Eliminating ER reduction in combination with termination or freeze

[Dawn Hafner]

DB is significantly overfunded. They want to freeze and/or termate the plan. Considerations are the following:

1) NRA = 65. Plan currently has a 50% reduction in benefits at ERA of 55, a 33% reduction in benefits at ERA of 60. What issues should we consider if they want to eliminate these reductions and allow full benefits at age 55 or 60 with a certain number of years of service - say 20 or 25? They have considered this previous to the freeze/terminate issue. I assume we would have to prove that this amendment was nondiscriminatory. How is this done? Just examine affected participants at the time of the amendment. If we freeze the plan will that eliminate further service accruals? What about someone who is age 54 with 25 years of service and then next year while the plan is frozen they reach age 55. I assume they will get the unreduced benefits. So how is nondiscimination measured if the number of affected participants is changing.

2) Considering using a 401(h) account to use part of the overfunded amount. Assume we would just have to freeze for now to allow for the 5 year window.

3) Considering adding a lump sum payout option for balances over $5,000. How will this affect the overfuneded status as most participants will choose to take lump sum and rollover to 401(k).

4) Timing of GUST amendments with amendment to termiate. Does it really matter which comes first. I have always done GUST amendments before amendment to terminate, can they be done after?

Any other thoughts I am missing.

[Guest JAREL]

Just a few thoughts.

1. Nondiscrimination would be measured using the most valuable accrual rate, essentially you would normalize the age 55 benefit to an equivalent age 65 benefit. You would probably use accrued to date method if you freeze benefits.

2. In addition to general nondiscrimination in (1.) above, test the timing of the amendment by comparing those affected by the amendment with those who terminated in recent years who would have been affected. There is no specific method; the intention is to avoid a situation where all the NCE's were terminated, then the plan was amended to increase benefits for the HCE's who were left. If the proportion actives who are HCE's is about the same as the proportion of former employees who were HCE's, this might be enought. Unfortunately, this is seldom the case.

[david rigby]

First questions I would ask: "Is the plan safe harbor? Is the plan integrated with social security?"

If both are Yes, then I think you can retain the safe harbor status by making sure that you do not waive the ER reduction for the "excess" portion of the benefit.

Other possible uses of the excess funds:

1. offer an early retirement window. Of course, discrimination issues also apply.

2. Increase benefits to all and/or redesign the benefit formula to use up some excess assets.

[Dawn Hafner]

No, it is not a safe harbor or integrated. Increasing benefits to all participants is another option being considered. The early retirement reduction has always seemed excessive to the sponsor and they wanted to eliminate this if funding allows.