How to Determine Unfunded Vested Benefits

General

"Unfunded vested benefits" (UVB) is the term used to describe the underfunding measure on which the Variable-rate Premium is based. For Variable-rate Premium purposes, unfunded vested benefits means the excess, if any, of:

The Premium Funding Target, over
The fair market value of plan assets.

This section describes how the Premium Funding Target and fair market value of plan assets are determined for this calculation.

Both the Premium Funding Target and the fair market value of assets are measured on the funding valuation date (i.e., the measurement date for determining the minimum required contribution) for the Premium Payment Year. For Large and Mid-sized Plans, this date is generally the first day of the plan year. For Small Plans, it could be any day during the plan year.

For premium purposes, this date is called the UVB Valuation Date to distinguish it from the Participant Count Date (see "How to Count Participants" section).

Premium Funding Target

The Premium Funding Target is the liability measure underlying the UVB calculation. It is determined the same way the funding target is determined under ERISA section 303 (minimum funding requirements) except that only vested benefits are included, and a special premium discount rate structure is used. With the exception of the discount rate structure, all other assumptions must be identical to those used to determine the minimum required contribution under ERISA section 303. However, you may make an election (irrevocable for five years) to use the same discount rates used to determine the minimum required contribution instead of the special premium discount rates. Different terminology is used to describe the Premium Funding Target depending on whether this election is in effect.

Standard Premium Funding Target – This term describes the Premium Funding Target that applies unless the above-noted election is in effect. The discount rates used to determine the Standard Premium Funding Target are the segment rates for the month preceding the month in which the Premium Payment Year begins that are determined in accordance with ERISA section 4006(a)(3)(E)(iv). For example, the December 2010 rates are used for plan years beginning in January 2011.

The ERISA section 4006(a)(3)(E)(iv) segment rates are based on the same bond yields as used to determine the segment rates for the ERISA section 303 funding target. However, for funding purposes, the yields are averaged over 24 months, whereas under ERISA section 4006(a)(3)(E)(iv), the yields are not averaged.

The segment rates needed to calculate a Standard Premium Funding Target are published by IRS each month and are also posted on the Practitioners Page of PBGC’s Web site (www.pbgc.gov).

Alternative Premium Funding Target – This term describes the Premium Funding Target if the above-noted election is in effect. In this case, the discount rates are identical to the rates used to determine the ERISA section 303 funding target for the Premium Payment Year.⁶ Thus, if an election is made under:
‑ ERISA section 303(h)(2)(D)(ii) to use the full yield curve instead of the three segment rates for purposes of determining the minimum required contribution, that same yield curve is used to determine the Alternative Premium Funding Target;

‑ ERISA section 303(h)(2)(E) to use one of the four months preceding the valuation date as the "applicable month," instead of the month containing the valuation date, for determining which month’s rates to use, that same month’s rates are used to determine the Alternative Premium Funding Target;

Since all of the assumptions used to the determine the Alternative Premium Funding Target are the same as those used to determine the funding target under ERISA section 303, the Alternative Premium Funding Target is equal to the vested portion of the ERISA section 303 funding target.

The following table compares the various 2011 funding targets for a calendar-year plan with a January 1 valuation date:

	ERISA section 303	Standard Premium Funding Target	Alternative Premium Funding Target
Benefits reflected in calculation	All benefits earned or accrued as of the beginning of the plan year	Vested portion of benefits included in ERISA § 303 Funding Target	Vested portion of benefits included in ERISA § 303 Funding Target
Discount rate basis	3 segments based on 24-month average of high-quality corporate bond yield curve Option to use full yield curve (no averaging)	3 segments based on high-quality corporate bond yield curve (no averaging)	Whatever is used for ERISA § 303
Which month’s rates?	If segment rates are uses, January 2011, December 2010, November 2010, October 2010, September 2010 If full yield curve used, December 2010	December 2010	Whatever is used for ERISA § 303
Mortality	As prescribed by Treasury Option—with Treasury approval, a plan-specific table	Whatever is used for ERISA § 303	Whatever is used for ERISA § 303
All other assumptions	Based on actuary’s expectations with some prescribed modifications if plan is at-risk	Whatever is used for ERISA § 303	Whatever is used for ERISA § 303

An election to use the Alternative Premium Funding Target cannot be revoked for five years. Until an election is officially revoked, it remains in place. For example:

If your plan is a calendar-year plan and you first elected to use this alternative for 2010, the election is still in effect; you must use it for 2011, as well as for 2012, 2013, and 2014. You may revoke the election for 2015 or any year after 2015.
If your plan is a calendar-year plan and you elect to use this alternative for the first time for 2011, the plan must also use it for 2012, 2013, 2014, and 2015. You may revoke the election for 2016 or any year after 2016.
The election (or revocation) must be made by the date the Variable-rate Premium is due. An election to use (or revoke) the Alternative Premium Funding Target is made as part of the comprehensive premium filing. If an election (or revocation) is not made as part of the comprehensive filing, it may be made as part of an amended filing only if the original comprehensive filing was made before the due date and the amended filing was made on or before the due date.

Vested benefits

As noted previously, only vested benefits are taken into account when determining the Premium Funding Target. For this purpose, a benefit does not fail to be considered vested solely because it is not protected under Code section 411(d)(6) and thus may be eliminated or reduced by the adoption of a plan amendment or by the occurrence of a condition or event. Such a benefit is vested for premium purposes (if the other requirements for vesting have been met) so long as the benefit has not actually been eliminated or reduced. In addition, certain benefits payable upon a participant’s death do not fail to be considered vested solely because the participant is still living. The benefits to which this rule applies are a qualified pre-retirement survivor annuity (QPSA), a post-retirement survivor annuity such as the annuity paid after a participant’s death under a joint-and-survivor or certain-and-continuous option, and a benefit that returns a participant’s accumulated mandatory employee contributions.

Also, a participant’s pre-retirement lump-sum death benefit (other than a benefit that returns accumulated mandatory employee contributions or a QPSA paid as a lump sum) is not vested if the participant is living. Similarly, a disability benefit is not vested if the participant is not disabled. The following examples illustrate these concepts:

Example 1 – Under Plan A, if a participant retires at or after age 55 but before age 62, the participant receives a temporary supplement from retirement until age 62. The supplement is not a QSUPP (qualified social security supplement), as defined in Treasury Reg. §1.401(a)(4)-12, and is not protected under Code section 411(d)(6). The temporary supplement is considered vested, and its value is included in the premium funding target, for each participant who, on the UVB valuation date, is at least 55 but less than 62, and thus eligible for the supplement. The calculation is unaffected by the fact that the plan could be amended to remove the supplement after the UVB valuation date.

Example 2 – Plan B provides a QPSA upon the death of a participant who has five years of service, at no charge to the participant. The QPSA is considered vested, and its value is included in the premium funding target, for each participant who, on the UVB valuation date, has five years of service and is thus eligible for the QPSA. The calculation is unaffected by the fact that the participant is alive on that date.

Fair Market Value of Plan Assets

The asset measure underlying the UVB calculation is determined the same way assets are determined under ERISA section 303 except that any averaging method adopted for funding purposes is disregarded for premium purposes. For premium purposes, the market value of assets is measured on the UVB Valuation Date and adjusted to account for contribution receipts using the same methodology as is used for funding purposes.

Adjustments for prior year contributions

If contributions for the prior plan year are made after the UVB Valuation Date, the market value is increased to reflect such contributions. Such contributions are discounted to the UVB Valuation Date, using the effective interest rate for the plan year for which the contributions were made. The effective interest rate is the rate determined under ERISA section 303(h)(2)(A) for minimum funding purposes. For example, for a calendar-year plan with a January 1 valuation date, contributions for 2010 made in 2011 count in the 2011 asset value, but the amount is discounted to January 1, 2011 using the 2010 effective interest rate.
Prior year contributions are included only to the extent received by the plan by the date of a premium filing.

Adjustments for current year contributions

If contributions for the current plan year are made before the UVB Valuation Date, the market value is decreased to exclude the adjusted value of these current year contributions. For this adjustment, current year contributions made before the UVB Valuation Date are increased to the UVB Valuation Date using the ERISA section 303(h)(2)(A) effective interest rate for the current plan year.

Note – this can happen only if the UVB Valuation Date is after the beginning of the plan year.

Comparison to asset value reported on Schedule SB

In general, the asset value used to determine unfunded vested benefits is identical to the market value of assets reported in the 2011 Schedule SB (item 2a). The only situation in which the amounts would differ is if a premium filing is made before the premium filing due date and prior year contributions are made after premium filing is made (and thus not included in assets).

Plans Subject to Special Funding Rules

Sections 104, 105, and 106 of PPA 2006 delay the effective date of the funding amendments for certain plans described in those sections, which in general deal with plans of cooperatives, plans affected by settlement agreements with PBGC, and plans of government contractors. Section 402 of PPA 2006 applies special funding rules to certain plans of commercial passenger airlines and airline caterers. None of these provisions affects how UVBs are determined. Plans in this small group must determine UVBs in the same manner (and using the same discount rate basis) as all other plans. In particular, under Section 402 of PPA 2006, certain plans may elect to use an 8.25% discount rate for funding purposes and other plans may elect to use an 8.85% discount rate. These rates may not be used to determine UVBs, even if the Alternative Premium Funding Target is elected.

Back to

Part II - Alternative Premium Funding Target election

Part III - Premium Information, item 7d - Premium Funding Target Information