On the heels of issuing accounting and financial reporting guidance on pension plans, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans and GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The purpose of this guidance is to provide accounting and financial reporting guidance for other postemployment benefit (OPEB) plans.
For the OPEB plans, GASBS No. 74 replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. GASBS No. 74 is effective for plan financial reporting periods ending June 30, 2017.
For employers who provide benefits through OPEB plans, GASBS No. 75 replaces Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. GASBS No. 75 is effective for employer financial reporting periods ending June 30, 2018.
Additionally, the GASB is working on implementation guides for both statements. An exposure draft of the GASBS No. 74 Implementation Guide was released in October 2016, with the final version expected to be released in the 2nd quarter of 2017. A proposed implementation guide for GASBS No. 75 is expected to be released in later in 2017 as well.
The GASB carried over the approach and many of the requirements established by the recently implemented pension standards (GASBS Nos. 67 and 68) and applied them to OPEB, as appropriate. These include (1) transitioning from a funding approach to an earnings approach, (2) modifying the requirements for financial reporting, footnotes disclosures, and required supplementary information, and (3) limiting allowable actuarial cost methods that can be used for projecting benefits to a single attribution method.
OPEB includes postemployment healthcare benefits (medical, dental, vision, and other health-related benefits) provided separately from or through a pension plan. Other examples include life insurance, disability, death benefits, and long-term care, when provided separately from a pension plan. However, OPEB does not include termination benefits or termination payments for sick leave.
The accounting and financial reporting requirements are dependent upon two broad characteristics: (1) whether the plan is administered as a trust or equivalent arrangement (trusted) or not (non-trusted); and (2) the type of OPEB plan (defined benefit plan or defined contribution plan).
Trusted or Non-Trusted
In order to be treated as a trusted plan under these standards, the following three criteria must be met:
- Contributions from employers and earnings must be irrevocable
- Plan assets are dedicated for paying benefits
- Plan assets are legally protected from creditors and the plan administrator
Non-trusted OPEB plans will not include reporting of plan assets, since they do not meet the above trust criteria, even if assets are being accumulated to fund OPEB payments. These assets will generally be reported as assets of the employer. Additionally, employers of non-trusted OPEB plans will focus on the total OPEB liability, instead of the net OPEB liability.
Defined benefit plans generally define the benefits to be provided after separation from employment. These plans are further delineated as (1) Single-employer (one employer), (2) Agent employer (multiple employers, pooled assets, but separate accounts by individual employer), or (3) Cost-sharing (multiple employers, pooled assets) defined benefit OPEB plans.
Much of the guidance provided in GASBS Nos. 74 and 75 addresses defined benefit OPEB plans. However, guidance is also provided on note disclosure requirements for defined contribution OPEB plans and financial reporting and note disclosures for employers of defined contribution OPEB plans.
The defined contribution plan classification is more prescriptive and must (1) provide an individual account for each plan member, (2) define the contributions that an employer is required to make to an active plan member’s account for periods in which that member renders service, and (3) ensure the benefits a plan member will receive will depend only on the contributions, actual earnings on investments of those contributions, and OPEB plan administrative costs that are allocated to the plan member’s account.
Measurement and Assumptions
Net OPEB liability equals the total OPEB liability less the amount of the OPEB plan’s fiduciary net position. The total OPEB liability is determined by either (1) an actuarial valuation, in conformity with Actuarial Standards of Practice issued by the Actuarial Standards Board, or (2) the alternative measurement method permitted for plans and employers with less than 100 members, active and inactive. Either method is required to be performed at least every two years, with more frequent valuations encouraged. If the valuation is performed as of a date other than the OPEB plan’s fiscal year, roll forward procedures must be performed to update the total OPEB liability from the valuation date to the OPEB plan’s or employer’s fiscal year-end. As stated previously, employers of trusted OPEB plans will focus on net OPEB liability, whereas employers of non-trusted OPEB plans will focus on total OPEB liability.
The first step in measuring the total OPEB liability begins with the projection of benefit payments. These payments are required to be based on claims costs or age-adjusted premiums approximating claims costs and the benefit terms and legal agreements existing at the OPEB plan’s fiscal year-end. Consideration of substance over form should be given when evaluating the benefit terms and conditions.
The next step is to discount the projected benefit payments to their actuarial present value. For trusted OPEB plans, the discount rate will be a single, blended rate that reflects:
- a long-term expected rate of return on OPEB plan investments, to the extent that the OPEB plan’s fiduciary net position is projected to be sufficient to make projected benefit payments and OPEB plan assets are expected to be invested using a strategy to achieve that return
- a yield or index rate for a 20-year, tax-exempt, high-quality municipal bond with an average rating of AA/Aa or higher to the extent that the conditions for use of the long-term expected rate of return are not met.
For non-trusted OPEB plans, the discount rate must reflect the 20-year, tax-exempt, high-quality municipal bond rate.
Finally, the attribution of actuarial present value of projected benefit payments must be made to periods of plan member service using the entry age actuarial cost method, with each period’s service cost determined as a level percentage of pay. It is also required to be attributed for each plan member individually, from the period when the plan member first provides service under the benefit terms through the period in which the member is assumed to exit service.
Financial Reporting for Defined Benefit OPEB
The financial reporting requirements for defined benefit OPEB plans under GASBS No. 74 are consistent with previous guidance with respect to the financial statements. However, for note disclosures and required supplementary information (RSI), the requirements are parallel with GASBS No. 67 for pension plans, modified for OPEB plans. Specific requirements will vary, depending on how the OPEB plan is classified, as discussed under the scope section above.
GASBS No. 74 carries over the sensitivity disclosure from the new pension standards regarding the impact of a discount rate 1 percentage point higher and lower than the assumed discount rate on the net OPEB liability (or total OPEB liability for non-trusted OPEB plans). If a healthcare cost trend rate was a factor used in calculating the OPEB liability, then a similar sensitivity disclosures regarding the impact of a healthcare cost trend rate 1 percentage point higher and lower than the assumed healthcare cost trend rate on the net OPEB liability (or total OPEB liability for non-trusted OPEB plans).
Employers of OPEB Plans
The financial reporting requirements for employers providing OPEB under defined benefit OPEB plans under GASBS No. 75 resemble those introduced by GASBS No. 68 for pensions, modified for OPEB plans. In the government-wide and proprietary fund financial statements, employers will need to either recognize (1) a net OPEB liability (for single and agent employers defined benefit trusted plans), (2) a proportionate share of the net OPEB liability (for cost-sharing defined benefit trusted plans), or (3) a total OPEB liability (for non-trusted defined benefit plans).
Employers will also need to recognize deferred outflows of resources and/or deferred inflows of resources, as previously introduced by GASBS No. 68 for pensions, including such items as demographic differences, investment differences and contributions made subsequent to the measurement date. OPEB expense will essentially be the change in the OPEB liability and related deferrals, but includes various components such as contributions, service cost, administrative costs, amortization of deferrals, etc. Requirements for governmental fund financial statements are comparable to previous guidance, generally just recognizing employer contributions to the OPEB plan as OPEB expenditures. Note disclosures and RSI under GASBS No. 75 are also comparable to those introduced by GASBS No. 68, modified to address OPEB, such as requiring the sensitivity disclosure for the healthcare cost trend rate, if applicable. As with GASBS No. 74 for OPEB plans, the specific requirements for employers on note disclosures and RSI are dependent on how the OPEB plan is classified, as addressed in the scope section above.
Employers providing OPEB through non-trusted defined benefit OPEB plans will follow similar guidance as trusted defined benefit OPEB plans, but with certain modifications to reflect the absence of OPEB plan assets for financial reporting purposes. Guidance for these plans is provided in paragraphs 143-223 of GASBS No. 75.
Guidance is also provided for circumstances in which a nonemployer entity is legally responsible for providing certain forms of financial support for OPEB of the employees of another entity. These are defined as special funding situations and are addressed in paragraphs 230-242 of GASBS No. 75.
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The experience gained by implementing the new pension standards should help lessen the learning curve on implementing aspects of the new OPEB standards. However, documentation on OPEB plans may be less formal and change more frequently due to constant changes to healthcare benefits and flexibility to make OPEB reform changes, as compared to pensions. Further, sources for health claims data may be more decentralized and maintained by multiple health insurance vendors or third-party administrators. Impacts to financial statements may be more significant than with pensions, given many OPEB plans are funded pay-as-you-go and have been impacted by a recent trend to reallocate more of the total contributions towards pension benefits over OPEB.
This may also be a good opportunity to review use of, or allocation of net (total) OPEB liabilities to, internal services funds. Generally, OPEB liabilities, related deferrals, and OPEB expenses are only recognized in the government-wide activities and proprietary funds, while governmental funds limit OPEB recognition to employer contributions. Allocating OPEB-related liabilities, deferrals, and OPEB expenses to an internal service fund could bring it into a deficit net position. In order to make sure the internal services fund operates on a cost-reimbursement, break-even basis, interfund loans or transfers will be needed and would likely come, in part, from governmental funds. This inherently creates a situation where OPEB liabilities, normally limited to accrual basis statements, creep into modified accrual basis governmental funds’ statements.