415 dollar limit and frozen plan

[Hojo]

I've tried searching for an answer to this and cannot find a direct source for a response.  Also, my plan document is eerily quiet on the issue so I thought I'd look for some ideas here.

I have a plan that was effective 1/1/2013 and frozen 1/1/2016.  The formula is 10% of comp per year of service and 3 year average comp of $260,000.

As of the freeze date, the monthly accrued benefit is $6,500, but is limited to the 415 dollar limit of $5,250 (due to the limit of 3 years plan participation).

As of 1/1/2017, the plan formula is still $6,500, but does the 415 dollar limit increase to $7,000 due to another year of plan participation?

 

[david rigby]

There are different applications of the term "frozen".  The place to start is the freeze amendment.

[Hojo]

Yeah, that's where I started and as I said in the original post, it was eerily quiet.

[david rigby]

Trying to read between the lines, it sounds like there may be no separate amendment to freeze the plan (unusual but not impossible).  Whether or not a separate amendment exists, it is essential to understand what the plan says/intends.  If it simply states "the benefit is frozen at 1/1/16" (or something similar), two things should happen: (1) the person who drafted the plan should be drawn and quartered, and (2) someone must interpret the exact words that do exist.

IMHO, a plain reading of "freeze" or "frozen" means no further accruals, and 415 participating service would not be an override.  In other words, if the plan is intended to allow for growth in the benefit solely due to additional participating service, that plan provision should be stated clearly; if it's not there, it doesn't exist.

Other readers may have different views.

[Hojo]

That would also be my thought process as well.  I just wanted to get some other opinions.  I worry that if it's not implicitly stated that participation service would continue to accrue and therefore the limit would continue to increase.

There is a note that no new employees who meet the eligibility requirements after the freeze date would become participants (which I could argue means that no one can earn additional participation service). 

I think any other interpretation would lead to a26 issues as well as other non-discrim issues.

[Calavera]

Years of participation for 415 purposes are tied to years of benefit accrual service (see Years of Participation definition under 1.415(b)-1). So I am not sure that you can even recognize additional years of participation for 415 purposes when a plan is frozen. But what you can recognize is increase in the 415 $ limit. However this amendment will be discriminatory if you have any non-HCEs in your DB plan.

[Effen]

Is this a one person plan, or are there other participants?  I know that shouldn't matter, but I think it is often helpful to consider the implications of the various interpretations.  

If it is a one life plan than I wouldn't worry about discrimination.  I know the IRS can always raise the issue, but the chances they ever look at this are slim.  If it has other participants, then you need to consider discrimination issues.  I don't recall if increases in 415 limit are considered to be accruals (I think they are), but giving only the HCE an increase would likely cause problems.

I think the $6,500 is safe, assuming you don't have any discrimination problems.  I don't think the $7,000 would be permitted since that would require an increase in the plan-defined accrued benefit.  I also think the $5,250 is probably ok,  

In all situations, it might be helpful to draft a clarifying resolution defining exactly what the intent was in the amendment, even after the fact.  If there are other participants you need to think through the discrimination implications, and I wouldn't do anything that could potentially be discriminatory, but if there are no other employees, I think it is fairly safe to go with whichever answer you want.

 

[Hojo]

It was a husband and wife plan.  The intent was to freeze the benefit at the $5,250 level so we proceeded under that assumption.

[Calavera]

Check what your plan document says about a year of participation/accrual. You mentioned that the plan was frozen 1/1/2016 and not 12/31/2015. If your year of accrual is based on 1 hour of work, you may have 4 years and not 3 years of participation. Otherwise you should be good, and the benefit will stay at $5,250 level.