Got You Covered! One set of terms stands out as a source of frequent confusion in the world of postemployment benefits accounting and financial reporting: covered payroll and covered-employee payroll.

• Author: Levine, Michele Mark
• Position: The Accounting Angle

In the labyrinthine world of postemployment benefits (PEB) accounting and financial reporting--which includes both pensions and other nonpension benefits such as retiree health care (other postemployment benefits, or OPEB)--one set of terms stands out as a source of frequent confusion: covered payroll and covered-employee payroll. Both are payroll-related measures that can provide context to defined benefit postemployment obligations, (1) but they are useful, available, and need to be disclosed in required supplementary information (RSI) in different situations.

The Governmental Accounting Standards Board (GASB) defines covered payroll as " [t] he payroll on which contributions to a pension plan are based." (2) Borrowing phrasing from an older (now superseded) definition, it is the amount "paid to active employees on which contributions to a pension plan are based. For example, if pension contributions are calculated on base pay including overtime, covered payroll includes overtime ..." (3) If the contributions were instead calculated on base pay excluding overtime compensation, then overtime pay would be excluded from covered payroll. Covered payroll is the amount of payroll that is "covered" by the contributions. Generally, payroll that is excluded from the calculation of pension plan contributions is the same as that which is excluded from the calculation of pension benefits, which is sometimes referred to as being "non-pensionable." (4) Covered payroll is projected and used in actuarial calculations of pension liabilities.

Covered-employee payroll, on the other hand, is the total amount of the "payroll of employees that are provided with pensions through the plan." (5) Building on the examples above, overtime compensation would be included in covered-employee payroll, whether or not it's included in the calculation of contributions, because it is part of the total payroll of the employees who are members of the pension plan. In the case of covered-employee payroll, it is the employees--not the payroll--being referred to as "covered." Because covered-employee payroll is not affected by different policies regarding pensionable and non-pensionable elements of pay, it can be viewed as a more "standard" measure among governments than covered payroll. For the same reason, a ratio of net pension or OPEB liabilities to covered-employee payroll may be a more useful "common-sized" measure than that of the net liabilities to covered payroll, when...