415 Compensation Limit in Frozen Plans - Does it Stop Increasing at Freeze?

[DW]

Assume DB plan frozen in 2015, no future credited service or pay - hard freeze. 

Older participants working significantly past normal retirement have a solid chance of running into compensation limit even if they're well below the dollar limit (pleasant workplace and working very late age full time not uncommon).

When I read 415 regulations, I see that the compensation limit is described as being based on compensation earned during "years of service". When you follow the link defining years of service, describes service credited for benefits. Service to the company doesn't stop, but the freeze stops earning years of benefit service.   

Participants continue to get pay increases as time passes. Assume all participants are full time - no phony active participants "working late in life" but not actually showing up. When doing the final retirement calculation, which years of compensation are allowed:

1) only those earned prior to the hard freeze?

2) years that would've otherwise met the definition for service except for the freeze amendment through cessation of employment (as in, all years of employment, not just years before freeze)?

[DW]

Chat gpt's answers to questions like this are humorous. Sky is blue followed by "contact a professional and read the IRS website".

Somehow I hoped that AI would improve finding the harder to find bits of guidance so that questions like this are pondered and answered in five minutes. I guess it's not there yet. 

[david rigby]

Suggestion: read the plan amendment that effected the plan freeze.  The usual definition of a "hard freeze" is to determine the accrued benefit (usually expressed as an annuity that commences at Normal Retirement Age), and that amount does not go up or down.  If there is anything that later changes that (such as amendment that could permit a higher benefit), the plan will no longer be "frozen".

[Effen]

Are you actuarially increasing the post NRA benefit and asking what years should be used to determine the 100% of the pay limit? 

As David said, if the plan was really "hard frozen", I think you would limit it to the average compensation used before the freeze.  However, nothing legally wrong with using the current average compensation for that purpose, but would probably require a plan amendment.  Consider that any time you amend the plan the effect of the amendment needs to be non-discriminatory, therefore, if the only person who would benefit from the change is an HCE, then the amendment would be difficult to justify.  However, if the amendment would benefit NHCEs, then the amendment would likely be fine. 

[DW]

Thanks, both of you. I'll check the plan amendment, and yes, the NRA benefit is being increased both after NRD to RMD age and then for what would've otherwise been RMD age. So, quite a stiff actuarial increase. Generally a 50% benefit at full service, but actuarial increases can blow past that without any trouble for a late retiree. maybe not a usual situation other than - in my experience - hospitals, where some low-income participants will practically work until they drop. In this case, the employer is unique and many people work late. 

Counsel who wrote the document is now out of the picture, unfortunately. Otherwise, I would typically just ask counsel to confirm anything that's not clear. 

[david rigby]

3 hours ago, DW said:

Counsel who wrote the document is now out of the picture, unfortunately. Otherwise, I would typically just ask counsel to confirm anything that's not clear. 

There are other ERISA lawyers.  If you have any doubts (any!), then getting legal review may be worthwhile.  

[DW]

On 11/27/2023 at 4:58 PM, david rigby said:

There are other ERISA lawyers.  If you have any doubts (any!), then getting legal review may be worthwhile.  

In this case, I suggested it. In all cases where the document isn't clear, I recommend it in writing unless I can get a hold of someone at the IRS who will give a definitive answer. 

A lot of my clients have an aversion to their counsel due to wandering (when asking a question, counsel answers 14 others and charges for all 15), but this one is big enough that it should have a review. 

I'm surprised there's no clear guidance for this one, though. I don't work on limit plans and get tied up when age-related circumstances arise like this once in a great while. Maybe I'm in the weeds and perhaps people hitting the pay limit in later age would be substantial owners in limit plans.