If a plan is effective 1/1/2002 and freezes benefit accruals as of 12/31/2006 (but is NOT terminated) and terminates as of 12/31/2007, what is the fractional reduction in the 415 dollar limit?

Is it 5/10 or 6/10?

5

You need to earn a year of accrual service as defined under the plan.

So if you need an extra year for 415 purposes, instead of freezing the plan, the plan should adopt a really small formula, and then freeze at termination? Cite please.

I believe 6/10 is the correct answer. See the final 415 regs:

"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 . . ."

As I read this, it does not say that you must accrue a benefit, only that you must satisfy the hours requirement for a benefit accrual. The language would be different (and simpler) if they wanted to link the 415 YOP with benefit accrual. I'll be interested to see if I have persuaded AndyH, and what others have to say.

I believe 6/10 is the correct answer. See the final 415 regs:

"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 . . ."

As I read this, it does not say that you must accrue a benefit, only that you must satisfy the hours requirement for a benefit accrual. The language would be different (and simpler) if they wanted to link the 415 YOP with benefit accrual. I'll be interested to see if I have persuaded AndyH, and what others have to say.

David,

That has been our interpretation also. However, we have only had the need to utilize that with a few clients, and it's never been brought up in an IRS examination with any of them.

Looking at this again, I agree. I should have checked rather than going from memory.
6/10 is correct.

The new 415 regs provide no different language than what Notice 87-21 did previously on this topic. One could argue it's impossible to be credited with at least the number of hours of service required under the terms of the plan in order to accrue a benefit for the accrual computation period if the plan is frozen. Because no matter if the participant worked 1 hour, 1,000 hours or whatever, they didn't accrue an additional benefit.

Anyone want to look up a Gray Book answer on this?

I found nothing in the Gray Book on point.

Can I change my mind again, but only 50%? Now I know where my initial comment came from.

IRS audit guidelines. Bold is my emphasis.

"In determining a participant’s years of participation for these purposes,
Q&A-7 of Notice 87-21 provides that a participant is credited with a year
of participation (computed to fractional parts of a year) for each accrual
computation period for which the following conditions are met:
a. 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
b. 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.
c. If these two conditions are met, the portion of a year of participation
credited to the participant is equal to the amount of benefit accrual
service credited to the participant for such accrual computation
period. Thus, where the terms of a plan provide that a participant
with 50 hours of service earns a year of service for benefit accrual
purposes, a participant with 50 hours of service could be credited
with a year of participation for purposes of IRC 415(b)(5).

The same fractional Year of Participation rule is in the final 415 regs (applies when benefit service can be accrued in fractional amounts).

This interpretation makes sense. If a plan had a strange provision that say only counted the first 8 years of service for benefit determination purposes, the 415 phase-in would still accrue over 10 years so it's possible some participant could accrue benefits beyond 8 years while others accrue their benefits over 8 years.

Any comments?