Segal: FAS 106 Impact of Medicare Act Will Not Be Felt in 2003

December 19, 2003 ( - The Medicare Prescription Drug, Improvement and Modernization Act of 2003 will have an impact on the way plan sponsors figure their Financial Accounting Standards Act No. 106 (FAS 106) - just not for 2003.

Any questions that plan sponsors may have had about the impact on this year’s FAS 106 disclosures were cleared up in the Financial Accounting Standards Board’s (FASB) staff position letter . In the letter, FASB says it would be premature for any plan sponsor to reflect the recent enhancement of the Medicare Act (See Medicare Bill has Implications for Plan Sponsors ) in its disclosures this year.

Plan sponsors though can begin their preparations now for changes to how the cost of retiree health coverage will change their future calculations. Since the Medicare Act introduces a prescription drug benefit under Medicare – Medicare Part D – as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D, questions have come up about how FAS 106 will account for these changes.

FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, addresses employers’ accounting for postretirement health care benefits and the Medicare Act introduces two features that may impact those measurements:

  • a subsidy to a plan’s sponsor based on 28% of the plan’s share of an individual beneficiary’s annual prescription drug costs between $250 and $5,000
  • the opportunity for a retiree to obtain a prescription drug benefit under Medicare.

In an analysis, the Segal Company says it is changes in 2006 that may have an impact on the projected cost of the plan, and therefore, the current liability and expense associated with the plan. Specifically, Segal says:

  • employers that continue to provide retiree prescription drug benefits as the plan exists today will receive a subsidy if the plan is at least as rich in an actuarial sense as the government plan;
  • any changes plan sponsors plan on making to their retiree health benefits in light of the new Medicare benefit would have to be announced to plan participants.

However, in echoing the earlier FASB opinions, Segal says it would be difficult for employers to take advantage of the legislation for 2003. Even still, Segal says plan sponsors should continue to keep an eye on the situation to determine when they have sufficient information to address whether a plan change is necessary.