Vested Benefit Obligation (VBO)

Definition

The term vested benefit obligation refers to the portion of the accumulated benefit obligation that employees will receive regardless of their continued participation in the company's pension plan.  A company's vested benefit obligation (VBO) is one of three ways to calculate expenses or liabilities associated with pension plans.  The other measures include accumulated benefit obligations (ABO) and projected benefit obligations (PBO).

Explanation

Companies provide employees with a pension plan as part of a larger array of employment benefits.  The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period.  Generally, there are three approaches to this measure, including:  accumulated, vested, and projected benefit obligations.

Also known as VBO, the vested benefit obligation is the portion of the accumulated benefit obligation that employees have earned, and will receive, even if they no longer participate in the company's pension plan.  For example, the vested benefit obligation exists even if the employee is terminated or resigns from the company before reaching the pension plan's normal retirement age.

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.

Related Terms

pension plan, defined benefits plan, defined contributions plan, pension obligation, accumulated benefit obligation, projected benefit obligation, pension service cost, pension interest cost, return on plan assets, amortization of prior service cost