GASB proposes change to forthcoming OPEB guidance: the GASB recently issued a revised exposure draft on other postemployment benefits that would alter the treatment of implicit rate subsidies in favor of even greater accrual.(The Accounting Angle)(Governmental Accounting Standards Board)

In February 2003, the Governmental Accounting Standards Board issued an exposure draft proposing that employers be required to accrue the cost of other postemployment benefits, or OPEB, as those benefits are earned by employees. (1) In January, the GASB issued a revised exposure draft that would alter the treatment of implicit rate subsidies proposed in the original exposure draft in favor of even greater accrual.

BACKGROUND

Healthcare costs typically increase significantly with age. Thus, the healthcare premium for a younger, active employee typically would be less than for a retiree. For example, the healthcare premium for an active employee might be $200, whereas that same premium for a retiree might be $400. Rather than charge different amounts for active and retired employees, an employer may elect instead to use a single premium for both. Assume, for example, that an employer has 400 active employees and 100 retirees. Using the hypothetical premiums described above, total premiums for this employer would total $120,000 ([$200 x 400] + [$400 x 100] = $120,000). The employer might choose to use a single $240 premium for all 500 plan participants ($120,000 / 500 = $240). When the premium for active employees is different than for retirees, it is called an age-adjusted premium. When a single amount is used for both groups, the "blended" amount is called a common premium.

In most circumstances, the premium charged for retirees will be less if a common premium is used. For example, if the employer in the case described above were to use a common premium, retirees would pay $240 rather than $400. The GASB describes this difference as the implicit rate subsidy ($400 age-adjusted premium--$240 common premium = $160 implicit rate subsidy). Stated another way, the implicit rate subsidy would comprise $40 of the $240 common premium charged for active employees ($240 common premium--$200 age-adjusted premium = $40 implicit subsidy). Exhibit 1 illustrates the implicit rate subsidy from the perspective of both an active employee and a retiree.

Healthcare premiums, of course, are a form of employee compensation. Thus, it would be expected that healthcare premiums paid for active employees would be treated as a cost of the current period. However, if a common premium is used, a significant portion of the premium charged for active employees (the implicit rate subsidy) may actually relate to services provided by retirees in prior periods. Under the matching principle of accrual accounting, such amounts should have been accrued as expense when the benefiting retirees were still active employees providing service to the employer.

In some cases, employers pay all or a portion of retiree healthcare premiums. In others, it is the retirees themselves who must pay the entire amount of their healthcare premiums. In the original exposure draft, the latter situation would not have qualified as OPEB (no advance accrual would have been required), whereas the former situation would have met the definition of OPEB (advance accrual would have been required). As Exhibit 2 shows, the result would have been a significant difference in how the implicit rate subsidy embedded in the common premium charged to active employees would have been treated in the two situations just described.

In short, the original exposure draft defined OPEB in such a way as to exempt employers from having to accrue the cost of retiree healthcare so long as the retiree paid the full amount of the common premium. The GASB justified this exemption based on cost-benefit considerations rather than theory. A number of respondents to the original exposure draft strongly objected to this proposed exemption.