A pension plan is a tax exempt or a fund that provides retirement income. The employer set some funds aside for an employee's future benefit. The funds are then invested on behalf of the employee, facilitating the employee to receive retirement benefits. A qualified plan is eligible for tax deferral benefits and must also meet the requirements of the Internal Revenue Code for the benefit of the employee and his/her beneficiaries.
VBO is the present value of the pension liability funds. VBO puts into consideration benefits that have vested in an employee, in preference to the accumulated benefit requirement.
Accumulated benefit obligation is the future viability of an employee’s pension plan that assumes that the employee will stop working for the company on the date the estimation is made. The plan does not account for future salary increase since it assumes that the employee will make no further contributions to the plan.
Projected Benefit Obligation is an estimate of the future viability of an employee’s pension that assumes that contributions increase with increase in employee’s salary. It also assumes that the employee will continue making contributions to the plan.
The balance of projected benefit obligation can change due to accrued Interest, periodic service cost, revised estimates, payment of benefits and plan amendments. The projected plan assets balance can change due to payment of benefits, employer Contributions and investment returns.
Pension expense reflects the employer's expense for the employee’s pension plan during a certain period of time. The following items are included in calculation of expense
- Interest rate
- Prior service cost amortization
- Expected and actual return on plan assets
- Projected benefit obligation
- Benefits paid to employee
- funding/Contributions
