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The Accounting Angle
Federal Reimbursement of Early Retiree
Health Benefits and Its Effect on OPEB
By Stephen J. Gauthier
Federal health-care
reform legislation
promises partial
reimbursement to
employers for health
benefits provided to
early retirees, which
affects accounting
and financial reporting
for OPEB.
H
ealth care is a major factor in
the cost of other postemployment benefits (OPEB) for most
state and local government employers. Federal health-care reform legislation, recently enacted by Congress
and signed by the President, promises
partial reimbursement to employers for
health benefits provided to early retirees. This article considers the effect of
federal reimbursement on accounting
and financial reporting for OPEB.
BACKGROUND
Health-care coverage is a special challenge for retirees more than 55 years
old, but not yet eligible for Medicare.
The newly passed federal health-care
legislation includes a provision to reimburse employers for a portion of the
cost of health benefits offered to such
early retirees and their dependents.
That provision will remain in effect
through December 31, 2013. Some
observers believe this reimbursement
could permit state and local government employers to recover a substantial portion (e.g., 20 percent) of their
claims cost for non-Medicare retirees.
ACCOUNTING TREATMENT
The Governmental Accounting
Standards Board (GASB) has not
addressed the issue of the appropriate accounting and financial reporting
for reimbursable early retiree health
benefits. However, the reasoning that
underlies the GASB’s earlier guidance
on accounting and financial reporting
for Medicare Part D reimbursements
appears relevant to early retiree health
benefit reimbursements as well.
The Medicare Prescription Drug,
Improvement, and Modernization Act
(2003) authorized the partial reimbursement of the cost of prescription
drug benefits provided to Medicare
retirees through employer health-care
plans offering prescription drug coverage equivalent to Medicare Part D.
At the time, employers in both the
public and the private sectors debated
the appropriate accounting and financial reporting treatment for these reimbursements. Some argued that such
reimbursements ought to be treated as
a reduction of future retiree health-care
payments when calculating the cost
of OPEB. Others argued that Medicare
Part D subsidized rather than reduced
OPEB cost, and that reimbursements,
therefore, should be treated as intergovernmental revenues rather than as
a reduction of employer cost.
In the private sector, the ultimate
conclusion was that employers should
treat the federal reimbursement subsidy connected with Medicare Part D as
a reduction of their benefit obligation
to employees. Thus, anticipated future
reimbursements under Medicare Part
D reduce the amount of OPEB expense
reported by private-sector employers.
June 2010 | Government Finance Review 65
The GASB reached the opposite conclusion. GASB TB 2006-1, Accounting
and Financial Reporting by Employers
and OPEB Plans for Payments from
the Federal Government Pursuant to
the Retiree Drug Subsidy Provision of
Medicare Part D, expressly directs that
employers not treat anticipated future
reimbursements as a reduction of their
benefit obligation. Consequently, future
reimbursements under Medicare Part D
do not reduce the amount of OPEB
expense reported by state and local
government employers.
The logic of GASB TB 2006-1 would
appear to apply equally well to anticipated federal reimbursement payments for early retiree health benefits.
Accordingly, state and local governments should not expect that their
OPEB expense will decrease as a result
of this particular provision of the new
federal health-care legislation.
Revenue related to reimbursements
made directly to employers would be
recognized using the guidance ordinarily applicable to voluntary nonexchange transactions. That is, a receivable would be recognized as soon as
all eligibility requirements had been
met, and revenue would be recognized
at that same time (i.e., accrual accounting) or as soon thereafter as it became
“available” to finance expenditures
of the current period (i.e., modified
accrual accounting).
Revenue related to reimbursements
made directly to an OPEB plan that
qualified as a trust or equivalent arrangement would be treated as an on-behalf
benefit. That is, the employer whose
retirees were receiving the health benefits being reimbursed would recognize
revenue as soon as reimbursement payments were either made or due to the
OPEB plan. If the plan did not qualify as
a trust or equivalent arrangement, the
reimbursements would be treated just
as though they had been made directly
to the employer, as described earlier. y
STEPHEN J. GAUTHIER is director of the
GFOA’s Technical Services Center in
Chicago, Illinois.
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66 Government Finance Review | June 2010