Freezing or partially freezing a DB plan-what are the concerns?

[Guest MattGulseth]

I have the following situation. The owners of a company want to freeze or partially freeze their DB plan. The DB plan is over funded and the owners would like to place more money into the DC plan that they have. (New-Comparability 30K limit/ I know about IRS notice 2000-14.)The owners are basically getting frustrated with the T-bill rate that they are tied to in the DB plan.

The following are what I believe are some of the pertinent facts. Company established the DB plan for the plan year 1994 and subsequently amended to a cash balance plan for plan year of 1996. Plan document has specific language saying "an amendment to freeze all future benefit accruals but otherwise continue maintenance of the plan, is not a termination..." Current benefit accruals are as follows:

Owners = A $ amount equal to the present value of 10% of participants maximum annual benefit.

Employees= A $ amount equal to 5.7% of the participants compensation for the plan year.

Can the company amend the DB plan to reduce the future benefit accrual amounts for both the owners and the employees? What is the process for freezing a DB plan? Is the DB plan to young to terminate? Where can I find more information on the process of freezing a DB plan?

[Guest Brian4]

The plan would need to be amended to cease, or freeze benefit accruals. This is NOT a termination is the sense of the PBGC and Title IV of ERISA. Note the advance notice requirement of ERISA 204(h). There is another posting on the Board on this topic. Also, interest credits would still be credited in most cash balance pension plans, even after the benefit freeze, as interest credits are generally "front loaded" to comply with the benefit accrual rules.

For more information, suggest you research the topic "partial termination" in one of the major services, e.g., CCH, BNA or RIA. Note the plan would still need to be administered after the benefit freeze, amended for law changes, etc. The plan will likely be required to fully (100%) vest participants affected by the benefit freeze, under the partial termination rules.

[Guest PAUL DUGAN]

If the owners think they are going to recieve only T-bill rate of return they really do not understand the workings of a DB plan. If the plan earns more than T-bill rates the excess earning will sooner or later have to be distributed. Since they are the owners they control when and to some degree how these excess earnings are allocated.

[david rigby]

I disagree with the last sentence from Brian4. A freeze is NOT a partial termination and does not require full vesting.

I'm not sure what a "partial freeze" is.

When you freeze a DB plan, be sure to freeze participation as well as benefit accruals. Also, note that certain benefits are not protected by 411(d)(6) so that you might want to consider eliminating them at the time of the freeze, such as subsidized disability benefits.

[Alonzo]

A freeze can be a partial termination if the plan is fully funded on a termination basis. See 1.411(d)-2(B)(2).

[mwyatt]

See following from Reg § 1.411(d)-2(B)(2)

(2) Special rule. If a defined benefit plan ceases or decreases future benefit accruals under the plan, a partial termination shall be deemed to occur if, as a result of such cessation or decrease, a potential reversion to the employer, or employers, maintaining the plan (determined as of the date such cessation or decrease is adopted) is created or increased. If no such reversion is created or increased, a partial termination shall be deemed not to occur by reason of such cessation or decrease. However, the Commissioner may determine that a partial termination of such a plan occurs pursuant to subparagraph (1) of this paragraph for reasons other than such cessation or decrease.

So full vesting could be required in certain situations. If you are freezing an underfunded plan (a typical use of a benefit freeze) then full vesting is inapplicable. However, this situation sounds like full vesting may apply (assume plan is at least fully funded on a termination basis) as elimination of future accruals would certainly increase amount of reversion to employer.

[Guest Ted Munice]

Since this is a cash balance plan why can't you increase the crediting rate of interest to the account from T-bills to something a bit more competitive. Also keep in mind that even if you freeze future accruals, the cash balance mechanism must be maintained. You cannot simply convert this to a deferred life annuity benefit.

[Guest Don N]

I have a question - if a plan provides for an actuarial increase to the benefit of a late retiree and the plan is then frozen, does the freeze apply to the act. increase provision also? Another question is : Do ongoing non-frozen plans have to provide an actuarial increase as a minimum accrual to late retirees ?

[This message has been edited by Don N (edited 06-06-2000).]