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General
"Unfunded vested benefits" (UVBs) 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:
This section describes how and when the Premium Funding Target and fair market value of plan assets are determined for this calculation.
Which year’s UVBs
In general, Variable-rate Premiums are based on UVBs for the Premium Payment Year. However, most Small Plans are subject to a Lookback Rule, under which the Variable-rate Premium for the Premium Payment Year is based on UVBs for the plan year preceding the Premium Payment Year - for example, the 2014 Variable-rate Premium is based on UVBs for 2013 (the Lookback Year). For 2014, a Small Plan is required to use the Lookback Rule unless the plan:
Special rules for New and Newly Covered Small Plans
The reason the Lookback Rule doesn’t apply to New and Newly Covered Small Plans is because such plans don’t have a covered prior year to look back to. So, special rules apply. If a New or Newly Covered Plan is Small and:
Opting out of the Lookback Rule Starting with 2014
A Small Plan that would otherwise be required to use the Lookback Rule for 2014 may opt out of doing so, and instead use current year UVBs to determine the Variable-rate premium. A decision to opt out of the Lookback Rule remains in place for all subsequent years unless and until PBGC grants permission for you to start using the Lookback Rule in the future. PBGC will review such requests based on the facts and circumstances and will grant such requests only for good cause in appropriate circumstances. PBGC will not grant requests made solely to reduce premiums. Information on how to make such a request will be provided in time for 2015 premium filings.
No special election is required to opt out of the Lookback Rule starting with 2014, nor is PBGC approval required. To opt out, simply use UVBs measured as of the UVB Valuation Date for the current year to determine the 2014 Variable‑rate Premium and report those data in the Variable-rate Premium section of the filing. Please use extra caution to ensure the data are entered correctly because if the reported UVB Valuation Date is within the Premium Payment Year, we will expect all future filings to be completed using current year UVBs to determine the Variable‑rate Premium.
Opting out of the Lookback Rule Starting with a Year after 2014
If a plan had the opportunity to opt out in a prior year, but did not take advantage of that option, PBGC approval is generally required to opt out starting with a year after 2014. PBGC will review such requests based on the facts and circumstances and will grant such requests only for good cause in appropriate circumstances. PBGC will not grant requests made solely to reduce premiums.
PBGC approval is not required for a plan that wants to opt out starting with the first plan year it would otherwise be expected to use the Lookback Rule. For example, approval will not be required in these situations:
In addition, with respect to a plan that is eligible for the Small-employer Cap for 2014 and chooses to pay the cap rather than calculating the Variable-rate Premium based on UVBs and paying the lesser of the two amounts, PBGC approval is not required if such plan wants to opt out of the Lookback Rule the first year after 2014 it decides to do the full calculation and pay the lesser of the two amounts.
As is the case for a plan that opts out of the Lookback Rule starting with 2014, a decision to opt out of the Lookback Rule starting with a year after 2014 remains in place for all subsequent years unless and until PBGC grants permission to start using the Lookback Rule in the future. Guidance with respect opting out of the Lookback Rule for a year after 2014, including how to request approval, will be provided in time for 2015 premium filings.
Measurement date
Unfunded Vested Benefits are measured on the funding valuation date (i.e., the measurement date for determining the minimum required contribution) for the applicable plan year (i.e. either the Premium Payment Year or the Lookback Year, depending on whether the Lookback Rule applies). Regardless of whether the Lookback Rule applies, this date is called the UVB Valuation Date to distinguish it from the Participant Count Date (see "How to Count Participants" section). So, for plans using the Lookback Rule, the UVB Valuation Date is the valuation date used to determine the minimum required contribution (i.e., "the funding valuation date") for the Lookback Year. For all other plans, the UVB Valuation Date is the funding valuation date for the Premium Payment Year.
Examples
The following examples illustrate these rules:
Example 1 – Plan A, a calendar year plan, is not a Small Plan and therefore, in accordance with ERISA 303 must have a beginning of year valuation date. Plan A’s Variable-Rate Premium for 2014 is based on UVBs for 2014 (i.e., the Premium Payment Year) measured as of 1/1/2014. This result is not dependent on whether the plan is a Continuation Plan.
Example 2 – Plan B is a pre-existing Small Plan and is therefore is subject to the Lookback Rule. Plan B has a calendar year plan year and a beginning of year valuation date. If Plan B does not opt out of the Lookback Rule, its Variable-rate Premium for 2014 is based on UVBs for the plan year beginning in 2013 (i.e., the "Lookback Year" measured as of 1/1/2013). If Plan B opts out of the Lookback Rule, its Variable-rate Premium for 2014 is based on UVBs for the plan year beginning in 2014 measured as of 1/1/2014.
Example 3 – Plan C is a pre-existing Small Plan and is therefore subject to the Lookback Rule. Plan C has a calendar year plan year and a year-end valuation date. Assuming Plan C does not opt out of the Lookback Rule, its Variable-rate Premium for 2014 is based on UVBs for the plan year beginning in 2013 (i.e. the "Lookback Year") measured as of 12/31/2013.
Note – in this case, it would not make sense for Plan C to opt out of the Lookback Rule. Doing so would mean its Variable-rate Premium for 2014 and all future years would be based on UVBs as of the end of the Premium Payment Year. For years after 2014, that measurement date would be 2½ months after the due date.
Example 4 – Plan D is a New Small Plan with a calendar year plan year and a year-end valuation date. Plan D was created as the result of a non de minimis spin-off on January 1, 2014 and is therefore considered a Continuation Plan for 2014. Even though Plan D is a Small Plan for 2014, it is not subject to the Lookback Rule for 2014 because it is a Continuation Plan. Therefore, Plan D’s Variable-rate Premium for 2014 will be based on UVBs for 2014 (i.e., the Premium Payment Year) measured as of 12/31/2014.
Note that Plan D’s 2014 premium is not due until 3/30/2015 (90 days after the 12/31/2014 UVB valuation date).
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, all other assumptions must be identical to those used to determine the minimum required contribution under ERISA section 303.
In lieu of using the special premium discount rates, you may make an election (irrevocable for five years) to use smoothed discount rates, similar to, and in some cases identical to, the rates used to determine the minimum required contribution. Different terminology is used to describe the Premium Funding Target depending on whether this election is in effect.
- In the case of a Small Plan using the Lookback Rule, the month before the month in which the Lookback Year begins.
- In the case of any other plan, the month before the month in which the Premium Payment Year begins.
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, unlike ERISA 303 segment rates which are averaged over 24 months, the segment rates used to determine the Standard Premium Funding Target are not averaged. These "spot" segment rates are published by IRS each month and are also posted on the "Interest Rates and Factors" section of the Practitioners Page at www.pbgc.gov.
- 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; or
- 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, determined without regard to the MAP-21 Stabilization Rules, are used to determine the Alternative Premium Funding Target.
An election to use the Alternative Premium Funding Target cannot be revoked for five calendar years. Until an election is officially revoked, it remains in place. The following example illustrates the rules on making and revoking an election to use the Alternative Premium Funding Target.
Example – Plan A first makes an election to use the Alternative Premium Funding Target for a plan year that begins on April 1, 2014. In this case, the Alternative Premium Funding Target must be used to determine unfunded vested benefits for all plan years beginning before April 1, 2019. The plan may revoke the election first effective for any plan year beginning on or after April 1, 2019, but unless the election is revoked, it will remain in place.
This is the case even if the plan year subsequently changes. For example, if the plan year is changed to the calendar year first effective January 1, 2019, the Alternative Premium Funding Target must be used for the short plan year April 1, 2018 – December 31, 2018 and for the January 1, 2019 – December 31, 2019 plan year. The first plan year for which Plan Administrator may revoke the election is the 2020 plan year.
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 amended filing was made on or before the due date.
Vested Benefits
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 qualified social security supplement (QSUPP) 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.
Estimated Premium Funding Target
If the Premium Funding Target is not known by the due date, an estimated Variable-rate Premium may be paid on the due date. Doing so triggers the need to submit an amended filing at a later date to reconcile the actual Variable‑rate Premium with the estimate. In the event the actual Variable-rate Premium is greater than the estimate, penalties for late payment will be waived if the estimate meets certain criteria and the reconciliation filing is made by the end of the sixth calendar month that begins on or after the premium filing due date (generally April 30th after year end for calendar year plans). For additional information see "Automatic Penalty Waiver for Late Variable-Rate Premiums" in the "Late Payment Charges" and the "Correcting Filings, Reconciling Estimates, Refunding Overpayments" section.
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 plan year prior to the Premium Payment Year (or, in the case of a plan using the Lookback Rule, the plan year preceding the Lookback Year), are made after the UVB Valuation Date, the market value is increased to reflect the value of such contributions discounted to the UVB Valuation Date. The discount rate for this purpose is the ERISA section 303(h)(2)(A) effective interest rate for the plan year for which the contributions were made (as reported in item 5 of Schedule SB). For example, consider a calendar year plan with a January 1, 2014 UVB valuation date.
Contributions made in 2014 for the 2013 plan year count in the January 1, 2014 asset value. Such contributions are discounted from the date made to January 1, 2014 using the 2013 effective interest rate. Prior year contributions are included only to the extent made by the date of a premium filing.
Adjustments for current year contributions
If contributions for the Premium Payment Year (or, in the case of a plan using the Lookback Rule, for the Lookback 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 plan year for which they were made.
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 the case of:
The amounts would differ only if a premium filing is made before the premium due date and prior year contributions are made after the premium filing is made (and thus not included in assets).
Summary
The following table summarizes the various dates and assumptions that are used to determine Variable-rate premiums for 2014. Although Participant Count Date is not used to determine the Variable-rate premium, it is included in the table so that all of the variables affecting premium calculations are contained in one summary. Please review the column that relates to your plan. The terms "funding" or "for funding purposes" in this table mean amounts determined under ERISA Section 303. Year references (e.g., "2013" or "2014") relate to the plan year beginning in such year.
Summary |
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If Lookback Rule Applies |
If Lookback Rule Does Not Apply |
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Standard Premium Funding Target |
Alternative Premium Funding Target |
Standard Premium Funding Target |
Alternative Premium Funding Target |
Participant Count Date |
Last day of 2013 plan year |
Last day of 2013 plan year |
Last day of 2013 plan year |
Last day of 2013 plan year |
UVB Valuation Date |
Funding valuation date |
Funding valuation date |
Funding valuation date |
Funding valuation date |
Benefits reflected in Premium Funding Target |
Vested portion of benefits included in 2013 funding target |
Vested portion of benefits included in 2013 funding target |
Vested portion of benefits included in 2014 funding target |
Vested portion of benefits included in 2014 funding target |
Assumptions used to determine Premium Funding Target |
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December 2012 spot segment rates |
Whatever was used for funding purposes for 2013 except that if |
December 2013 spot segment rates |
Whatever is used for funding purposes for 2014 except that if |
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Whatever was used |
Whatever was used |
Whatever is used |
Whatever is used |
At-risk status |
Whatever status was |
Whatever status was |
Whatever status is |
Whatever status is |
At-risk load included in Premium Funding Target |
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If the plan was at-risk for 2013 for funding purposes, 4% of what |
If the plan was at-risk for |
If the plan is at-risk for 2014 for funding |
If the plan is at-risk for |
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The same amount |
The same amount |
The same amount |
The same amount |
Plans Subject to Special Funding Rules
Sections 104 and 105 of PPA 2006 delay the effective date of the PPA funding rules for certain plans of cooperatives, charity plans, and plans affected by settlement agreements with PBGC. 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.