Federal reimbursement of early retiree health benefits and its effect on OPEB.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Other postemployment benefits

Health 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...