Freezing benefit service

[fiona1]

DB plan's normal retirement age is 65. It allows an early retirement, but only if a member has attained age 55 and has 10 years of benefit service.

The employer is looking to freeze all benefits as of 6/30/17. They will continue to credit service in regards to vesting, but are they allowed to freeze benefit service as of this date for the purpose of early retirement eligibility?

For instance - assume a member is age 57 and has 9 years of benefit service as of 6/30/17. He/she could have been planning on retiring at age 60 - but will no longer be able to retire early if benefit service is frozen.

Is the plan sponsor allowed to do this or would this violate a protected benefit rule?

 

[My 2 cents]

It is my understanding that the ability to grow into early retirement benefits (subsidized or not) is part of the accrued benefit, and that even terminating the plan cannot by itself prevent the participant (if still employed by the sponsor) from growing into being eligible for the early retirement benefit.

 

[FAPInJax]

I agree. The ability to get the early retirement benefit can not be eliminated. The example provided would have the member eligible at 6/30/2018 when they have 10 years of service

 

[david rigby]

This is the reason many plans define the eligibility using Vesting Service.

 

[My 2 cents]

17 minutes ago, david rigby said:

This is the reason many plans define the eligibility using Vesting Service.

 

Vesting service cannot be frozen away.  Good practice would probably call for granting full vesting when accruals are frozen (to keep there from being any kind of "partial termination" issue), but if full vesting is not granted, it is impermissible to deny ongoing employees the opportunity to grow into full vesting after accruals are frozen.  The same is true for early retirement benefits. 

If a plan had an unreduced early retirement benefit for participants with 25 years of service and the plan terminated when a participant had 7 years of service, any annuity to be purchased would have to make provision for an unreduced early retirement benefit if the participant worked for another 18 years (i.e., the benefit earned for 7 years of service would become payable without reduction if the person remained in employment for 18 years after the plan was terminated and the annuity purchased).  One can surely do no less if the plan is merely amended to freeze accruals.

[david rigby]

Sorry if my too-brief post added confusion. 

In my view, this question is tied to the nature of what happens in a plan termination, as well as clarity of plan definitions: a freeze amendment should freeze the benefit, participation, and benefit service.  (Yes, I've seen many poorly-drafted amendments that were not that thorough.)  Of course, the amendment cannot freeze vesting service (assuming an ERISA plan). 

• In order to facilitate plan clarity, I advocate using multiple defintions of service within a document: eligibility service, vesting service, benefit service.  Each will be a subset of the plan definition of "Service", but might have its own variation (for example, benefit service might permit fractional years, but vesting service probably won't).
• The plan will define eligibility for Early Retirement (and maybe Disability) by reference to VS (never using a term as simple as "service"). 
• By freezing Benefit Service but not Vesting Service, it should be immediately clear that the freeze amendment will have no effect on this definition.  Accordingly, no one (not the employer nor employee, etc) will debate the original question of whether the employee can "earn into" the Early Ret benefit, because the Plan already defines it.