29 C.F.R. § 4006.4 — Determination of unfunded vested benefits.

(a) General rule. Except as permitted by paragraph (c) of this section or as provided in the exemptions and special rules under § 4006.5, the amount of a plan's unfunded vested benefits (as defined in paragraph (b) of this section) shall be determined as of the last day of the plan year preceding the premium payment year, based on the plan provisions and the plan's population as of that date. The determination shall be made in accordance with paragraph (a)(1) or (a)(2).

(1) The unfunded vested benefits shall be determined using the actuarial assumptions and methods described in paragraph (a)(3) for the plan year preceding the premium payment year (or, in the case of a new or newly-covered plan, for the premium payment year), except to the extent that other actuarial assumptions or methods are specifically prescribed by this section or are necessary to reflect the occurrence of a significant event described in paragraph (d) of this section between the date of the funding valuation and the last day of the plan year preceding the premium payment year. (If the plan does a valuation as of the last day of the plan year preceding the premium payment year, no separate adjustment for significant events is needed.)

(2) Under this rule, the determination of the unfunded vested benefits may be based on a plan valuation done as of the first day of the premium payment year, provided that—

(i) The actuarial assumptions and methods used are those described in paragraph (a)(3) for the premium payment year, except to the extent that other actuarial assumptions or methods are specifically prescribed by this section or are required to make the adjustment described in paragraph (a)(2)(ii) of this section; and

(ii) If an enrolled actuary determines that there is a material difference between the values determined under the valuation and the values that would have been determined as of the last day of the preceding plan year, the valuation results are adjusted to reflect appropriately the values as of the last day of the preceding plan year. (This adjustment need not be made if the unadjusted valuation would result in greater unfunded vested benefits.)

(3) For purposes of paragraphs (a)(1) and (a)(2), the actuarial assumptions and methods for a plan year are those used by the plan for purposes of determining the additional funding requirement under section 302(d) of ERISA and section 412(1) of the Code (or, in the case of a plan that is not required to determine such additional funding requirement, any assumptions and methods that would be permitted for such purpose if the plan were so required).

(4) In the case of any plan that determines the amount of its unfunded vested benefits under the general rule described in this paragraph, the determination must be made in a manner consistent with generally accepted actuarial principles and practices.

(b) Unfunded vested benefits. The amount of a plan's unfunded vested benefits under this section shall be the excess of the plan's vested benefits amount (determined under paragraph (b)(1) of this section) over the value of the plan's assets (determined under paragraph (b)(2) of this section).

(1) Vested benefits amount. A plan's vested benefits amount under this section shall be the plan's current liability (within the meaning of section 302(d)(7) of ERISA and section 412(1)(7) of the Code) determined by taking into account only vested benefits and by using an interest rate equal to the applicable percentage of the annual yield for 30-year Treasury constant maturities, as reported in Federal Reserve Statistical Release G.13 and H.15, for the calendar month preceding the calendar month in which the premium payment year begins. If the interest rate (or rates) used by the plan to determine current liability was (or were all) not greater than the required interest rate, the vested benefits need not be revalued if the interest rate (or interest rates) used was (or were all) not greater than the required interest rate. For purposes of this paragraph (b)(1) (subject to the provisions of § 4006.5(g), dealing with plans of regulated public utilities), the applicable percentage is—

(i) For a premium payment year that begins before July 1997, 80 percent;

(ii) For a premium payment year that begins after June 1997 and before the first premium payment year to which the first tables prescribed under section 302(d)(7)(C)(ii)(II) of ERISA and section 412(1)(7)(C)(ii)(II) of the Code apply, 85 percent; and

(iii) For the first premium payment year to which the first tables prescribed under section 302(d)(7)(C)(ii)(II) of ERISA and section 412(1)(7)(C)(ii)(II) of the Code apply and any subsequent plan year, 100 percent.

(2) Value of assets

(i) Actuarial value. For a premium payment year that is described in paragraph (b)(1)(i) or (b)(1)(ii) of this section, the value of the plan's assets shall be their actuarial value determined in accordance with section 302(c)(2) of ERISA and section 412(c)(2) of the Code.

(ii) Fair market value. For a premium payment year that is described in paragraph (b)(1)(iii) of this section, the value of the plan's assets shall be their fair market value.

(iii) Use of credit balance. The value of the plan's assets shall not be reduced by a credit balance in the funding standard account.

(iv) Contributions. Contributions owed for any plan year preceding the premium payment year shall be included for plans with 500 or more participants and may be included for any other plan. Contributions may be included only to the extent such contributions have been paid into the plan on or before the earlier of the due date for payment of the variable-rate portion of the premium under § 4007.11 or the date that portion is paid. Contributions included that are paid after the last day of the plan year preceding the premium payment year shall be discounted at the plan asset valuation rate (on a simple or compound basis in accordance with the plan's discounting rules) to such last day to reflect the date(s) of payment. Contributions for the premium payment year may not be included for any plan.

(c) Alternative method for calculating unfunded vested benefits. In lieu of determining the amount of the plan's unfunded vested benefits pursuant to paragraph (a) of this section, a plan administrator may calculate the amount of a plan's unfunded vested benefits under this paragraph (c) using the plan's Form 5500, Schedule B, for the plan year preceding the premium payment year. Pursuant to this paragraph (c), unfunded vested benefits shall be determined from values for the plan's vested benefits and assets that are required to be reported on the plan's Schedule B. The value of the vested benefits shall be adjusted in accordance with paragraph (c)(1) of this section to reflect accruals during the plan year preceding the premium payment year and with paragraph (c)(2) of this section to reflect the interest rate prescribed in paragraph (b)(1) of this section, and the value of the assets shall be adjusted in accordance with paragraph (c)(4) of this section. (If the interest rate (or rates) used to determine the vested benefit values taken from the Schedule B was (or were all) not greater than the interest rate prescribed in paragraph (b)(1) of this section, the interest rate adjustment prescribed in paragraph (c)(2) of this section is not required.) The resulting unfunded vested benefits amount shall be adjusted in accordance with paragraph (c)(5) of this section to reflect the passage of time from the date of the Schedule B data to the last day of the plan year preceding the premium payment year.

(1) Vested benefits adjustment for accruals. The total value of the plan's current liability as of the first day of the plan year preceding the premium payment year for vested benefits of active and terminated vested participants not in pay status, computed in accordance with section 302(d)(7) of ERISA and section 412(l)(7) of the Code, shall be adjusted to reflect the increase in vested benefits attributable to accruals during the plan year preceding the premium payment year by multiplying that value by 1.07.

(2) Vested benefits interest rate adjustment. The value of vested benefits as entered on the Schedule B shall be adjusted in accordance with the following formula (except as provided in paragraph (c)(3) of this section) to reflect the interest rate prescribed in paragraph (b)(1) of this section:

VBadj = VBPAY×.94(RIR-BIR)+VBNON-PAY ×.94(RIR-BIR)×((100+BIA)/ (100+RIR))(ARA-50);

where—

(i) VBadj is the adjusted vested benefits amount (as of the first day of the plan year preceding the premium payment year) under the alternative calculation method;

(ii) VBPAY is the plan's current liability as of the first day of the plan year preceding the premium payment year for vested benefits of participants and beneficiaries in pay status, computed in accordance with section 302(d)(7) of ERISA and section 412(l)(7) of the Code;

(iii) VBNON-PAY is the total of the plan's current liability as of the first day of the plan year preceding the premium payment year for vested benefits of active and terminated vested participants not in pay status, computed in accordance with section 302(d)(7) of ERISA and section 412(l)(7) of the Code, multiplied by 1.07 in accordance with paragraph (c)(1) of this section;

(iv) RIR is the required interest rate prescribed in paragraph (b)(1) of this section;

(v) BIR is the post-retirement current liability interest rate used to determine the pay-status current liability figure referred to in paragraph (c)(2)(ii) of this section;

(vi) BIA is the pre-retirement current liability interest rate used to determine the pre-pay-status current liability figures referred to in paragraph (c)(2)(iii) of this section; and

(vii) ARA is the plan's assumed weighted average retirement age.

(3) Optional use of substitution factors in interest rate adjustment formula. In lieu of the term, .94 (RIR-BIR) in the formula prescribed by paragraph (c)(2) of this section, a plan administrator may use the optional substitution factor provided in the PBGC's premium instructions.

(4) Adjusted value of plan assets. The value of plan assets shall be the actuarial value of plan assets as of the first day of the plan year preceding the premium payment year, determined in accordance with section 302(c)(2) of ERISA and section 412(c)(2) of the Code without reduction for any credit balance in the plan's funding standard account, unless that amount was determined as of a date other than the first day of the plan year preceding the premium payment year or the premium payment year is described in § 4006.4(b)(1)(iii). In either of those events, the value of plan assets shall be the current value of assets (as reported on Form 5500) as of that first day or (if Form 5500-EZ is filed) as of the last day of the plan year preceding the Schedule B year. The value of assets from the Schedule B shall be adjusted in accordance with paragraph (b)(2) of this section, except that the amount of all contributions that are included in the value of assets and that were made after the first day of the plan year preceding the premium payment year shall be discounted to such first day at the interest rate prescribed in paragraph (b)(1) of this section for the premium payment year, compounded annually except that simple interest may be used for any partial years.

(5) Adjustment for passage of time. The amount of the plan's unfunded vested benefits shall be adjusted to reflect the passage of time between the date of the Schedule B data (the first day of the plan year preceding the premium payment year) and the last day of the plan year preceding the premium payment year in accordance with the following formula:

UVBadj = (VBadj−Aadj)×(1+RIR/100)Y;

where—

(i) UVBadj is the amount of the plan's adjusted unfunded vested benefits;

(ii) VBadj is the value of the adjusted vested benefits calculated in accordance with paragraphs (c)(1) and (c)(2) of this section;

(iii) Aadj is the adjusted asset amount calculated in accordance with paragraph (c)(3) of this section;

(iv) RIR is the required interest rate prescribed in paragraph (b)(1) of this section; and

(v) Y is deemed to be equal to 1 (unless the plan year preceding the premium payment year is a short plan year, in which case Y is the number of years between the first day and the last day of the short plan year, expressed as a decimal fraction of 1.0 with two digits to the right of the decimal point).

(d) Restrictions on alternative calculation method for large plans.

(1) The alternative calculation method described in paragraph (c) of this section may be used for a plan with 500 or more participants as of the last day of the plan year preceding the premium payment year only if—

(i) No significant event, as described in paragraph (d)(2) of this section, has occurred between the first day and the last day of the plan year preceding the premium payment year; or

(ii) An enrolled actuary makes an appropriate adjustment to the value of unfunded vested benefits to reflect the occurrence of significant events that have occurred between those dates.

(2) The significant events described in this paragraph are—

(i) An increase in the plan's actuarial costs (consisting of the plan's normal cost under section 302(b)(2)(A) of ERISA and section 412(b)(2)(A) of the Code, amortization charges under section 302(b)(2)(B) of ERISA and section 412(b)(2)(B) of the Code, and amortization credits under section 302(b)(3)(B) of ERISA and section 412(b)(3)(B) of the Code) attributable to a plan amendment, unless the cost increase attributable to the amendment is less than 5 percent of the actuarial costs determined without regard to the amendment;

(ii) The extension of coverage under the plan to a new group of employees resulting in an increase of 5 percent or more in the plan's liability for accrued benefits;

(iii) A plan merger, consolidation or spinoff that is not de minimis pursuant to the regulations under section 414(l) of the Code;

(iv) The shutdown of any facility, plant, store, etc., that creates immediate eligibility for benefits that would not otherwise be immediately payable for participants separating from service;

(v) The offer by the plan for a temporary period to permit participants to retire at benefit levels greater than that to which they would otherwise be entitled;

(vi) A cost-of-living increase for retirees resulting in an increase of 5 percent or more in the plan's liability for accrued benefits; and

(vii) Any other event or trend that results in a material increase in the value of unfunded vested benefits.