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Freezing Defined Benefit Plans

Practical Law Company
May 2014

In the current economic climate more companies are freezing their defined benefit plans. This used to be a rare event that usually involved only financially-strapped companies. Yet lately, profitable companies have joined the chorus of those announcing freezes to their plans.

The general cause seems to be that US companies are reacting to stiff competition overseas and at home from companies that do not sponsor defined benefit plans. Many pension plan freezes are also in response to companies' growing concern that defined benefit plans have become more costly and risky, with no relief on the horizon. In view of these developments, defined benefit plan freezes are likely to continue.

Freezing a defined benefit plan may help to reduce a plan sponsor's long-term cost and the volatility of a plan sponsor's financial obligations. However, once a pension plan is frozen, the plan sponsor and the frozen pension plan's fiduciaries retain important ongoing obligations and duties under both the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC). Failure to comply with these obligations and duties could have significant adverse consequences to the plan sponsor, the plan fiduciaries, plan participants and their beneficiaries. Therefore, when considering a plan freeze, a plan sponsor should carefully analyze its long-term strategies for the management and disposition of the frozen plan to avoid significant liability exposure in the future.

The attached article explains:

  • Some common reasons for choosing to freeze a defined benefit plan.
  • The difference between freezing and terminating a defined benefit plan.
  • Types of plan freezes.
  • The various implications of a plan freeze.
  • The process of freezing a defined benefit plan.
  • Long-term strategies for frozen defined benefit plans.