Defined benefit pension plans, including cash balance plans, require a contribution each year, which is primarily used to fund the benefits which participants accrue (i.e., earn) during the plan year.

The annual required contribution may also include an amount needed to make up a shortfall in a prior year in the investment return on plan assets. In most defined benefit pension plans, a participant earns a benefit for a plan year after working 1,000 or more hours during that year. Once a benefit for a plan year has accrued, the contribution required to fund that benefit becomes a fixed obligation of the employer maintaining the plan.

An employer failing to make the minimum required contribution is subject to a series of nondeductible excise taxes – in addition to the required contribution. Small employers have been hit particularly hard by the COVID-19 pandemic and in most cases have reduced or stopped operations. The stock market has declined sharply, which, absent a prompt recovery, will likely increase an employer’s contribution to its defined benefit pension plan.

As one result of these events, employers are looking at ways to reduce business expenses. While termination of a defined benefit pension is one possible solution, this could result in an even larger employer contribution being required for 2020, particularly when the value of plan assets has declined. In many cases, a better solution to reduce an employer’s contribution to its defined benefit pension plan for the 2020 plan year is to cease or “freeze” the accrual of benefits.

Freezing a plan requires advance written notice to plan participants and, in most cases, an amendment to the plan document. A “small plan” (fewer than 100 participants) requires 15 days prior written notice of freezing while a “large plan” (100 or more participants) requires 45 days prior written notice. To be effective for the 2020 plan year, these actions must be completed before participants have earned a benefit for this year.

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