Frozen Defined Benefit Plan and 415 Limit Increases

[Dougsbpc]

I have read threads about this and it still seems unclear.

We are looking at a plan that is a 1 participant DB that has existed 9 years but has never had an AFTAP. Benefit accruals are not frozen through year 5. Benefit accruals are frozen years 6,7,8 and 9. Clearly the participant does not get benefit increases for years 6-9. If she worked more than 1,000 hours each year in years 6-9 does she at least get a 415 limit increase for years of participation? I would think not. 

This appears to be a plan that has always been well funded. If an AFTAP is done this year (above 110%) is there any way to restore accruals (and 415 limit increases) for years 6,7,8 and 9?

Thanks!

[truphao]

Restore or not is spelled out in your Plan Document/Adoption Agreement.  It is a choice in the AA.

[Dougsbpc]

Ok so the plan document indicates that when the AFTAP is done for the subsequent year and it is certified with a high enough percentage, just the prior year benefit accrual is restored.

The document is a volume submitter.

Is it legally possible to have a provision that indicates when the AFTAP is done for the subsequent year and it is high enough, ALL PRIOR YEAR's BENEFIT ACCRUALS ARE RESTORED? If this is possible, we would have them adopt an individual design plan if necessary.

Our concern would be the potential lack of getting a 415 limit increase for those frozen years, even though the current document seems to indicate that a participant will have a 415 limit increase even if the plan is frozen as long as he/she otherwise meets the requirements to accrue a benefit (worked 1,000 hours etc.).

 

[HBActuary]

The answer is no, can't have a YOP for 415 when a plan is frozen.  There are many work arounds to your situation but the devil is in the details of what your document says on 436 restrictions and the timing things are done. But you can easily amend at some point to pick up the lost 415 years, something like .50% x YOP up to 10 which won't even have an impact on the accrued benefit. Can do it differently if you want an increase, but need to satisfy any 436 rules on amendments.  If you intentionally freeze an owner only plan best practice is to instead use .50% of pay formula x 10 YOP  to continue to pick up 415 YOP.  Or amend when you terminate.

 

 

[My Three Sons]

HB, why does the plan being frozen prevent a YOP for 415? If the participant is credited with the hours during an accrual computation period needed to accrue a benefit they get the YOP. It doesn't say that you must accrue a benefit during the year, just need to satisfy the conditions to accrue a benefit.

"A participant is credited with a year of participation (computed to fractional parts of a year) for each accrual computation period for which the participant is credited with at least the number of hours of service (or period of service if the elapsed time method is used for benefit accrual purposes) required under the terms of the plan in order to accrue a benefit for the accrual computation period, and the participant is included as a plan participant under the eligibility provisions of the plan for at least one day of the accrual computation period".

[HBActuary]

Under 415, there is no credit for a YOP when a plan is frozen because the Participant cannot accrue a benefit (i.e., participate) when the plan is frozen. It's a different story if the plan is active, but the participant does not earn an increase in their benefit, for example, a formula of $100 x YOP up to 3 YOP. In year 4 the  Participant will earn a YOP if the required hours were worked for 415.

[My Three Sons]

Is there a cite for this? What happens if the plan is opened up providing past service accruals for the frozen years?

[Bri]

I've sort of got the same question - Plan was frozen in 2013 when the sole proprietor had 5 years of participation.  Now he's got excess assets to use up, so although he could still unfreeze for 2024-2025 to get him 7 years, why not bang out an extra 5 years of participation for 415 purposes by doing a 401b3 amendment to accrue 5 more years (say from 2014-2018 at 0.5% per year to avoid triggering a contribution requirement) and really avoid worrying whether 7 years would be enough to use up all the excess?

 

On 12/13/2024 at 1:41 PM, My Three Sons said:

Is there a cite for this? What happens if the plan is opened up providing past service accruals for the frozen years?