Pension Plans Pension Plans

							Pension Plans: General: Is a company permitted to freeze its
pension plan?
1/22/2010




Yes. Companies are permitted to freeze their pension plans as long as the benefits that
employees have already earned are protected. The Bureau of Labor Statistics collects data on
frozen defined benefit pension plans. According to its March 2008 National Compensation
Survey, one-fifth of all private industry workers participating in a defined benefit plan are
affected by a freeze. An up-to-date list of U.S. companies that have announced the freezing of
accruals for pension plan participants is available on the Pension Rights Center web site.

Freezing a pension plan means that some or all employees in the plan stop earning some or all
benefits effective with the date of the freeze. Employers freeze their pension for a variety of
reasons. Some cite domestic and global competition from companies that do not have pension
plans. Others say that the increasing cost of providing health insurance prevents them from
continuing a pension plan. Other employers state that employees prefer defined contribution
plans, such as a 401(k) plan, to which they contribute and for which they make their own
investment decisions. Employers facing difficult financial circumstances freeze their pension
plans to reduce expenses, placate creditors or avoid bankruptcy.

There are different ways an employer can freeze a pension plan. It may stop employees from
earning future benefits. When the plan is fully funded, covered employees become 100
percent vested immediately, but they would not earn any additional benefit. Another way is
allowing the plan to continue for employees already in the plan but not covering new
employees. A third type of freeze stops employees from receiving credit for years of work after
the effective date of the freeze but permits calculations of the benefit to be made based on the
pay level at time of termination instead of on the effective date of the freeze.

Some employers decide to terminate their pension plans instead of freezing them. There are
two ways an employer can do this. The employer can end the plan in a standard termination
after showing the federal agency, the Pension Benefit Guaranty Corporation (PBGC), that the
plan has enough money to pay all benefits owed to participants. The plan must either
purchase an annuity from an insurance company or issue one lump-sum payment that covers
an employee’s entire benefit. If the plan is not fully funded, the employer may apply for a
distress termination if the employer is in financial distress. PBGC cannot grant the application,
however, unless the employer proves to a bankruptcy court or to PBGC that it cannot remain
in business unless the plan is terminated. If the application is granted, PBGC normally will take
over the plan as trustee and pay plan benefits, up to the legal limits, using plan assets and
PBGC guarantee funds.