OBRA 90: two minuses and one plus for financing benefits.

• Author: Becker, Frank
• Position: Omnibus Budget Reconciliation Act of 1990

The Omnibus Budget Reconciliation Act of 1990 (OBRA 90) affects the financing of employer-provided health and pension benefits in three ways:

* Employers may use excess pension fund assets to pay retiree health costs.

* Pension Benefit Guaranty Corporation (PBGC) premiums go up.

* The excise tax on reversions of excess pension plan assets to the employer on termination of a pension plan also goes up.

Using pension assets to pay retiree health costs

As we are all painfully aware, FASB Statement 106, Accounting for Postretirement Benefits Other than Pensions, requires accrual accounting for retiree health benefits. Postretirement health plans are, for the most part, unfunded, and the liabilities associated with them are enormous. To make matters worse, very few tax-effective vehicles for funding these benefits are available, and, in view of the size of the federal budget deficit, it's unlikely that any will be forthcoming soon.

But most pension plans are well funded, mostly because of superior investment performance in the mid and late 1980s. So it's only natural to relieve the lack of funding for retiree health benefits with the apparent excess of funds in the pension plan, especially when the same participants are covered under both plans.

OBRA makes this possible. And, while the ability to use pension plan assets to pay retiree health benefits can be advantageous to the employer, it also results in revenue gains for the government. How so?

Raising federal revenues

The tax law currently limits deductible pension plan contributions under full-funding limitations. After pension plan assets grow to a certain level relative to plan liabilities, further contributions to the plan are no longer tax deductible. Many pension plans are fully funded already.

For retiree health benefits, employer payments are all tax deductible - unless they come from excess pension assets, which were already deducted as contributions to the pension trust. Under OBRA 90, the amount of assets that employers use to pay retiree health benefits cannot be so large as to make the pension plan less than fully funded in the near future. So federal tax revenues will increase for several years because employers that transfer assets will not be taking tax deductions for retiree health benefits, and will still be unable to make tax-deductible pension contributions.

Although an employer that transfers assets loses a deduction for healthcare benefits paid with those assets, payments do not come out of corporate cash. The transfer is a win-win situation. A win for the government because revenues are increased, at least in the near term. And a win for the employer because cash flow is conserved.

How it works

Under OBRA 90, an employer that plans to pay retiree health benefits with excess pension plan assets...