May an employer freeze a pension plan?
Author: James O'Keefe, The Seabreeze Group LLC
Yes, an employer may freeze a pension plan. In general, the freeze can take three forms.
- An employer may choose to completely bar all employees from earning additional benefits under the plan, and if the plan is fully funded all participants become fully vested in the plan.
- An employer may choose to freeze entry into the plan, excluding new employees, but allowing benefits to continue to accrue to those already enrolled in the plan.
- An employer may stop all employees from gaining additional benefits based on continued service. In this case, pension benefits are usually calculated based on the employee's final salary.
Companies may differ in their reasoning to freeze a pension plan, but they often include a need to reduce continuing expenses, to compensate for the rising cost of health care, or in response to a perceived preference of employees for a defined contribution (401k) plan.
It is important to note the decision to freeze a pension plan does not take away the benefit the employee has already earned up until the date of the freeze. The plan may be "unfrozen" in the future.