Health benefits for retirees - surviving with OPEB.

• Author: Dankner, Harold
• Position: Postretirement benefits other than pensions

After years of controversy, the FASB statment on postretirement benefits other than pensions is now a reality. Here's help in implementing its provisions.

Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, will for the first time require employers to begin to accrue the cost of retiree health and other postretirement benefits over the working careers of active employees. Statement 106 is generally effective for fiscal years beginning after December 15, 1992 (i.e., the first quarter of fiscal 1993).

Management is now faced with the challenge of balancing the health benefit needs of current and future retirees with financial, business, and accounting constraints. There are certain steps that employers can incorporate into an action plan to understand more fully the significant financial reporting and business issues related to their retiree health programs. These steps are as follows:

* Understand the basic accounting requirements under Statement 106.

* Measure obligations and expense under the new accounting rules.

* Evaluate plan design changes and their impact.

* Assess financing and advance funding alternatives.

* Select transition approach and adoption date.

Management should develop an overall strategy that deals with these issues, integrating each of the steps in the action plan.

This article discusses the key accounting and measurement issues under Statement 106. In a second article in the March/April issue of Financial Executive, we will highlight the important plan design, cost control, financing, and funding issues that management will need to consider before adopting the new accounting rules.

Understanding statement 106:

Management needs to start with a good understanding of the new rules and their general impact. Based on the comprehensive field test of the FASB's exposure draft (ED) that Coopers & Lybrand conducted last year for Financial Executives Research Foundation and on other actuarial valuations performed by our firm that consider the changes the FASB is making to the ED, the FASB's new rules will generally result in significantly higher expense, increased recorded liabilities, and reduced net worth.

The amount of the increase in expense will vary from company to company, based on specific company demographics and plan terms, and on the assumptions used to determine expense. For those companies that participated in the field test and that had a...