effen]

I don't understand what you are asking. What do you mean the "HCE has fully accrued benefits"? Did they hit the 415 limit or is there some plan imposed maximum benefit?

Assuming the accruals were all complaint with the applicable non-discrimination rules at the time they were earned, there is no problem freezing them.

[Hojo]

I'm guessing by the vague question that he means only the owner is 100% vested. However, I think even with a freeze that participants can accrue vesting service. Otherwise, I have no idea what the OP could be questioning.

[My 2 cents]

I have to think that the question implies that the HCE/Key is up against the 415 limit and essentially nothing further can be put iin his or her hypothetical account. Be that as it may, the question makes me wonder if the IRS has attempted to invoke the requirement that plans be intended to be permanent in the past few years. Also, is there any chance that freezing the plan for all immediately after the HCE/Key will stop receiving any further accruals would run afoul of the timing of amendments provision of the non-discrimination regulations (which is a facts and circumstances determination)?

Were the plan to terminate, it could be less likely that such issues would be raised (which is not to say that it is likely that they would be raised in the event that the plan were merely frozen).

[justanotheradmin]

Thank you everyone for the responses.

My 2 Cents, yes, that is what I was trying to say both in regards to the HCE and the amendment question.

I wondered if the amendment timing was problematic.

I am less concerned about the permenancy issue as the plan has been around since 2002, and my understanding was the IRS was more concerned for plans that were less than 5 years old. But please correct me if I've misunderstood that.

Effen, yes, the accruals had no discrimination issues when earned, so I am just concerned about the amendment removing the future benefits to the NHCE.

[Effen]

Sorry, but I am still confused, but that doesn't really matter.

If your client is really bumping the 415 limit in a cash balance plan, you should be thinking termination, not freeze. Depending upon the age of the HCE and the plan's NRA, his maximum lump sum may actually start to decrease. Not only that, but if he is at the maximum, excess assets can only be allocated to the other participants, or reverted to the sponsor. Small plan sponsors typically don't like either of those options.