Retiree Health Benefit Changes Affect Company Reporting

May 1, 2014 ( – As companies make changes to retiree health care benefits offerings, they should consider the related accounting implications.

An Insights report from PwC’s Human Resources Services says companies are likely to continue to shift away from employer-sponsored plans or move to private exchanges for retiree benefits, similar to the shift over the last decade from defined benefit pension arrangements to defined contribution plans. Many employers that shift benefits from traditional employer-sponsored group health plans to the private exchanges will continue to provide some sort of subsidy to their retirees, often a fixed annual amount in a retiree health reimbursement account (HRA).

According to the report, from a cost perspective, the employer obligation has changed from covering the claims and administrative costs (if self-insured) or premium costs (if insured) not paid for by retiree contributions, to providing a fixed annual subsidy. Even though the employer may have reduced some of its risk and uncertainty, the arrangement continues to represent a defined benefit plan. Benefits have not been eliminated nor have the plan participant’s expected years of future service been significantly reduced, therefore no curtailment occurs. Likewise, since the employer is not making any payment to transfer the liability associated with the original benefit promise, there is no settlement.

PwC says some judgment may be required in assessing whether this is more akin to a plan amendment or to an actuarial gain/loss. Plan amendments are typically the result of an economic decision by the employer to grant increased (or decreased) plan benefits. If there is expected to be a more than insignificant change in the cost of providing benefits, this may indicate the change is more akin to a negative plan amendment. In this case, recognition of the impact on the plan’s obligation would be deferred and amortized, generally over the average remaining years of service to the full eligibility date for active participants.

If the change is insignificant, it may be viewed as more akin to an actuarial gain or loss. In this case, the impact of any change in the plan liability would be treated as a gain/loss recognized in other comprehensive income (OCI), and subject to amortization following the company’s policy for gain/loss recognition.

An employer may eliminate retiree health care benefits for all current and future retirees without providing any substitute compensation to employees or retirees. In other cases, the employer may amend its plan to provide a reduced level of benefit for some period, say, two years, until ultimate wind-down of the plan. In such a case, the plan would need to be remeasured.

As a result of the reduction in benefits, the remeasured plan obligation is reduced, and the reduction of the plan’s obligation would be accounted for as a negative plan amendment.

PwC warns that employers should carefully consider the possibility that a negative plan amendment might later be reversed, for example, as a result of litigation against the employer on behalf of the plan’s participants, particularly retirees, seeking reinstatement of the prior level of benefits. If it’s probable the negative plan amendment will be rescinded, then the retiree health care obligation should not be reduced by the effects of the negative plan amendment. If rescission is not probable, the facts and circumstances may represent a contingent liability requiring disclosure.

PwC offers more detail about these and other retiree health benefits changes and reporting in the report “Market trends in retiree healthcare and financial reporting implications,” available here.