Term
| Reasons for offering a retiree group benefit plan (304) |
|
Definition
1. Retiree group benefits are a tax-effective means of providing retirement financial security
2. Retiree benefits are a valuable benefit for those currently receiving the coverage or who are soon to retire
3. The benefits can support workforce planning and growth opportunities for employees
4. Providing ongoing health care coverage is a social responsibility of the employer
5. Retiree health care benefits help provide a competitive package of total compensation
6. The current cash costs are nominal relative to the total spending on benefits
7. Retiree benefits are often at the top of the list of union demands |
|
|
Term
| Methods for coordinating benefits with Medicare (304) |
|
Definition
C = covered expenses M = the Medicare payment % represents the application of the employer's benefit provisions
1. Standard coordination of benefits: plan payment = the lesser of (C * %) or (C - M)
2. Exclusion: plan payment = (C - M) * %
3. Carveout: plan payment = (C * %) - M
4. Supplemental plans (Medigap) |
|
|
Term
| Recent plan design changes to control retiree medical plan costs (307) |
|
Definition
1. Making eligibility requirements more stringent (e.g., age 60 with 15 years of service)
2. Introducing service-related benefits (i.e., varying the employer cost share based on length of service)
3. Adjusting retiree contributions based on the employee's age at retirement (i.e., early retirement reductions)
4. Setting the employer subsidy as a fixed dollar amount rather than as a percentage of plan costs
5. Providing an account-based employer subsidy (e.g., the employee earns a set amount for his account for each year of service) |
|
|
Term
| Characteristics of the ideal vehicle for prefunding retiree benefits (309) |
|
Definition
1. Company tax deduction - for contributions that adequately fund retiree health benefits
2. Tax-free or tax-deferred savings mechanism for employees
3. Tax-sheltered investment earnings
4. Tax-free benefits for retirees
5. There is no impact on plan design provisions
6. Funds are counted as an asset under FAS 106
7. Assets are revocable if the obligation to the plan changes |
|
|
Term
| Vehicles used to prefund retiree benefits (309) |
|
Definition
1. Welfare benefit funds - such as VEBAs or continuance funds held by an insurance company
2. 401 (h) funding in a qualified pension trust
3. Incidental account in a profit sharing plan
4. Employee-purchased group annuities
5. Employee Stock Ownership Plans with a money purchase plan account
6. Qualified retirement trust funds - pension plan or 401 (k) profit sharing plan |
|
|
Term
| FAS 106 attribution of costs (175) |
|
Definition
1. Expected future benefit payments must be accrued while each employee is working (pay-as-you-go accounting is no longer allowed)
2. The period when benefits are accrued is called the attribution period, and usually begins at hire and ends at full eligibility (which is normally shorter than the full working lifetime)
3. The net periodic postretirement benefit cost (aka "cost") is the amount attributed to a specific financial accounting period
4. The expected postretirement benefit obligation (EPBO) is the actuarial present value of all expected future postretirement benefit payments for the individual
a) The EPBO is allocated among the amounts attributable to service before the measurement date (APBO), service in the current year (service cost), and future service
5. APBO = Accumulated postretirement benefit obligation
a) Expected APBO = (Current APBO + Service Cost)*(l + d) - (Benefit payments)*(l + I/2 d) |
|
|
Term
| Components of the FAS 106 net periodic postretirement benefit cost (178) |
|
Definition
Cost = service cost + interest cost - expected return on assets + amortizations
1. Service cost - the cost of benefits accruing in the current period
2. Interest cost - interest on the APBO, the service cost (if not at end of year), and minus the interest on benefit payments (assumed to be paid uniformly throughout the year) all at the discount rate. = (APBO + SC)*d - BP*(d/2)
3. Expected return on plan assets = Assets*i - BP*(i/2)
4. Amortization of net transition obligation or asset
a) The net transition obligation is the difference between the APBO and plan assets when FAS 106 was first adopted
b) Amortization is straight line to expected retirement date (can use 20 years if the calculated amortization period was less than 20 years)
5. Net amortization and deferral
a) Amortization of gains and losses - a gain or loss is the change in APBO resulting from a change in assumptions, or experience that is different than assumed. Can defer recognition until the amount exceeds 10% of the greater of the APBO or the plan assets. Amortize to expected retirement, or use another method with faster amortization.
b) Prior service cost (plan amendment) - the change in the APBO due to a plan amendment. Amortize over the expected future service to full eligibility date of active employees. |
|
|
Term
| Formula for accrued or prepaid expense for postretirement benefits (189) |
|
Definition
1. An accrued expense for postretirement benefits results when the cumulative amount expensed exceeds the cumulative cash outlay
2. A prepaid expense for postretirement benefit results when the cumulative cash outlay exceeds the cumulative amount expensed
3. Accrued expense = prior period accrued expense + net periodic postretirement benefit cost - contributions (plan funding and benefit payments) |
|
|
Term
| Footnote disclosures for FAS 106 (190) |
|
Definition
Includes an explanation of many key assumptions and financials. For example:
1. Reconciliation of assets and APBO balances
2. Breakdown by component of annual cost
3. Discount rate
4. Assumed health care trend rate
5. A description of any alternative methods used Certain disclosures are not required for nonpublic entities |
|
|
Term
| Plans covered by FAS 106 (193) |
|
Definition
1. Single employer plan - sponsored by one employer for a group of employees, retirees, and dependents
2. Multiemployer plan - subject to collective bargaining and involves two or more unrelated employers. Accounted for on a "pay-as-you-go" accounting basis (the FAS 106 requirement of full accrual accounting does not apply).
3. Multiple employer plan - groups of single employer plans are combined to reduce administration costs and broaden risk distribution (considered a single employer plan by FAS 106)
4. Individual contracts - these contracts are not covered under FAS 106. But FAS 106 may apply if the employer has multiple individual contracts with identical terms.
5. Non-US plans - FAS 106 applies to retiree plans that an employer sponsors in its non-US subsidiaries |
|
|
Term
| Accounting for FAS 106 settlements and curtailments (198) |
|
Definition
1. A settlement is an irrevocable transaction which relieves the employer of the benefit obligation
a) The maximum recognized gain/loss is the unrecognized gain or loss, plus any remaining net transition asset
b) The maximum gain or loss is prorated, depending on the fraction of the APBO settled
c) Gains are first used to reduce any unrecognized transition obligation, then any remaining gain is taken into earnings. Losses are taken into earnings.
2. A curtailment is an event which significantly reduces the expected service of plan participants or
eliminates defined benefit accruals for a significant number of active participants
a) The gain or loss equals the sum of:
i) The change in the APBO netted against any previously unrecognized net gains or losses ii) A special loss equal to the portion of the prior service cost and unrecognized transition obligation that is attributable to future years of service that are eliminated
b) Gains are taken when employees are terminated or the amendment is adopted. Losses are taken when
the curtailment is probable and can be reasonably estimated. |
|
|
Term
| Accounting standards for employee benefit programs (211) |
|
Definition
1. FAS 106
2. IAS 19 from the International Accounting Standards Board (LASB)
3. Section 3461 from the Handbook of the Canadian Institute of Chartered Accountants (CICA) - designed to mirror US standards
4. Statements 43 and 45 of the Government Accounting Standards Board (GASB) - for the financial reporting of state and local governments in the US
5. FASAB 5 from the Federal Accounting Standards Advisory Board (FASAB) - for federal government plans in the US |
|
|
Term
| The tasks of the actuary under IAS 19 (213) |
|
Definition
1. Allocating expected benefits between past and future years of employment
2. Making assumptions about future experience in areas such as economics and demographics
3. Performing actuarial valuations to calculate the service cost and the defined benefit obligation
4. Preparing all information needed for the IAS 19 footnote disclosures |
|
|
Term
| Actuarial assumptions needed for calculating the IAS 19 benefit expense (217) |
|
Definition
1. Discount rate - should be based on market yields on high quality corporate bonds
2. Expected rate of return on assets
3. Salary increases
4. Benefit increases - if benefits increase over time, then an assumption must be made about benefit increases after the employee has left employment
5. Pre-retirement mortality - rates are typically derived from standard tables based on nationwide experience
6. Termination - assumptions are usually based on an employer's own history and industry norms
7. Disability - standard tables are generally used
8. Retirement age - this assumption should reflect the richness of early retirement benefits and the availability of medical benefits to early retirees
9. Duration of benefit payments - a mortality assumption will be needed for benefits that are paid until death |
|
|
Term
| Components of the IAS 19 benefit expense (222) |
|
Definition
(note that this is very similar to the FAS 106 periodic cost)
Benefit expense = service cost + interest cost - expected return on assets + amortizations + other items
1. Service cost - the benefit earned by the employee during the plan year minus any employee contributions
2. Interest cost - equals the defined benefit obligation multiplied by the discount rate
3. Expected return on assets - equals the expected rate of return multiplied by plan assets
4. Amortization of past service costs - these costs must be amortized over the average period until these benefits become vested
5. Amortization of gains and losses - this amortization amount is recalculated each year by dividing the amount to be amortized by the average future working lives of the population. Can defer recognition until the amount exceeds 10% of the greater of the DBO or the fair value of assets.
6. Other items - such as the effect of any curtailment or settlement |
|
|
Term
| Options for handling the transition obligation resulting from Canadian Section 3461 (233) |
|
Definition
1. Prospective application - amortized over the expected average remaining service lifetime of the employee group
2. Retrospective application - taken as a one-time charge to the opening retained earnings
3. Match US figures - initial values were allowed to equal values from US accounting rules, so employers can use one set of numbers for both Canadian and US purposes |
|
|
Term
| Significant differences between Canadian Section 3461 and US accounting standards (234) |
|
Definition
1. Canadian standards place a limit on the accrued pension asset that can be recognized on the balance sheet
2. Canadian pension standards do not require poorly funded pension plans to recognize a minimum liability on the balance sheet |
|
|
Term
| Types of other postemployment benefits (OPEB) plans (241) |
|
Definition
1. Single-employer plan
2. Agent plan - a plan that serves multiple employers, and where separate actuarial valuations are done to determine each participating employer's required contributions
3. Cost-sharing plan - a plan that serves multiple employers, but only one actuarial valuation is done for all employers combined |
|
|
Term
| GASB standards for employers sponsoring OPEB plans (242) |
|
Definition
1. Standards for employers in single and agent OPEB plans
a) The OPEB cost and the Net OPEB obligation must be calculated and included in the employer's financial statements
b) Required disclosures are the Notes to the financial statements, Schedule of funding progress, and Schedule of employer contributions
2. Standards for employers in cost-sharing OPEB plans
a) The required contribution to the cost-sharing plan is reported as the OPEB expense
b) The OPEB liability is calculated as the difference between the required contributions and the contributions actually made
3. Standards for OPEB plans - the same disclosures as listed above for employers are required here, plus a
Statement of net plan assets and Statement of changes in net plan assets |
|
|
Term
| Assumptions needed for the valuation of pension plans (252) |
|
Definition
1. Economic assumptions
a) Inflation
b) Discount rate
c) Salary increase
d) Social Security benefit increase
2. Demographic assumptions
a) Termination rate
b) Mortality rate
c) Disability rate
d) Retirement rate |
|
|
Term
| Additional assumptions needed for the valuation of retiree life and health plans (260) In addition to the pension assumptions that were listed separately |
|
Definition
1. Economic assumptions
a) Current retiree plan costs - the starting point for projecting future benefit costs
b) Current retiree contributions - the starting point for projecting future contributions
c) Health care cost trend - should represent expected long-term trends. Trend rates should grade down over time to a lower level than today's trends (such as GDP plus one percentage point).
d) Medicare Part B premium rate increase - employers who pay this premium for the retiree need an assumption for future increases
e) Retiree contribution rate increase - should reflect the current and expected future policies regarding retiree contributions to the plan
2. Demographic assumptions
a) Plan participation - needed if a retiree contribution is required (watch for antiselection)
b) Spouse plan continuation after death of retiree - needed if a contribution is required
c) Dependent children plan termination - since dependents' ages are normally not recorded, an assumption is needed for when the limiting age is reached
d) Plan design change - a valuation may account for future plan design changes if changes are expected |
|
|
Term
| Common problems in setting assumptions for retiree group benefit plan valuations (275) |
|
Definition
1. Under age 65 premium - determining the costs for under age 65 participants is difficult because their experience is blended with active employees
2. Composite premiums - current rates may be on a per employee basis, rather than having separate rates for retirees, spouses, and children
3. Spouse / dependent premium - data for dependents may be based on the age of the retiree, rather than the age of the dependent
4. Old premium structure - the current premium differences between actives and retirees may be based on outdated studies
5. Missing data - some claims data may be missing
6. Different plans - costs developed for current retirees may not be applicable for future retirees due to different plan provisions
7. Costs by age - few plan sponsors will have enough retirees to develop the needed costs by age |
|
|
Term
| Modified pension methods to use for the valuation of retiree life and health plans (289) |
|
Definition
1. Modified projected unit credit (required attribution method under FAS 106) - benefit must be accrued by the full eligibility date (as opposed to the expected retirement date used for pension funding)
2. Delayed funding eligibility (can be used with any actuarial method) - include only participants that are most likely to get benefits (those meeting certain age and service requirements)
3. Modified entry age (used for welfare benefit fund calculations) - uses standard entry age normal method with entry age at later of the hire date and the date the benefit fund was adopted |
|
|
Term
| Types of integration with Medicare (3) |
|
Definition
1. Full coordination of benefits - the plan pays the lesser of:
a) The difference between total eligible charges and the Medicare reimbursement amount
b) The amount the plan would have paid in the absence of Medicare
2. Exclusion - the plan applies its normal reimbursement formula to the amount remaining after Medicare reimbursements have been deducted from total eligible charges
3. Carve-out - the plan applies its normal reimbursement formula to the total eligible charges, then subtracts the amount of Medicare reimbursement |
|
|
Term
| Steps in measuring retiree group benefit obligations (4) |
|
Definition
1. Develop a model that represents the plan provisions, the covered population, and the current and projected benefit costs
2. Evaluate the quality and consistency of data used in construction of the model, and make appropriate adjustments
3. Identify administrative inconsistencies and make appropriate adjustments
4. Select projection assumptions
5. Measure the obligations and, when necessary, allocate costs to time periods
6. Review and test the results of the calculations |
|
|
