Soft Plan Freeze

[rodin011]

Plan sponsor wants to close the plans to new participants while continuing to accrue benefits for existing participants.

A couple of questions:

Must the 40% participation test, the 410(b) and and the plan's average benefit tests include the employees that - in the absence of this freezing- would qualify to participate?

I vaguely remember that it may be an exception for frozen plans, but I am not sure.

Any citations?

Usually when freezing a plan, the amendment simply replace the plan accrual formula with 0.0%. Any special language for an amendment that continue accruals for existing participants but close the plan to new participants?

Any potential pitfalls - excepting the employees happiness- I should be aware of?

Thanks for your help

[Lou S.]

I believe on a hard freeze the IRS gives you a pass on 401(a)(26) if you pass at the time of the freeze. Though that exception may only be for underfunded plans.

I am not aware similar "free pass" on a soft freeze.

[rodin011]

Thanks.

The plan is not underfunded

[Effen]

The (a)(26) exemption is only for "underfunded" plans, and that exemption has exceptions. Check out 1.401(a)(26).

All other NDT still apply.

Generally, it is few years before (a)(26) becomes an issue for a soft frozen plan, but it will eventually get them.

[My 2 cents]

Soft frozen plans have to pass compliance testing. People who are not excludable in accordance with the law and regulations (i.e., non-resident aliens with no US income, people covered by collective bargaining agreements, etc.) have to be factored into the compliance testing whether they can participate in this or any other plan of the sponsor's controlled group. Hard frozen plans get a pass on coverage and generally also non-discrimination because no HCEs are benefitting, but that is not necessarily true in a soft freeze.

Important distinction: Testing is based on regulatory definitions of excludable and not (in general) on who the plan(s) in question will allow to participate and those who cannot. Sometimes I wonder if that distinction is understood. Excludable in the testing context does not equate to excluded from this plan.

[rodin011]

The (a)(26) exemption is only for "underfunded" plans, and that exemption has exceptions. Check out 1.401(a)(26).

All other NDT still apply.

Generally, it is few years before (a)(26) becomes an issue for a soft frozen plan, but it will eventually get them.

So, it seems that for all practical purposes- if the plan is not underfunded- new would be entrants are treated and included in ND tests as any other nonstatutory excluded class, right?

I was fairly sure... it sounded too good for the plan sponsor.

[Effen]

Sorry, I don't really understand your statement - could you edit your post?

[GMK]

as a guess, maybe it's 'new, would-be entrants'

[My 2 cents]

The (a)(26) exemption is only for "underfunded" plans, and that exemption has exceptions. Check out 1.401(a)(26).

All other NDT still apply.

Generally, it is few years before (a)(26) becomes an issue for a soft frozen plan, but it will eventually get them.

So, it seems that for all practical purposes- if the plan is not underfunded- new would be entrants are treated and included in ND tests as any other nonstatutory excluded class, right?

I was fairly sure... it sounded too good for the plan sponsor.

I think that the comment meant was that for purposes of participation and other compliance testing, the people who would otherwise have become participants (but for the soft freeze) are treated for the various non-discrimination tests like any other group excluded from the plan who don't fall into the group excludable for testing purposes (such as non-resident aliens with no US income or people covered by bargaining agreements, etc.).

[Effen]

Ok, assuming that is the meaning, then, yes, I agree.

[rodin011]

Thank you all.