Other postretirement benefits (OPRBs) are a crucial part of employee compensation packages. Unlike pensions, OPRBs typically include health care, life insurance, and other non-pension benefits for retirees. These benefits are often unfunded, posing financial challenges for employers.

Accounting for OPRBs involves complex calculations and disclosures. Employers must measure the accumulated postretirement benefit obligation (APBO) and recognize the net periodic benefit cost. This process requires careful consideration of actuarial assumptions and future healthcare costs.

Other Postretirement Benefits

Types of OPRBs

• Other postretirement benefits (OPRBs) are benefits, other than pensions, that employers provide to their retired employees
• The most common type of OPRB is postretirement health care benefits, which can include medical, dental, and vision coverage
• Other types of OPRBs can include:
  • Life insurance coverage for retirees
  • Legal services provided to retirees
  • Tuition assistance for retirees or their dependents
  • Day care services for retirees' grandchildren
  • Housing subsidies or allowances for retirees
• Employers are not legally required to offer OPRBs, but many choose to do so as part of their overall compensation package to attract and retain talented employees
• OPRBs are becoming less common as employers look for ways to reduce costs and manage their long-term financial obligations

Funding of OPRBs

• OPRBs are typically unfunded, meaning that employers pay for them on a pay-as-you-go basis rather than setting aside assets in advance to cover the cost of future benefits
• With an unfunded plan, the employer simply pays the cost of benefits as they are incurred each year, rather than making regular contributions to a trust fund
• Unfunded plans are less secure for retirees because there is no dedicated pool of assets to ensure that benefits will be paid in the future
• Some employers choose to partially or fully fund their OPRB plans by making regular contributions to a trust fund, similar to a pension plan
• Funded OPRB plans provide greater security for retirees, but they also require the employer to make larger upfront contributions and manage the investment of plan assets

Accounting for Other Postretirement Benefits

Measurement of OPRB Obligations

• Accounting for OPRBs is governed by FASB ASC 715-60 (formerly SFAS 106), which requires employers to recognize the cost of providing OPRBs over the service lives of employees
• Employers must measure and recognize the accumulated postretirement benefit obligation (APBO), which represents the actuarial present value of all future OPRB costs attributed to employee service rendered to date
• The APBO is calculated using actuarial assumptions about future events, such as:
  • Employee turnover and retirement rates
  • Life expectancy and mortality rates for retirees
  • Future increases in healthcare costs
  • Discount rates used to calculate the present value of future benefits
• The APBO is remeasured each year to reflect changes in actuarial assumptions and the passage of time

Recognition of OPRB Costs

• The net periodic postretirement benefit cost is recognized each period and includes several components:
  • Service cost: The actuarial present value of benefits attributed to services rendered by employees during the period
  • Interest cost: Increase in the APBO due to the passage of time (i.e., the unwinding of the discount rate)
  • Actual return on plan assets: Increases or decreases in the fair value of plan assets, if any
  • Amortization of prior service cost: Deferred gains or losses from plan amendments recognized over the remaining service period of active employees
  • Amortization of gains and losses: Deferred gains and losses resulting from changes in actuarial assumptions or differences between actual and expected returns on plan assets
• Employers must provide extensive disclosures about their OPRB plans in the notes to the financial statements, including:
  • The funded status of the plan (i.e., the difference between the APBO and the fair value of plan assets)
  • The components of net periodic benefit cost for the period
  • Expected future benefit payments for each of the next five years and in aggregate for the following five years

Pensions vs Other Postretirement Benefits

Differences in Accounting Treatment

• Both pensions and OPRBs are forms of deferred compensation that employers provide to their retired employees, but there are several key differences in the accounting treatment:
  • Pensions are typically funded in advance, with the employer making regular contributions to a trust fund, while OPRBs are usually unfunded and paid on a pay-as-you-go basis
  • The APBO for OPRBs includes the expected cost of future benefits for both vested and non-vested employees, while the projected benefit obligation (PBO) for pensions only includes vested benefits
  • Actuarial gains and losses are recognized immediately in other comprehensive income for pensions, but they are deferred and amortized over time for OPRBs

Similarities in Accounting Treatment

• The calculation of the service cost and interest cost components of net periodic benefit cost is similar for both pensions and OPRBs:
  • Service cost represents the present value of benefits earned by employees during the current period
  • Interest cost represents the increase in the benefit obligation due to the passage of time
• Employers must provide similar disclosures for both pensions and OPRBs in the notes to the financial statements, including:
  • The funded status of the plan at the end of the period
  • The components of net periodic benefit cost recognized during the period
  • Expected future benefit payments for each of the next five years and in aggregate for the following five years

Journal Entries for Other Postretirement Benefits

Recording Net Periodic Benefit Cost

• At the end of each period, employers must record the net periodic postretirement benefit cost and update the APBO
• The basic journal entry to record net periodic benefit cost is:
  • Debit: Net Periodic Postretirement Benefit Cost (an operating expense account)
  • Credit: Cash (for any benefits paid directly to retirees during the period)
  • Credit: Accrued Postretirement Benefit Liability (a balance sheet liability account)
• The Accrued Postretirement Benefit Liability represents the cumulative difference between the APBO and the fair value of any plan assets, and it is reported as a long-term liability on the balance sheet

Recording Contributions to Plan Assets

• If the employer makes contributions to a funded OPRB plan, the journal entry to record the contribution is:
  • Debit: Plan Assets (a balance sheet asset account)
  • Credit: Cash
• Contributions to plan assets increase the funded status of the plan and reduce the Accrued Postretirement Benefit Liability

Recording Gains and Losses

• Gains and losses that are not immediately recognized in net periodic benefit cost are recorded in other comprehensive income (OCI) and then amortized over time
• The journal entry to record gains and losses in OCI is:
  • Debit/Credit: Other Comprehensive Income - Postretirement Benefits (an equity account)
  • Credit/Debit: Accrued Postretirement Benefit Liability
• Amortization of prior service costs and deferred gains/losses is recorded as a component of net periodic benefit cost each period, with a corresponding reduction in the balance of the OCI account