When all or almost all plan participants are inactive, gains and losses subject to amortization and newly arising prior service cost or negative prior service cost should be amortized over the average remaining life expectancy of the inactive participants rather than the average remaining service period of active participants. ASC 715-30-55-48
indicates that there is no specific threshold for determining "all or almost all" and that judgment is required based on the facts and circumstances of the particular plan. However, the analysis should be based on the number of participants, not another unit of measure. We expect that at least 90% of participants would be inactive in order to use this alternative amortization period.
Question PEB 3-1 addresses the definition of an “inactive” participant.
Question PEB 3-1
PEB Corporation adopts an amendment to freeze the benefits provided under its defined benefit plan. The result of this amendment is that no participants in PEB Corporation's plan will accrue additional pension benefits for service provided in future years. However, a substantial majority of the plan participants are active employees; retirees currently make up a minority of the plan’s population.
For purposes of determining the amortization period for gains and losses subject to amortization, are all or substantially all of PEB’s plan participants inactive?
We believe that there are two acceptable interpretations of “inactive” in this context.
One interpretation is based solely on employment status. This interpretation is based on a common use of the word "inactive," suggesting that a plan participant who is working for the reporting entity is active and a plan participant who is no longer working for the reporting entity is inactive. This interpretation is also supported by ASC 715-30-55-50
, which indicates that, in the event all employees covered by a plan are terminated but not retired, the minimum amortization of a net gain or loss included in AOCI should be determined based on the average remaining life expectancy of the inactive participants. This indicates that a participant who is no longer working for the reporting entity is considered to be inactive. Under this interpretation, PEB Corporation would use the average remaining service period to determine the amount of gain or loss to amortize.
Under another interpretation, participants are considered inactive if they are no longer earning additional defined benefits under the plan. This would include participants who are retired or are otherwise no longer working for the reporting entity (i.e., former employees), since their lack of current service to the reporting entity generally means they are not able to earn additional defined benefits under the plan. In addition, this interpretation would include current employees who are participants in the plan, but for whom future services do not earn them additional defined benefits under the plan (e.g., as the result of a permanent hard freeze of benefits under the plan). This interpretation is supported by ASC 715-30-55-49
, which implies that the determination of whether a plan participant who is currently employed by and working for the reporting entity is inactive would be made by reference to whether the participant is earning additional defined benefits under the plan. This guidance indicates that, in the event all or almost all of a plan's participants are inactive due to a temporary suspension of the plan, the minimum amortization of a net gain or loss in AOCI should continue to be determined based on the average remaining service period of the temporarily inactive participants expected to receive benefits under the plan. This guidance uses the phrase "inactive" even though participants are still working for the reporting entity, which suggests that the determination of inactive may depend on whether the participants will earn additional benefits under the plan, not whether the participants are providing services to the reporting entity (i.e., employed by and working for the reporting entity).
Whichever interpretation a reporting entity chooses should be consistently applied to each plan sponsored by the reporting entity.
Question PEB 3-2 addresses when the amortization period for gains and losses should be changed when all or almost all participants become inactive.
Question PEB 3-2
PEB Corporation adopted an amendment of its pension plan during FY20X1. As a result of this amendment, all plan participants ceased accruing additional benefits under the plan effective June 20X2 (i.e., a plan freeze). PEB Corporation defines an inactive participant as a participant who is no longer accruing benefits for future service under the plan. Consequently, all plan participants became inactive in June 20X2. PEB Corporation's annual measurement date for its pension plan is December 31.
When should PEB Corporation reassess the amortization period for unrecognized gains or losses as a result of all of its participants becoming inactive in June 20X2?
At the next measurement date following June 20X2. The amortization period is determined as part of the overall process of calculating and assessing the overall actuarial gain/loss, which is only done in conjunction with a measurement of the plan assets and obligations. At December 31, 20X1, the participants are active. Therefore, the amortization period would be based on their average remaining service period as employees. The change in status from active to inactive of a group of participants through the ordinary operation of the plan is not considered a significant event that would require a remeasurement. As such, the change in participants’ status during 20X2 would neither require nor permit (absent a policy of more frequent interim remeasurements) a reassessment of the amortization period for deferred gains and losses. Accordingly, the amortization established at the most recent measurement date of December 31, 20X1 should continue for the remainder of the year. At the measurement date of the plan following June 20X2, the amortization period for gains and losses would be based on the remaining life expectancy of the plan participants. If there is no significant event between June 20X2 and the end of the year, the next measurement of the plan would be December 31, 20X2.
If, however, PEB Corporation had a policy of remeasuring their defined benefit plans on an interim basis or in the event of other similar events, the amortization period would be reassessed in conjunction with that full remeasurement of all of the plan assets and obligations.