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How to Determine Unfunded Vested Benefits

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 the Premium Funding Target, over the fair market value of plan assets. 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, 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, under the Lookback Rule, the 2015 Variable-rate Premium is based on UVBs for 2014 (the Lookback Year).

Opting out of the Lookback Rule – general rule

Small Plans may, subject to certain conditions, opt out of the Lookback Rule and instead use UVBs measured as oAppendix 1f the UVB Valuation Date for the current year to determine the 2015 Variable‑rate Premium. Once a Small Plan opts out of the Lookback Rule, it is required to continue to use current year UVBs to determine the Variable-rate Premium for all subsequent years unless and until the plan seeks and receives permission from PBGC to start using the Lookback Rule in the future (or unless the plan ceases to be a Small Plan).

For 2015, a Small Plan is subject to the Lookback Rule unless:

Requesting to use the Lookback Rule after opting out in a prior year

If a plan that opted out of the Lookback Rule for 2014 wants to request permission to use the Lookback Rule for 2015 (and all subsequent years), an email with "Request re: Lookback Rule" in the subject line must be sent to premiums@pbgc.gov at least 60 days before the due date. In the email, you must identify the plan and explain the reason for the requested change. PBGC will reply to acknowledge receipt of such requests. If you do not receive an acknowledgement within two business days, please call PBGC at 1 (800) 736-2444 to confirm that your request was received.

PBGC will review such requests based on the facts and circumstances and will grant such requests only for good cause in appropriate circumstances.   If you do not receive a determination within 30 days of making the request, please call us at the 800 number shown above, as you will need the determination to make a timely premium filing.

Opting out of the Lookback Rule starting with the 2015 plan year

If a Small Plan had the opportunity to opt out of the Lookback Rule in the past but chose not to, PBGC permission is required to opt out. To request permission, send an email with "Request re: Lookback Rule" in the subject line to premiums@pbgc.gov at least 60 days before the due date. In the email, you must identify the plan and explain the reason the plan wants to opt out for the 2015 plan year, but did not do so for 2014 (when approval was automatic). PBGC will reply to acknowledge receipt of such requests. If you do not receive an acknowledgment within two business days, please call PBGC at 1 (800) 736-2444 to confirm that your request was received.

PBGC will review such requests based on the facts and circumstances and will grant such requests only for good cause in appropriate circumstances.   If you do not receive a determination within 30 days of making the request, please call us at the 800 number listed above, as you will need the determination to make a timely premium filing.

If the 2015 plan year is the first year for which a plan has the opportunity to opt out of the Lookback Rule, the plan may do so without first seeking permission from PBGC. For example, permission is not required if, for the 2014 plan year:

Note for small plans with year-end valuation dates – It is not practical for a small plan with a year‑end valuation date to opt out of the Lookback Rule. For example, consider a small plan with a calendar year plan year. Opting out of the Lookback Rule would mean measuring UVBs on December31st, two and half months after the October 15th due date.

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 2015 is based on UVBs for 2015 (i.e., the Premium Payment Year) measured as of 1/1/2015. 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. Plan B did not submit a request a PBGC regarding the Lookback Rule. If Plan B did not opt out of the Lookback Rule for 2014, its Variable-rate Premium for 2015 is based on UVBs for the plan year beginning in 2014 measured as of 1/1/2014. If Plan B opted out of the Lookback Rule for 2014, its Variable-rate Premium for 2015 is based on UVBs for the plan year beginning in 2015 measured as of 1/1/2015.

Example 3 – Plan C is a New Small Plan with a calendar year plan year and a beginning of year valuation date. Plan C was created as the result of a non de minimis spin-off on 1/1/2015 and is therefore considered a Continuation Plan for 2015. As a Continuation Plan, Plan C is not subject to the Lookback Rule for 2015 (because there is no prior year to look back to). That means UVBs are measured as 1/1/2015.

Example 4 – Plan D is a pre-existing Plan which has a calendar year plan year and a beginning of year valuation date. Plan D had a participant count of 102 for 2014, but due to attrition, its 2015 participant count is 98. Thus, Plan D is now subject to the Lookback Rule. That means Plan D’s Variable-rate Premium for 2015 is based on UVBs for the plan year beginning in 2014 (i.e., the "Lookback Year" measured as of 1/1/2014), the same UVBs that were used to determine the 2014 VRP. Alternatively, Plan D may opt out of the Lookback Rule, in which case, its Variable-rate Premium for 2015 will be based on UVBs for the plan year beginning in 2015 measured as of 1/1/2015.

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.

Until an election is officially revoked, it remains in place. An election to use the Alternative Premium Funding Target cannot be revoked for five calendar years. Similarly, once an election is revoked, the plan cannot make another election to use the Alternative Premium Funding Target for five full years. 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, 2015. In this case, the Alternative Premium Funding Target must be used to determine unfunded vested benefits for all plan years beginning before April 1, 2020. The plan may revoke the election first effective for any plan year beginning on or after April 1, 2020, 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, 2020, the Alternative Premium Funding Target must be used for the short plan year April 1, 2019 – December 31, 2019 and for the January 1, 2020 – December 31, 2020 plan year. The first plan year for which the Plan Administrator may revoke the election is the 2021 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 is 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 a requirement 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 Certain Late Variable-Rate Premiums" in the "Late Payment Charges" 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 without regard to any averaging method. 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, 2015 UVB valuation date.

Contributions made in 2015 for the 2014 plan year are included in the January 1, 2015 asset value. Such contributions are discounted from the date made to January 1, 2015 using the 2014 effective interest rate. Such contributions are included only to the extent made by the date of the 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, 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, such 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. 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 2015. 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.

Summary

 

If Lookback Rule Applies

If Lookback Rule Does Not Apply

 

Standard Premium Funding Target

Alternative Premium Funding Target

Standard Premium Funding Target

Alternative Premium Funding Target

Participant Count Date

Last day of
2014 plan year

Last day of
2014 plan year

Last day of
2014 plan year

Last day of
2014 plan year

UVB Valuation Date

Funding valuation
date for 2014

Funding valuation
date for 2014

Funding valuation
date for 2015

Funding valuation
date for 2015

Benefits reflected in Premium Funding Target

Vested portion of
benefits included in
2014 funding target

Vested portion of
benefits included in
2014 funding target

Vested portion of
benefits included in
2015 funding target

Vested portion of
benefits included in
2015 funding target

Assumptions

 

 

  • Discount rates

December 2013
spot segment rates

Whatever would have been used for funding purposes for 2014 if HATFA stabilization rules had not applied

December 2014
spot segment rates

Whatever would be used for funding purposes for 2015 if HATFA stabilization rules did not apply

  • All other assumptions

Whatever was used
for funding purposes
for 2014

Whatever was used
for funding purposes
for 2014

Whatever is used
for funding purposes
for 2015

Whatever is used
for funding purposes
for 2015

At-risk status

Whatever status was
in effect for funding purposes for 2014

Whatever status was
in effect for funding
purposes for 2014

Whatever status is
in effect for funding purposes for 2015

Whatever status is
in effect for funding purposes for 2015

At-risk load

 

 

  • 4% of liability portion of load

If the plan was at-risk for 2014 for funding purposes, 4% of what
the Standard Premium Funding Target would be
if the plan wasn’t at-risk. Otherwise, N/A.

If the plan was at-risk for
2014 for funding
purposes, 4% of what
the Alternative Premium Funding Target would be
if the plan wasn’t at-risk. Otherwise, N/A.

If the plan is at-risk for 2015 for funding
purposes, 4% of what
the Standard Premium
Funding Target would be
if the plan wasn’t at-risk. Otherwise, N/A.

If the plan is at-risk for
2015 for funding
purposes, 4% of what
the Alternative Premium Funding Target would be
if the plan wasn’t at-risk. Otherwise, N/A.

  • Per-participant portion of load

The same amount
included in the liability
for funding purposes
for 2014

The same amount
included in the liability
for funding purposes
for 2014

The same amount
included in the liability
for funding purposes
for 2015

The same amount
included in the liability
for funding purposes
for 2015

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.