Which governs, frozen accrued benefit or indexed 415 Dollar Limit?

[David MacLennan]

Suppose a DB plan is amended to eliminate future benefit accruals (benefit "freeze"). At the time the amendment is adopted (or effective date, if later) A participant in this plan has a benefit governed by the 415 $ limit. For example, suppose his accrued benefit under the benefit formula at the time of the freeze is $8,000/mo, but the 415 $ limit is $6,000/mo. Since his accrued benefit under the formula is $8,000/mo, is he entitled to future benefit increases as the 415 $ limit is indexed, regardless of the benefit freeze? Or, since the 415 $ limits are presumably part of the plan document's provisions, can the benefit "freeze" eliminate entitlement to the 415 $ limit indexed increases?

[Guest]

Unless the freeze amendment specifically precluded it, I think you could allow the increase.His plan benefit actually is $8,000,not the $6,000 that is "artificially" imposed by 415.If the benefits had not been frozen any non-discrimination testing would be done without regard to the limit,no? But I can also think of two problems:

1.If the benefit is maintained at $6,000 there is no question that the participant isn't benefiting for purposes of 410(B) and therefore passes coverage automatically.(I'massuming he's an HCE.)If the benefit rises due to the indexing is he now considered benefiting under 1.410(B)-3(a)(2)(ii)? If so,then you fail coverage unless there are NHCE's in the same boat.Probably not.

2.What is the funded status of the plan? If the benefits were frozen because the plan was underfunded you might not be able to pay the increase anyway.

[Guest]

The terms of the plan document (e.g., do terminated employees have their benefits adjusted for section 415 increases?) and the purpose for which the benefit is being frozen (e.g., section 401(a)(4) "fresh start" or statutory change) drive the answer here. There is too much information needed before any reasonable answer can be given.

SDOLCE -- your reference to section 410(B) problems is confusing to me. So what if the employee is benefitting under section 410(B)? The employer simply runs the ratio or reasonable classification/ABT tests and includes the employee. Why would his inclusion cause section 410(B) problems?

[Guest]

HarryO-If all benefit are frozen,then no HCE benefits,and the plan will automatically pass 410(b)per 1.410-2(B)(6). If the participant in question is an HCE and he is considered to be benefiting (this is a question,not a statement) because of increase in the indexed 415 limit,then you no longer have the automatic pass, so you have to test. Assuming that there are no NHCE's who are similarly situated,the ratio % test will fail.Since the ratio % is -0- then the Average Benefit Test will fail also.The key question to me is whether the participant is "benefiting".He does realize an increase in his benefit due to the increase in the index,and a participant whose benefit is limited by 415 is considered to be benefiting for purposes of 410(B). On the other hand,his benefit has not increased over his "true" frozen accrued benefit of$8,000. Am I overthinking,underthinking,or what?

[David MacLennan]

I'm not sure either of your responses address what I want to get at. Or, perhaps the answer to my question is self-evident to other practitioners' thinking, and so you're looking for other issues. Or, maybe I'm just confused!

Sdolce - is his benefit really $8,000 when the 415 $ limits go up in later years? This is the question I want to focus on. Why not $6,000 since the plan document, taken in its entirety (i.e., including 415 provisions), says the benefit is $6,000?

Harry O - the plan is being frozen by the plan sponsor in an effort to cease all future benefit accruals for actives and terminees (if a reason is needed, let's say the assets dropped precipitously in the last year, and the sponsor wants to limit contributions, something that has happened to many small DB plans).

My own opinion is that the sponsor has the right to eliminate all future benefit accruals (TH 416 and certain 401a4 issues excluded) due to increases in 415 limits, as long as these limits are found in the plan document (and they would be of course). It seems the amendment to truly freeze benefits could not simply say the formula is now 0% of AMC (combined with the standard no reduction in AB provision), but would have to specifically cease all future benefit increases, which really cannot be done in many of the prototypes I've seen w/o going outside the elective provisions in the adoption agreement. If the prototype has fresh start provisions, the 0% fresh start w/o wearaway may work, if the document follows the regs and defines the frozen benefit as the benefit to a terminee, and the document says terminees don't get 415 increases, which I think may have been Harry O's thought.

Another variation on this theme w/o any presumed amendment of the plan: If 415 was suddenly repealed in its entirety, and if the 415 limits are in the document, I don't think plan sponsors would be on the hook for the benefit cost increase.

[Guest]

You're confused,I'm confused,and if Harry O is still on the board I'm sure he'd make it unanimous.But we may not be as far apart as we think.If the freeze amendment does not specifically include 415 increases in the freeze (which seems to be where you're going in your comments to Harry O above) I think you can (must?) allow the benefit to go up annually with the index,but not to exceed $8,000. However, if you do,you'll run into the testing issues I've outlined above.I've checked this with an ERISA attorney and he agrees. Either we're both right or we're two not-so-great minds running in similar channels. The testing may not be as bad as I thought if the plan is top-heavy and minimum benefits are granted to the non-keys,but it still has to be considered.

But what are you trying to accomplish? If the plan is already underfunded the participant (again, I'm assuming he's an HCE) may never realize the increases. Does this make the problem academic?