What Is a Frozen Pension Plan?

A pension plan is a type of defined benefit plan for retirement savings. Your employer makes contributions and you receive monthly payments from the account when you retire. Pension funds can be expensive for companies to maintain and in some cases, an employer may decide to freeze its plan. If your pension is frozen, it can have a significant impact on the amount of benefits you'll receive once you retire.

Companies can opt for a hard freeze or a soft freeze of a pension plan. A hard freeze means that your employer stops contributing to your pension account altogether. You won't lose any of the money you've already accumulated but it effectively reduces the amount you'll get when you retire. Monthly payouts are typically based on your age, current salary and the number of years you've been with the company.

When a pension is frozen, the payout is calculated based on these factors at the time the freeze was put in place. This means that even if you're earning a higher salary by the time you retire, it won't increase your pension plan payments.

A soft freeze also means your pension benefits will be reduced, but it's not as severe as a hard freeze. With a soft freeze, your pension benefits continue to grow based on increases in your salary, but you won't get credit for any additional years of service.

Your employer also has the option of putting a cap on the salary amount used to calculate your monthly benefit. For example, your benefits could be based on an average of your salary over a period of years rather than your salary at retirement. Depending on the company, a soft freeze might impact all employees or just a specific group, such as new hires.

If your employer decides to freeze your pension, it might offer retirement alternatives like a 401(k), 403(b) or 457 plan. These types of plans are defined contribution plans, which means you're responsible for making your own contributions. Your employer can offer matching contributions but is not required to.

With this type of plan, you're not guaranteed a set amount of money once you retire. The size of your nest egg ultimately depends on how much you contribute and how well your investments perform. There is an upside, however, since you can easily roll your plan over to another retirement account if you decide to leave your job.

In some cases, a company might decide to terminate a pension plan rather than initiate a freeze. Under federal law, you're entitled to receive all of the money in your account if your pension is terminated. Typically, you'll receive the benefits as a lump sum, which you can roll over into an individual retirement account. Keep in mind that if you don't roll the funds over, you'll have to pay income tax and a 10 percent penalty on the money.