Hard-frozen top-heavy defined benefit plans

[My 2 cents]

A very tight reading of EGTRRA shows that if a plan is hard-frozen (so that no further benefits accrue for any plan participants, necessarily resulting in there being no key employees benefiting under the plan), no further service need be recognized for top-heavy minimum benefit purposes. Many practitioners have been operating under the idea that the intent behind the EGTRRA changes was to permit even top-heavy plans to adopt hard freezes.

In accordance with the language of EGTRRA, subsequent plan restatements have talked about years of service not counting if no key employee benefits.

Would either of the following be considered unacceptable? If not, why not?

1. A non-frozen plan that is top-heavy is amended as of a current date to freeze accruals (service and average compensation), explicitly stating in the amendment that neither credited service nor compensation after the end of the plan year containing the freeze date will be recognized in determining any individual's top-heavy minimum benefit.

2. A previously hard-frozen top-heavy plan adopts an amendment explicitly recognizing compensation increases (but not service) between the original freeze date and the end of the plan year containing the new amendment's effective date, solely for purposes of determination as of that date of each non-key employee's top-heavy minimum benefit (either in formal recognition of legal necessity or to render the issue moot), and explicitly provides that compensation after the end of that plan year would not be taken into account in the determination of any participant's top-heavy minimum benefit. Assume for this that Section 436 would not prevent the adoption of such an amendment.

[My 2 cents]

Nobody has any opinions on this question? OK, granted item 2 is a bit far-fetched. No opinions on item 1?

[tymesup]

If I'm reading 1 correctly, the plan would give credited service and compensation from the freeze date to the end of the plan year. Since that would be more than the minimum necessary under 416, that would not be unacceptable.

It's not clear whether the "freeze date" would be the date in the middle of the year or the end of the plan year.

[My 2 cents]

If I'm reading 1 correctly, the plan would give credited service and compensation from the freeze date to the end of the plan year. Since that would be more than the minimum necessary under 416, that would not be unacceptable.

It's not clear whether the "freeze date" would be the date in the middle of the year or the end of the plan year.

The point of the question is whether a plan can explicitly exclude recognition of compensation after the freeze date for purposes of the top-heavy minimum benefits (assuming that the top-heavy percentage stays above 60%). There had been some talk about possibly having to calculate the top-heavy minimum by multiplying the top-heavy service (ignoring any service after the year of the freeze) by the actual final average compensation (taking into account compensation even after the year of the freeze if the plan remains above 60%). Does anyone treat the top-heavy minimum benefit as being based on frozen service but recognize post-freeze compensation if a top-heavy plan is frozen and stays top-heavy?

[tymesup]

Our document provides that service is disregarded if the plan is frozen. There is no mention of disregarding post-freeze compensation.

[My 2 cents]

Our document provides that service is disregarded if the plan is frozen. There is no mention of disregarding post-freeze compensation.

Is there any reason to not amend the plan to specifically say that compensation after the freeze will be ignored for top-heavy minimum purposes? Would that be acceptable?

[tymesup]

I could see an argument that such an amendment would imply that compensation after the freeze, but before the amendment, should be included.

A plan sponsor might not want to pay for such an amendment.