Defined benefit freeze and DB-to-DC conversion costing

The Bureau of Labor Statistics describes a hard freeze as a plan that no longer lets current participants accrue additional benefits, and a soft freeze as a change to the prospective benefit formula that limits or ends future accruals. A conversion is a freeze plus a replacement: a 401(k) with an employer contribution, or a cash balance formula that credits a pay credit and interest. The BLS fact sheet was last modified May 7, 2024.

PBGC's premium form asks about both pieces. Item 15 records whether participation is closed to new entrants, and Item 16 records the nature of any accrual freeze in five categories: pay and service both frozen for all participants, both frozen for some, service frozen but not pay for all, service frozen but not pay for some, or another type (2026 premium instructions).

An amendment that significantly reduces the rate of future benefit accrual in an applicable pension plan needs a section 204(h) notice at least 45 days before its effective date (26 CFR 54.4980F-1, Q&A-9). A plan that the administrator reasonably expects to have fewer than 100 participants with an accrued benefit on the effective date gets 15 days, and so does an amendment adopted in connection with an acquisition or disposition. Applicable plans are defined benefit plans qualified under Code section 401(a) or 403(a) and individual account plans subject to the section 412 funding rules. Governmental plans and church plans with no election aren't covered.

The notice goes to each participant and alternate payee whose accrual is reasonably expected to be significantly reduced. For a reduction in the rate of future accrual it must describe the benefit formula before the amendment, the formula after it and the effective date (Q&A-11).

The penalty is an excise tax of $100 for each day in the noncompliance period for each applicable individual (Code section 4980F(b)). No tax applies to a failure corrected within 30 days when the employer used reasonable diligence, and the tax for unintentional failures is capped at $500,000 for the employer's taxable year (section 4980F(c)). Separately, ERISA section 204(h)(6) turns an egregious failure into a benefit rule: participants are entitled to the greater of the benefit with or without the amendment (Q&A-14).

The timeline shows a calendar-year plan frozen on January 1, 2027, with the notice deadline first and the PBGC and Form 5500 dates after.

A freeze stops new accruals, so the plan's target normal cost falls toward zero. Three things keep running and one starts.

• Minimum funding continues. The deadline for a plan year's minimum required contribution is 8 1/2 months after the plan year ends, and a plan with a funding shortfall in the preceding year owes quarterly installments on the 15th day of the 4th, 7th and 10th plan months and the 15th day after the plan year ends (26 CFR 1.430(j)-1).
• PBGC premiums continue. The flat rate is $111 per participant for plan years beginning in 2026 and $116 for 2027. The variable rate is $52 per $1,000 of unfunded vested benefits, capped per participant at $751 for 2026 and $783 for 2027 (PBGC, last updated October 14, 2026). Filing continues through the plan year in which a trustee is appointed, the plan merges away, coverage ends or assets are distributed in a standard termination.
• Administration and the audit continue. Valuations, the Form 5500 and the accounting disclosures don't stop on the freeze date.
• The replacement benefit starts. A DC contribution is new cost, inside the 2026 limits of $72,000 for annual additions and $24,500 for employee deferrals (IRS Notice 2025-67).

The illustrative plan below has 250 active participants, 400 participants in all and covered pay of 20,000 ($000). Check: 1,100 + 650 + 44.4 = 1,794.4 and 0 + 650 + 44.4 + 800 = 1,494.4, a difference of 300.

The example leaves out the variable-rate premium, administrative expense, transition credits and the effect of the freeze on the shortfall schedule. Those belong in the real model.

A freeze is a curtailment under US GAAP. FASB Statement 88 defines a curtailment as a significant reduction in, or an elimination of, defined benefit accruals for present employees' future services. The Codification carries this guidance in Subtopic 715-30 behind a login, so we cite the Statement.

Paragraph 12 treats the unrecognized prior service cost tied to service that is no longer expected to be rendered as a loss. Paragraph 13 nets any change in the benefit obligation against unrecognized net gains or losses. Under paragraph 14 a net loss is recognized when a curtailment is probable and the effects are reasonably estimable, and a net gain when the plan suspension or amendment is adopted. In an illustrative case, 200 of unrecognized prior service cost relating to service that will never be rendered becomes a 200 loss before netting.

IAS 19 reaches the same event by a different route. Past service cost, including the effect of a curtailment, is expensed at the earlier of the amendment or curtailment and the related restructuring or termination cost (paragraph 103), and the net liability is remeasured with current assumptions (paragraph 99). The IAS 19 and ASC 715 comparison sets the two side by side. We prepare the entry and the disclosure schedule for the signing actuary and your auditor.

The benefit already earned stays. Code section 411(d)(6) says a plan doesn't satisfy the section if an amendment decreases a participant's accrued benefit, and an amendment that eliminates an early retirement subsidy or an optional form of benefit for earlier service is treated as a reduction. So the comparison is about future service.

Our impact schedules show, for sample ages and service lengths, the frozen benefit, the replacement contribution and the projected account at retirement age. See cash balance and defined benefit plan valuation support for the design side. The mix of employer and employee deferrals is a payroll question as well, covered under benefits administration support.

ERISA funding items go to the plan's enrolled actuary. The Schedule SB attached to Form 5500 is prepared and signed by the plan's enrolled actuary, and the PBGC premium filing carries an enrolled actuary's certification of the variable-rate premium unless the plan is multiemployer, exempt or capped (2026 premium instructions, Item 21). The adjusted funding target attainment percentage certification is made by the enrolled actuary too.

Finbryn prepares the data checks, projections and schedules for that review. The engagement letter names who signs each item. The accounting numbers for a curtailment follow the other route: a credentialed signing actuary reviews and signs them, and your auditor tests them.

The notice, the plan amendment and any certification are reviewed and signed by the people the law requires. A freeze also touches the sponsor's other filings, such as the summary of material modifications, which counsel handles.