What To Do With A Closed Or Frozen Pension Plan

What To Do With A Closed Or Frozen Pension Plan

February 04, 2020

There are a number of reasons that an employer might choose to freeze its pension plan. Perhaps they simply cannot afford it anymore. Maybe they just wanted to go in a different direction with their employee benefits. They could feel that employees didn’t value the plan and would prefer a savings plan or better health benefits. Or two companies merged and it didn’t make sense to merge the pension plans so one was frozen.

What Does It Mean To Freeze A Pension Plan?

When a pension plan is frozen, it means that some or all of the participants covered by the plan can no longer accrue benefits going forward. It does not affect past benefits; any benefits that an employee has already earned cannot be taken away. Sometimes a plan is completely frozen and no participants can earn future benefits. It’s also possible to freeze a plan where it is closed to new employees but old employees can continue to participate.

Freezing a pension plan does not end the plan. The plan continues to operate, just new benefits are not accrued. The plan is still insured by the federal Pension Benefit Guaranty Corporation and the possibility remains to unfreeze the plan in the future.

Option 1: Unfreeze The Plan

One option is to unfreeze the pension plan and allow participants to accrue benefits once again. This is not a common option because most companies freeze their plans in order to move away from them. However, it does provide the option of continuing with the same plan if the company decides against their other alternatives.

Option 2: Keep The Plan Frozen

Another option is to simply do nothing and keep the plan frozen. This may be a good option for companies that don’t want to make any major decisions or big moves. Businesses that want to honor their intentions to their older employees can maintain a frozen plan for legacy employees but not allow in new participants. Underfunded plans may prefer to stay frozen and wait for more favorable financial or economic conditions because termination would require the involvement of the Pension Benefit Guaranty Corporation.

Option 3: Terminate The Plan

Companies that are completely sure that they don’t want to sponsor the pension plan anymore and don’t want a frozen plan hanging over their heads can completely terminate the plan. Doing so ends all plan operations. If the plan has sufficient funding, it can be turned over to an insurance company that will take over payment of the benefits. Participants can be offered annuity payments, a lump sum, or a choice between the two.

Underfunded plans can apply for a distress termination. In such cases, the Pension Benefit Guaranty Corporation takes over the plan and is responsible for paying plan benefits up to a certain limit. It’s important to note that funded status for a plan termination requires more assets than maintaining funded status on an active plan. 

Making The Decision

Choosing what to do with a frozen pension plan is a major decision that should not be taken lightly. There are a lot of different factors that must be taken into consideration and important steps that must be taken to maintain legal compliance. If you are an advisor helping a business owner client think through this topic, you would benefit from partnering with an experienced pension consultant.

At FinancialFocus Retirement Plan Services, we can work with you and your clients to determine the best step forward and also assist with compliant implementation. If you have a client with a frozen pension plan, email me today at info@ff401k.com.

About Kenny Phan

Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.