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Pension Obligation
The deferred compensation obligation it has to its employees for their service under the terms of the pension
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Contributory Plans
The employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits.
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Funded: Over & Under
Measured as the difference between the fair value of the plan assets and the projected benefit obligation.
- PBO > FV plan assets UnderfundedPBO < FV plan assets Overfunded
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Qualified plans
- Plans that offer tax benefits
- permit deductibility of the employer's contributions to the pension fund and tax-free status of earnings from pension fund assets.
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Defined contribution
- The employer agrees to contribute to a pension trust
- a certain sum each period, based on a formula. This formula may consider such
- factors as age, length of employee service, employer’s profits, and
- compensation level. The plan defines only the employer’s contribution. It makes
- no promise regarding the ultimate benefits paid out to the employees. A common
- form of this plan is a 401(k) plan.
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Defined benefit
- Outlines the benefits that employees will receive
- when they retire. These benefits typically are a function of an employee’s
- years of service and of the compensation level in the years approaching
- retirement.
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Vested benefits
- Benefits that the employee is entitled to receive
- even if he or she renders no additional services to the company.
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VBO (Vested Benefit Obligation)
- Computed by using only vested benefits, at current
- salary levels
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ABO (Accumulated Benefit Obligation)
- a measurement of the pension obligation that uses
- both vested and nonvested years of service. The company computes the deferred
- compensation amount on all years of employees’ service – both vested and
- nonvested – using current salary levels.
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PBO (Projected Benefit Obligation)
- a measurement of the pension obligation that bases
- the deferred compensation amount on both vested and nonvested service using
- future salaries.
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Service Cost
- the expense caused by the increase in pension
- benefits payable (the projected benefit obligation) to employees because of
- their services rendered during the current year. Actuaries compute service cost
- as the present value of the new benefits earned by employees during the year.
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Corridor approach
- An approach FASB invented to limit the growth of the
- Accumulated OCI account and for amortizing the account’s accumulated balance
- when it gets too large.
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PBGC (Pension Benefit
Guaranty Corporation)
- Purpose is to administer terminated plans and to
- impose liens on an employer’s assets for certain unfunded pension liabilities.
- If a company terminates its pension plan, the PBGC can effectively impose a lien
- against the employer’s assets for the excess of the present value of guaranteed
- vested benefits over the pension fund assets
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