(b)lines Ask the Experts – Must a Frozen 401(a) DB Plan Be Terminated?

“I read with great interest your Ask the Experts Q&A on frozen plans, since our organization has a frozen Employee Retirement Income Security Act (ERISA) 401(a) plan as well.
By PS

“However, in our case, it is a defined benefit plan, not a defined contribution plan. Does this change your response at all with respect to plan termination?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:  

All of the elements of our response to the previous question regarding 401(a) defined contribution plans would apply to defined benefit (DB) plans as well. However, due to funding and other concerns, DB plans that are subject to ERISA can be more difficult to terminate, which is why it is not uncommon to see frozen DB plans remain frozen for long periods of time prior to termination.

Specifically, frozen DB plans often do not have sufficient assets to pay out benefits to all participants, which is required when a plan is terminated. What occurs on many occasions is that the plan sponsor attempts to fund the asset shortfall over several years, and then terminate the plan when it is fully funded in what is called a standard termination.

In addition there are some ongoing administrative obligations which are unique to frozen ERISA DB plans, such as the payment of Pension Benefit Guarantee Corporation (PBGC) premiums, recognition of the plan on the sponsoring employer’s balance sheet, and satisfaction of minimum funding requirements. For an excellent assessment of all of the issues associated with freezing and terminating defined benefit plans, this article certainly fits the bill. As an aside, you may recognize one of the authors!

Thank you for your question!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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