Vested Benefit Obligation (VBO)
The Employee Retirement Income Security Act (ERISA) of 1974 requires companies to vest benefits using one of the following two approaches: Pension benefits must fully vest in five years or less; alternatively A company can choose to vest 20% of the employee's pension benefits in three years or less, then vest another 20% per year until the employee is 100% vested in the program after seven years of service. Since minimum vesting requirements are generally five years, the values of the vested benefit obligation and accumulated benefit obligation are very close in most pension plans. Vested benefit obligation (VBO) refers to the actuarial present value of the pension plan that has been earned by employees and is one measure of a firm's pension fund liability. Vested benefit obligation (VBO) is one of three approaches firms use to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period — as they are required to under FASB Statement of Financial Accounting Standards No. 87. This is the benefit that has vested in employees — as opposed to the accumulated benefit obligation, which represents the present value of any benefits, whether vested or not. While the ABO and VBO values are required to be disclosed at fiscal year-end, in cases where the values are almost similar, companies' financial statements show the ABO value and state that the VBO and ABO values are not materially different.
Definition of Vested Benefit Obligation (VBO)
Vested benefit obligation (VBO) refers to the actuarial present value of the pension plan that has been earned by employees and is one measure of a firm's pension fund liability.
Understanding Vested Benefit Obligation (VBO)
Vested benefit obligation (VBO) is one of three approaches firms use to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period — as they are required to under FASB Statement of Financial Accounting Standards No. 87. The other two measures are the firm’s accumulated benefit obligation and projected benefit obligation.
The VBO is the portion of the accumulated benefit obligation that employees will receive regardless of their continued participation in the company's pension plan. This is the benefit that has vested in employees — as opposed to the accumulated benefit obligation, which represents the present value of any benefits, whether vested or not.
The Employee Retirement Income Security Act (ERISA) of 1974 requires companies to vest benefits using one of the following two approaches:
Since minimum vesting requirements are generally five years, the values of the vested benefit obligation and accumulated benefit obligation are very close in most pension plans. While the ABO and VBO values are required to be disclosed at fiscal year-end, in cases where the values are almost similar, companies' financial statements show the ABO value and state that the VBO and ABO values are not materially different.
Related terms:
Accrued Monthly Benefit
An accrued monthly benefit is the dollar amount of the pension that an employee can expect to receive after retiring. read more
Accumulated Benefit Obligation (ABO)
Accumulated benefit obligation (ABO) is the approximate amount of a pension plan liability, assuming that no more liability accumulates from that point on. read more
Business Valuation , Methods, & Examples
Business valuation is the process of estimating the value of a business or company. read more
Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act (ERISA) protects workers' retirement savings by ensuring fiduciaries do not misuse plan assets. read more
Financial Statements , Types, & Examples
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements include the balance sheet, income statement, and cash flow statement. read more
Nondiscrimination Rule
A nondiscrimination rule states that all employees of a company are able to receive the same benefits, regardless of their position within the company. read more
Projected Benefit Obligation (PBO)
A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities. read more
Pension Plan
A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. read more
Vested Benefit
A vested benefit is a financial package granted to employees who have met the requirements to receive a full, instead of partial, benefit. read more