Frozen Pension Plan

[Jim Nichols]

I had worked for a CPA firm for 17 years before taking a job in a different city.  The CPA firm recently terminated their pension plan and sent me a letter advising me of what my benefit would be and giving me the option to roll it over into or take a lump sum.  The amount was significantly smaller than I expected.  Upon talking to the actuary of the plan I was informed that my employer had frozen the pension nine years ago.  I have spoken to several employees and not one of them remembers being informed of the plan being frozen.  Does anyone know what actions we can take?

[jpod]

Was it a defined benefit pension plan or a money purchase pension plan?  Are they saying it was frozen before you left employment?  There may be an ERISA 204(h) violation here which could give you a strong case for additional benefits if you are inclined to take an adversarial approach here.        

[david rigby]

You could ask for a copy of the 204(h) notice, and any other related communication.

[jpod]

Talk to an ERISA lawyer, preferably an ERISA trial lawyer, before you ask for a copy of the 204(h) notice. 

[ESOP Guy]

You might want to simply read the most recent copy of the SPD and other notices. If the plan is frozen they should clearly say that.  It is possible you just don't remember getting the notices.  Before you lawyer up try and decide which is the case.  If you don't have a copy of the SPD or it isn't online with other benefits information you might have access to as a plan participant ask for one. 

Asking for an SPD isn't as hostile as other actions.  There can be a time for a lawyer and asking for specific notices and so forth but not sure that ought to be the first move. 

[Jim Nichols]

Thanks for the responses everyone.  It was a defined benefit pension plan.  They are saying it was frozen nine years before I terminated my employment with them.  Yesterday I asked for a copy of the 204(h) notice but so far I have not received anything.  I have spoken to at least 5 people (it was a relatively small firm) and no one remembers being notified of the plan being frozen.  Also, we stopped getting any type of plan communication at all around the time frame. They weren't real good about giving us the required annual communication so no one thought much of it.

 

[jpod]

Years ago I had a great deal of success getting the local DOL office to put pressure on a client's former employer where there was a missing 204(h) notice, and it was a small employer (less than 25 employees).  Who knows what luck you may have now given the thinness of DOL's resources. 

[Jim Nichols]

Thanks, I've thought about contacting the DOL but I wasn't sure if they would be more interested in penalizing my ex employer more than they would be in righting the wronged participants.  Also, someone brought it to my attention to look at my  W-2s since the plan was frozen to see if they indicated that I was an active participant in a retirement plan.  Every year (2008 through 2015) indicated that I was an active participant in a retirement plan.  

[My 2 cents]

It is my understanding that if the participants were not properly notified, then their benefits are NOT frozen.  The amendment can take effect only if the required notices are given.  Have you requested a copy of the amendment supposedly freezing accruals?

The burden of proof should be on the employer.

[Belgarath]

That may be accurate for a DB plan. Depending upon the formula, even if you aren't accruing future benefits, if your accrued benefit Is, for example, based upon final average compensation, then you are considered an "active participant."

So, the fact that the plan was (supposedly) frozen does not necessarily mean you are no longer an "active participant" for the W-2 box.

See Treasury Regulation 1.219-2(b)(3).

[Effen]

I am not sure how the DOL/IRS would actually handle this. The is from the Pension Answer Book:

If the 204(h) notice is not provided and the failure to provide is egregious (i.e., was intentional or failed to provide most of the required information), the participants and alternate payees are entitled to their plan benefits without regard to the freeze amendment. [Treas. Reg. § 54.4980F-1, Q&A-14] Whether a failure to provide the 204(h) notice is egregious or not, an excise tax of $100 per day applies for each failure to provide the notice with respect to any participant or alternate payee who should have been provided the notice. However, the tax will not be imposed if reasonable diligence was exercised to meet the notice requirements and either the employer did not know of the failure or corrected the failure within 30 days of the date the employer knew, or should have known, of the failure by exercising reasonable diligence. Further, if reasonable diligence was exercised, the excise tax for failures in a taxable year is limited to $500,000. Also, the IRS may waive all or a portion of the excise tax under appropriate circumstances. [I.R.C. § 4980F; Treas. Reg. § 54.4980F-1, Q&A-15] A plan that terminates in a standard termination (in accordance with Title IV of ERISA) is deemed to have satisfied the 204(h) notice requirement not later than the proposed termination date and no additional benefits are required to accrue after the proposed termination date on account of ERISA Section 204(h) or related Code Section 4980F. [Treas. Reg. § 54.4980F-1, Q&A-17(b)]

 

I always "thought" the solution for a late 204(h) notice was that the plan wasn't actually frozen until the 204(h) Notice was issued, however it appears that is only in egregious situations.  If you can prove the 204(h) was not issued, you then need to prove they intentionally withheld the information.  This seems likely since they continue to check the box on the W-2 (although different opinions about that also can be found).

Seems like you are on the right path.

[Jim Nichols]

After much harassment they finally provided me a copy of their calculation and my average compensation and years of service was calculated as of the freeze date.  They have yet to provide me with a copy of the 204(h) notice.  I'm afraid they are going to try to give me a letter that they have recreated to cover themselves.

[BG5150]

Did you ask for the most recent SPD?

[tymesup]

Another possibility, which is unlikely, is that the plan's Adjusted Funding Target Attainment Percentage (AFTAP) was less than 60%, which would also cause benefit accruals to cease. If this happened, the plan administrator should have sent the participants a notice.

[jpod]

That's why you shouldn't have asked for the 204(h) notice without the benefit of counsel.  They can look up Section 204(h) and then "find one" and say "oh, you mean this thing we sent to you and everyone else 9 years ago?"

[jpod]

Also, I believe the regulations make it clear that if you didn't distribute the 204(h) notice to anyone it is egregious, i.e., you aren't saved by ignorance of the law. 

[jpod]

The other thing you may have going for you is that if there was no 204(h) notice, and you press the point and demand the continued accruals, the extra cost to the plan, or at least much of it, may end up coming out of the plan actuary's pocket, or it's insurance company's pocket, and not your former employer's pocket.   

[My 2 cents]

While enrolled actuaries would normally try to keep their clients' noses clean by telling them what notices are required, when they are required, etc., seeing to it that the plan administrator actually performs its duties in a diligent and competent manner is not really a responsibility of the enrolled actuary (who is, under normal circumstances, NOT a co-fiduciary).  Under what grounds would the plan's actuary be held liable for the plan administrator's failure to properly notify the plan participants of an amendment freezing the plan?

ESPECIALLY IF THE EMPLOYER, BEING A CPA FIRM, WOULD GENERALLY BE HELD TO A REASONABLE STANDARD OF KNOWLEDGE.  Sorry for shouting.

Technical point - if the plan's AFTAP falls below 60% (forcing a freeze in accruals), the required notice falls under 101(j), not 204(h).  Big penalties for not meeting that requirement too.

[jpod]

• If there was a lawyer involved, maybe the malpractice was committed by the lawyer by not mentioning the 204(h) notice requirement, and my comment would extend to the lawyer and his/her insurance.  Nonetheless, if the actuary was the only one involved in advising the employer in connection with the freeze and never advised the employer about 204(h), the actuary has significant exposure in my opinion.  Of course it's always possible that the employer was properly advised and either forgot to follow through or intentionally ignored that advice. 

[My 2 cents]

Actuaries should not be providing legal advice with the idea that the sponsor or plan administrator can rely on it unless they are also lawyers, and just saying "be sure to discuss this with your legal advisor" ought to be enough to keep the actuary from sustaining any liability for a 204(h) failure even if the actuary offers a draft amendment for the freeze without mentioning the need for a notice (and the client neglects to check with an attorney).

It could depend on the terms of the service agreement with the plan sponsor.  Under normal circumstances, actuaries are not responsible for making sure that all compliance requirements are met.  Malpractice for an actuary would be bad calculations, not failure to warn the sponsor of all the hoops that must be jumped through for an action to be compliant.  Good service practice would certainly include warnings (like "be sure to give a timely 204(h) notice!"), but as the actuary is not a fiduciary or the sponsor's legal advisor, the actuary should not be subject to liability for legal malpractice.

 

[jpod]

Pension actuaries do, and are required to do, many things that involve the application of law, e.g., ERISA and Internal Revenue Code funding requirements.  If an actuary made a mistake in applying minimum funding rules, which are LAW, and as a result the employer got hit with an excise tax, that is malpractice.  It is not a stretch to conclude that a failure to mention the 204(h) requirement when an actuary is helping the employer through a freeze is also malpractice. 

[BG5150]

But, I don't think it's up to the actuary to make sure the notices were delivered to the participants.

[My 2 cents]

23 minutes ago, jpod said:

Pension actuaries do, and are required to do, many things that involve the application of law, e.g., ERISA and Internal Revenue Code funding requirements.  If an actuary made a mistake in applying minimum funding rules, which are LAW, and as a result the employer got hit with an excise tax, that is malpractice.  It is not a stretch to conclude that a failure to mention the 204(h) requirement when an actuary is helping the employer through a freeze is also malpractice. 

Making a mistake in applying minimum funding rules is what I mean by "bad calculations".  Granted that the methods to be followed in performing actuarial calculations are subject to law and regulations, that does not make performing those calculations the same as providing legal advice.   Best practices would involve helping to point out things that the plan administrator is supposed to do, but that is not the same as saying that the actuary must bird-dog the plan administrator into doing the right thing or the enrolled actuary becomes liable for the failure.  As BG5150 points out, the actuary is not responsible for making sure that the notices were delivered.

[Jim Nichols]

The managing partner of the CPA firm just called me and told me that the actuary froze the plan in 2008 by "statute" because it was underfunded and supposedly didn't inform the managing partner until five years later that it was frozen.  He also told me that they had no responsibility to tell the participants that it was frozen and that they couldn't pay out anything other than the reduced benefit that they are currently offering.  

[Jim Nichols]

I have now contacted an ERISA attorney.

[Effen]

ya, well, I am calling BS....

If the plan's funded status was below 60%, then yes, the plan was frozen by statute (the actuary didn't "do it").  However, you were definitely required to be notified at the time of the freeze, and some say every year thereafter that it was below 60%.

If it was frozen for this purpose, once the funding level increased above 60%, it was automatically unfrozen (by statute), unless the sponsor amended it to keep it frozen.  Again, a required notice.  

It sounds like you at least know the reason for the freeze, now you just need to find out if it should have been automatically unfrozen at some future date.

The plan document will determine if you get those frozen accruals back.

Make sure you attorney requests the AFTAPs for every year since 2008.

This could be sloppy work by the actuary, but it could also be a deceitful plan sponsor.

 

[david rigby]

Agree with Effen.  To elaborate, don't overlook the possibility that the real BS is someone claiming it was "frozen by statute", as an excuse upon realizing that sending the 204h notice was missed. 

[jpod]

Assuming for the sake of argument that there was a valid volitional freeze per a 204(h) notice, isn't it possible that minimum accruals were still required post-freeze under the top-heavy rules?  

[My 2 cents]

18 hours ago, Jim Nichols said:

The managing partner of the CPA firm just called me and told me that the actuary froze the plan in 2008 by "statute" because it was underfunded and supposedly didn't inform the managing partner until five years later that it was frozen.  He also told me that they had no responsibility to tell the participants that it was frozen and that they couldn't pay out anything other than the reduced benefit that they are currently offering.  

1.  OK, if that is exactly what happened, it does not sound particularly close to my understanding of what enrolled actuaries are supposed to do.  The enrolled actuary determined that the plan's funded percentage was below 60%, freezing accruals, and told nobody for years??? That just doesn't sound right.  And does the managing partner have a code section they can cite to back up the assertion that they had no responsibility to tell the participants it was frozen?  I am pretty sure that the law and regulations do require proper timely notice to the affected participants by the plan administrator (not by the enrolled actuary, who should certainly work with the plan administrator to help the plan administrator fulfill their obligations under the law). 

1 hour ago, jpod said:

Assuming for the sake of argument that there was a valid volitional freeze per a 204(h) notice, isn't it possible that minimum accruals were still required post-freeze under the top-heavy rules?  

2. If a plan must freeze accruals due to IRC Section 436, wouldn't that also freeze accruals of top-heavy benefits under 416, or would 416 override 436?

[Kevin C]

10 hours ago, Effen said:

Make sure you attorney requests the AFTAPs for every year since 2008.

 

The Form 5500-SF for years starting in 2009 or later should be available on the DOL website. The Schedule SB asks for the AFTAP.  For the actuaries, would SB line 15 be the applicable percentage? Would line 16 be the applicable percentage for the prior year?

The OP can search for the filings here:

https://www.efast.dol.gov/portal/app/disseminate?execution=e2s1

[CuseFan]

If accruals are frozen then no top heavy. PPA/436 amendment must state what happens if/when a plan comes out of a restricted period - it can provide for resumed accruals, restoration of retroactive accruals, or continued suspension of accruals. If this what happened, it is statutory and compliance with plan document. However, as someone already stated, there is clearly a participant notice requirement under ERISA 101(j), within 30 days of the freeze. DOL penalties can be severe - see below. Unfortunately, I don't think any of this gets you a higher benefit, it will only punish the plan sponsor (rightly so) and likely delay completion of the plan termination - if it hasn't been completed yet.

The DOL may assess a civil penalty of up to $1,000 per day for each failure to provide a 101(j) Notice.  The DOL can implement the penalty for failure to notify any participant, alternate payee or beneficiary, and will consider the willfulness of the failure in assessing penalties.

[My 2 cents]

15 hours ago, Kevin C said:

The Form 5500-SF for years starting in 2009 or later should be available on the DOL website. The Schedule SB asks for the AFTAP.  For the actuaries, would SB line 15 be the applicable percentage? Would line 16 be the applicable percentage for the prior year?

The OP can search for the filings here:

https://www.efast.dol.gov/portal/app/disseminate?execution=e2s1

My understanding:  Line 15 is the AFTAP (which would, to the extent applicable, take into account annuity purchases for non-HCEs during the past two years).  Line 16 (an FTAP, not an AFTAP) is only concerned with whether credit balances can be used.  The former is net of both the carryover and prefunding balances (unless the percentage prior to subtraction is over 100%, in which case the AFTAP is determined without subtracting the credit balances), while the latter is determined without regard to either annuity purchases or the carryover balance (i.e., reduced only by the prefunding balance).  Only the AFTAP determines whether Section 436 limitations on distributions or accruals apply.

[jpod]

Cuse Fan, how does what you said about TH square with this, from the IRS website:

Is a Frozen Defined Benefit Plan Subject to the Top-Heavy Minimum Benefit Rules?

Yes. A frozen defined benefit plan must meet the top-heavy minimum benefit rules.

A frozen plan may be one in which benefit accruals have ceased but all assets have not been distributed to participants or their beneficiaries. A defined benefit plan is top-heavy if, as of the determination date, the present value of the accrued benefits under the plan for the key employees is more than 60% of these benefits under the plan for all employees. If a frozen DB plan is top-heavy, it must provide top-heavy minimum benefit accruals to all non-key employees.

Many employers sponsor both a defined contribution and a defined benefit plan. In many instances, these plans’ provisions require the defined contribution plan to provide an extra minimum top-heavy contribution covering employees in both plans instead of the defined benefit plan crediting top-heavy minimum benefit accruals for these employees.

Alert: Employers that are amending a defined benefit plan to freeze benefit accruals should carefully review the plan’s top-heavy language. If these employers also maintain a defined contribution plan, they may want to amend both plans so that any top-heavy minimums are provided under the defined contribution plan. These amendments would avoid the frozen defined benefit plan having to provide minimum benefit accruals if the plan becomes top-heavy.

 

[Jim Nichols]

I've had no luck finding any 5500s on the above mentioned website.  It only goes back to 2009 but it doesn't show any matches.  I'm putting the correct plan name, sponsor name, ein and plan number in.  Is it possible that they haven't been filing 5500s since the freeze? I've also asked the plan sponsor for the 2015 form 5500 but I have not received it and don't anticipate receiving it.

[My 2 cents]

43 minutes ago, jpod said:

Cuse Fan, how does what you said about TH square with this, from the IRS website:

Is a Frozen Defined Benefit Plan Subject to the Top-Heavy Minimum Benefit Rules?

Yes. A frozen defined benefit plan must meet the top-heavy minimum benefit rules.

A frozen plan may be one in which benefit accruals have ceased but all assets have not been distributed to participants or their beneficiaries. A defined benefit plan is top-heavy if, as of the determination date, the present value of the accrued benefits under the plan for the key employees is more than 60% of these benefits under the plan for all employees. If a frozen DB plan is top-heavy, it must provide top-heavy minimum benefit accruals to all non-key employees.

Many employers sponsor both a defined contribution and a defined benefit plan. In many instances, these plans’ provisions require the defined contribution plan to provide an extra minimum top-heavy contribution covering employees in both plans instead of the defined benefit plan crediting top-heavy minimum benefit accruals for these employees.

Alert: Employers that are amending a defined benefit plan to freeze benefit accruals should carefully review the plan’s top-heavy language. If these employers also maintain a defined contribution plan, they may want to amend both plans so that any top-heavy minimums are provided under the defined contribution plan. These amendments would avoid the frozen defined benefit plan having to provide minimum benefit accruals if the plan becomes top-heavy.

 

This language is from regulations issued before the enactment of EGTRRA and ought to have been updated by the IRS (who may be considering doing that) accordingly.  EGTRRA clearly provides that service in the defined benefit plan does not count for top heavy accruals if no key employee is benefiting under that plan (as would always be the case if the accruals have been frozen, "benefiting" having the meaning of earning benefits NOW).  The law refers to "the Plan" (in a way that would NOT bring in other plans in the required aggregation group), so receipt of a defined contribution amount by a key employee would not apparently affect whether the defined benefit plan owed non-key employees recognition of new top heavy service under the defined benefit plan.  The provision in EGTRRA only makes full sense when interpreted to mean that a frozen plan that is top heavy may be treated as fully frozen with respect to top heavy minimum benefits.

Further, the entire quoted text fails to mention IRC Section 436, and thus gives no guidance as to whether 416 or 436 is to prevail when a top heavy plan is frozen under Section 436.  Obsolete language!  Action by the IRS to integrate their 416 rules with subsequent changes in the law (EGTRRA and PPA, at least) is nearly 20 years overdue.

[BG5150]

Jim, try it with just one of those items entered.

Also, do you want to send me the name of the company in a private message and I can see if I can wrangle it up?

 

[My 2 cents]

19 minutes ago, BG5150 said:

Jim, try it with just one of those items entered.

Also, do you want to send me the name of the company in a private message and I can see if I can wrangle it up?

 

This, of course, assumes that the sponsor, who may have chosen to ignore the notice requirements, was taking the trouble to file 5500-SFs.

[Kevin C]

The search engine on the DOL website is very picky and requires an exact match to the search terms.  If you have the EIN, it usually works best using only that to search.  Enter it without the dash. If you have a copy, the Summary Annual Report they are required to provide each year will show the EIN they are using for the filing.  If they stopped filing, there is another website (freeerisa) that should have the last filing or two that were done, even if it was before 2009.  If it turns out they are not filing a 5500, that's even more of a reason to contact the DOL.

 

 

[My 2 cents]

2 minutes ago, Kevin C said:

The search engine on the DOL website is very picky and requires an exact match to the search terms.  If you have the EIN, it usually works best using only that to search.  Enter it without the dash. If you have a copy, the Summary Annual Report they are required to provide each year will show the EIN they are using for the filing.  If they stopped filing, there is another website (freeerisa) that should have the last filing or two that were done, even if it was before 2009.  If it turns out they are not filing a 5500, that's even more of a reason to contact the DOL.

 

 

Since PPA, defined benefit plans are not required to issue summary annual reports.  They are required to issue annual funding notices, but why am I unsure that this sponsor has been doing so?

[ESOP Guy]

I would add on the Form 5500 search if you put in part of the name you will get more results and then you can thin from there.

Example:

You are looking for Dover Manufacturing, Inc.  but they have been filing as Dover Manufacturing.

If you put the first part in you might not get a hit. 

If you simply put Dover in you will get every company the first word in the name is Dover in the name.  So one of them ought to be Dover Manufacturing.

[Jim Nichols]

I PM'd BG5150 with all the info and he couldn't locate any 5500s either unfortunately.

[My 2 cents]

10 minutes ago, Jim Nichols said:

I PM'd BG5150 with all the info and he couldn't locate any 5500s either unfortunately.

Maybe, as I noted before, they didn't bother to file 5500s!

Was there no identifying information in the plan termination material they sent you?

[Jim Nichols]

Unfortunately there wasn't.  The letter didn't even mention when the plan was terminated.  When I spoke to the managing partner of the firm the other day he informed me that the plan was terminated on 11/1/15 (19 months ago).  I don't think that falls within the notification guidelines.

[Mike Preston]

2 hours ago, My 2 cents said:

Since PPA, defined benefit plans are not required to issue summary annual reports.  They are required to issue annual funding notices, but why am I unsure that this sponsor has been doing so?

Only if PBGC covered, right? This is a small professional firm that most likely isn't covered by PBGC.

[Kevin C]

2 hours ago, My 2 cents said:

Since PPA, defined benefit plans are not required to issue summary annual reports.  They are required to issue annual funding notices, but why am I unsure that this sponsor has been doing so?

PBGC covered DB plans are required to issue the annual funding notice instead of the SAR.  I may not be correct, but I assumed CPA firm and small company meant a professional service employer with under 25 active participants exempt from Title IV.

 

My suggestion is to contact the DOL. They have more leverage in getting information from plan sponsors than participants do.  I've had a few DOL investigators tell me that when they have an unresponsive plan sponsors, they issue a subpoena for the information they need.

 

[BG5150]

By law, the participants must be furnished with a paper copy of the 5500 and supporting documents and schedules upon request (after payment of reasonable copying costs).  Does that apply to DB plans, too?

 

[Jim Nichols]

What is my best option at this point?  To talk to the DOL or an attorney?

[ESOP Guy]

2 hours ago, Jim Nichols said:

What is my best option at this point?  To talk to the DOL or an attorney?

Part of the equation is are you willing to pay for an attorney?

The DOL costs you nothing but they are the government and move at that speed.  They do have plenty of power and if there is something wrong they will most likely find it.  They will then work on a correction.

An attorney is obviously quicker but more expensive.  it is hard to predict how a little saber rattling by an attorney will work.  An attorney can help you get a solution also.  You just don't know how much time and cost it will take. 

[Mike Preston]

3 hours ago, Jim Nichols said:

I PM'd BG5150 with all the info and he couldn't locate any 5500s either unfortunately.

Did he try freeerisa.com?

[BG5150]

Mike, great idea!  I did find it there.  2007 & 2008.  (I only have a free account).

So it looks like 2008 was the last one they filed.  The EIN matches the one Jim sent me.  Same Plan administrator, too.

Odd:  2008 the only benefit code is 3E (back then, it was the code for prototype).  2007 only had 1A and 3E.

I sent Jim a link to the form on FreeERISA.