Final guidance on other postemployment benefits.(The Accounting Angle)

The basic premise of the new GASB guidance on other post-employment benefits is that they are a form of employee compensation that should be recognized as expense as the benefits are earned by employees

This year saw the completion of the Governmental Accounting Standards Board's longstanding project on accounting and financial reporting for other postemployment benefits, or OPEB. The GASB released two statements: Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. The new standards for OPEB are closely patterned after similar GASB guidance for pensions.

MEASURING THE COST OF OPEB TO EMPLOYERS

The basic premise of the new GASB guidance on OPEB is that OPEB, like pension benefits, are a form of employee compensation that should be recognized as expense as benefits are earned by employees.

For employers that participate in defined contribution plans, cost-sharing defined benefit plans equivalent to trusts, or insured defined benefit plans, the obligation for OPEB is limited to a contractually required contribution or premium. The contractually required contribution or premium is the appropriate measure of OPEB cost for accounting and financial reporting purposes. For employers that participate in single-employer plans, agent multiple-employer plans, and cost-sharing plans that are not equivalent to trusts, the cost of OPEB must be calculated by (1) projecting future cash flows based on the substantive plan (i.e., the plan as it is understood by employers and employees), (2) discounting those cash flows to their present value, and (3) allocating that amount to specific years of employee service using one of several acceptable actuarial cost allocation methods (e.g., entry age, frozen entry age, attained age, frozen attained age, aggregate, or unit credit).

Normally, healthcare costs may be expected to increase with age. Age-adjusted healthcare premiums reflect this simple economic fact. Many employers, however, opt to use a single common premium for both their active and retired employees, in which case the premium paid for active employees typically is higher than it otherwise would be. The GASB considers the resulting higher premiums for active employees to be an implicit rate subsidy of retirees and requires that such amounts be included as part of the actuarially projected cash flows for OPEB described earlier (unless the plan is community rated).

The annual required contribution (ARC) calculated by the actuary for funding purposes typically serves as the measure of OPEB cost for employers that participate in single-employer and agent multiple employer plans (as well as in cost-sharing plans that are not equivalent to trusts). A portion of the ARC will reflect the amortization of any unfunded actuarial accrued liability over a period not to exceed 30 years (including the obligation for any unfunded benefits at transition to the new standard). Therefore, as long as employers contribute the full amount of the ARC each year, no liability is reported in their financial statements. However, if employers contribute less (or more) than the ARC, the cumulative effect of this funding difference is reflected as a liability (or asset) on the face of the accrual-based statement of position (net OPEB obligation). For this purpose, contributions include only amounts paid by the employer (or on the employer's behalf) to outside parties, not amounts earmarked internally for future benefits.