Blog
March 30, 2020
Plan Amendment to Minimize Required Contribution
We wanted to reach out to you in this time of uncertainty and all of us at BEI hope you and your family are well, during this unprecedented time in our nation and world. We understand that the demands of running your business and taking care of your employees are first and foremost on your mind. And that your defined benefit plan or cash balance plan may not be on your mind at this time, but we are just looking ahead and want to bring you this information.
You might want to consider this scenario: If your business slows down this year, you might chose to contribute the minimum amount required for 2019. Then let’s say the stock market doesn’t recover by the end of the year, your pension contribution for 2020 which is not due until 2021, may be more than you can afford. We have a solution, but you would need to act now.
The rules set forth by our government say that after you have worked 1,000 hours in your Plan Year, you must make a contribution to your pension plan. You can substantially decrease this requirement by “freezing” the plan for 2020. Freezing means you are putting a hold on the pension plan accruing more benefits.
Therefore, you may want to freeze your defined benefit plan or cash balance plan for the 2020 Plan Year. By freezing the plan now, this could reduce your 2020 minimum required contribution. However, there is no guarantee there will not be a required contribution, but freezing it will definitely lower your required contribution. By law you cannot retroactively amend a plan to eliminate, or substantially reduce 2019 or 2020 contributions, after working 1,000 hours in your Plan Year.
In order to freeze a plan, the plan must be amended at least 15 days prior to any participant (this includes owner only plans) who is working 1,000 hours. Please note: If your plan year is not on the calendar year your timing will be different.
FAQ’s About Freezing Your Pension Plan
Q. How long can the freeze be in place?
A. Many years.
Q. When can I unfreeze the plan?
A. Anytime up to the Plan Year end. It would be as if you never froze the plan.
Q. What if I wait until 2021 to decide?
A. You have until March 15, 2021 to unfreeze. Then we need to determine to what extent you want to make up for not accruing a benefit in 2020.
Q. What if I don’t want to make up the accrual?
A. We would amend to plan to reduce your future liability.
Q. Do I still have to make contributions for my employees, if I have a 401(k)/Profit Sharing Plan?
A. You will most likely have to contribute around 3% of an employee’s salary.
Please let us know by April 16, 2020, if you want to freeze your plan for 2020. As always there is a small administrative cost to amend the plan.
You will still have the ability to contribute to the plan for 2020, if you desire and to amend the plan, and when you feel comfortable again.
Michael Gorelick, APR
President