Accounting, Funding and Tax Consequences

Plan-related functions, employer-related functions, tax-related functions, audits, and claim reserves

The course outlines five major groupings of accounting-dominated functions: (I) Plan-Related Functions (funding, compliance), (II) Employer-Related (contingencies, retirees, trust accounting, bankruptcy, government contracts), (III) Tax-Related (trust filing, employer filing, employee filing, discrimination issues), (IV) Audits, and (V) Claim Reserves.

The DOL/IRS Form 5500 annual report for plans meeting the audit threshold

The plan-related compliance functions include the Annual Report (Form 5500) and the Independent Accountant's Statement. The accountant's audit and opinion are required for the DOL/IRS Form 5500 when the plan meets the participant threshold for an audit requirement.

Employer-related claim reserves

The course notes that ASC 450 and ASC 715 provide guidance on employer-related claim reserves, emphasizing detailed disclosures and current assumptions. These standards address how employers should recognize and report contingencies and retirement benefit obligations.

Plan A is trusteed, so the risk has been transferred to the trust, and the trust has fully funded the claim reserves

Bill determines that Plan A, being trusteed, has transferred the risk to the trust. It is presumed that the trust has fully funded the claim reserves. Therefore, there is no contingent liability for the ABC Company on the employer's GAAP-basis statement.

Claims paid for year X plus actuarially determined claim reserve at 12-31-X minus actuarially determined claim reserve at 12-31-X-1

For Plan A (trusteed), the deduction is (a) + (b) - (c) where: (a) is claims paid for year X, (b) is actuarially determined claim reserve (not plan obligation) as of 12-31-X, and (c) is actuarially determined claim reserve (not plan obligation) as of 12-31-X-1.

Because dental plans have such small catastrophic risk that the liability is immaterial

Plan B, being a dental plan with general asset funding, has no material contingent liability because the catastrophic risk associated with dental claims is so small that it fails the materiality threshold for contingent liability recognition.

Because John is an over 2% sub-S corporation owner, whose employer-paid health benefits are taxable income

John Doe is an over 2% sub-S owner. Under tax rules, the economic value of employer-provided healthcare benefits for sub-S owners with more than 2% ownership must be reported as taxable income on IRS Form 1099.

The accountant should always prepare the Form 5500 when an accountant's statement is required

The course states it is good practice that the accountant always does the Form 5500 when an accountant's statement is required. The plan supervisor should prepare the Form 5500 in other instances where no accountant's statement is needed.

SOC 1, because XYZ is a service organization whose controls affect the employer's financial reporting

Bill informs John and Mary that XYZ Administrative Firm is a service organization that needs SOC 1. A SOC 1 audit focuses on a service organization's controls relevant to their clients' internal controls over financial reporting.

Paid claims for year X only

For Plan B, which is a general asset plan, the deduction is limited to the paid claims for year X. Unlike the trusteed Plan A, there is no adjustment for changes in actuarially determined claim reserves.

They use their position as the employer's accountant to promote their own management, risk management, and consulting services

The course notes that larger national accounting firms have management-type services, and the opportunity to use their position as the employer's accountant to promote their risk management and consulting services is too common to be ignored. They may take work away from plan supervisors by offering the accountant's audit and actuarial work as a package.

By offering actuarial services as part of its own package of services, through either a staff actuary or a retained actuary

The course states that plan supervisors may avoid unwanted encroachment by offering actuarial services as part of their package of services. Such actuarial services may be provided by a staff actuary or a retained actuary of the plan supervisor (or a consortium of plan supervisors).

The services of another actuary may be required to verify or replace the questionable work

The course states that where the first actuary's work product is in doubt, the service of another actuary may be required. This is one of the principles governing the relationship between plan accountants and actuaries, as set forth in ASC 980.

Audit-type tests of the actuary's work product regarding reasonableness of methods and assumptions, results, and expertise of the actuary

The course specifies that the accountant relies on the work of the actuary but does its own audit-type tests of the actuary's work product regarding reasonableness of methods and assumptions, results, and expertise of the actuary. The accountant must also be satisfied with the professional qualifications and reputation of the actuary.

ASC 980 (Regulated Operations)

The course states that the principles governing the joint endeavors of accountants and actuaries are set forth in ASC 980—Regulated Operations. These include requirements for coordination, reliance on actuarial work, and verification of the actuary's qualifications.

When it is probable that a liability has been incurred AND the amount can be reasonably estimated

ASC 450 requires that a loss contingency be accrued when two criteria are met: (1) it is probable that a liability has been incurred, and (2) the amount can be reasonably estimated. If both criteria are not met, the contingency may still require disclosure depending on its likelihood and potential impact.

The minimum amount in the range

ASC 450 specifies that if a range of loss is estimated and no single amount within the range is more likely, the minimum amount in the range should be accrued. This represents a conservative approach while still recognizing the contingent liability.

Reasonably possible

ASC 450 uses three categories of likelihood: Probable (likely to occur), Reasonably Possible (more than remote but less than probable), and Remote (slight chance of occurring). The 'reasonably possible' classification sits between the other two.

Gain contingencies are not recognized until they are realized or virtually certain to be realized, unlike loss contingencies which may be accrued when probable and estimable

ASC 450 applies an asymmetric approach: loss contingencies are accrued if probable and reasonably estimable, but gain contingencies are not recognized until they are realized or virtually certain to be realized. Disclosure of material gain contingencies is encouraged but not required until realized.

Expected future revenue from a new product line

ASC 450 addresses loss contingencies such as lawsuits, product warranties, environmental liabilities, and uncertain tax positions. Expected future revenue would be a gain contingency or revenue recognition matter, not a loss contingency.

Material reserves for self-funded risks must be shown as a liability on audited statements, including both reported and unreported claims reserves

ASC 450 requires that material reserves for self-funded risks be shown as a liability on audited statements. This includes both reported and unreported claims reserves, emphasizing the need for detailed and transparent disclosures about the nature and amount of these reserves.

The present value of expected benefits earned by employees up to the measurement date, including future salary increases if applicable

Under ASC 715, the projected benefit obligation (PBO) is defined as the present value of expected benefits earned by employees up to the measurement date, including future salary increases (if applicable). This forward-looking measure captures the full economic obligation of the plan.

Employer contributions to the plan during the period

Net periodic pension cost under ASC 715 includes service cost, interest cost, expected return on plan assets, amortization of prior service costs and actuarial gains or losses, and other adjustments. Employer contributions are a cash flow item that affects the funded status but are not a component of the periodic pension expense.

Service cost must be presented with other employee compensation costs, while other components like interest cost and expected return on plan assets must be presented separately

ASU 2017-07, issued by FASB, clarified that the service cost component of pension and OPEB expense should be presented in the same line item as other employee compensation costs, while other components (interest cost, expected return on plan assets, etc.) should be presented separately outside of operating income.

Benefits like healthcare and life insurance provided to retirees

OPEB under ASC 715 includes benefits like healthcare and life insurance provided to retirees, often under the same general plan provisions as pensions. The accounting for OPEB involves recognizing a postretirement benefit obligation and periodic expense similar to pension accounting.

They are generally recognized in other comprehensive income (OCI) and amortized into net periodic pension cost over time

Under ASC 715, changes in pension or OPEB obligations such as actuarial gains or losses are generally recognized in other comprehensive income (OCI) and amortized into net periodic pension cost over time. This smoothing mechanism prevents large one-time impacts on net income.

Healthcare cost trend rates

For OPEB under ASC 715, assumptions related to healthcare cost increases (healthcare cost trend rates) are essential because rising healthcare costs directly drive the obligation for retiree health benefits. Other assumptions like discount rate, expected return on plan assets, and salary growth also apply, but healthcare cost trends are specifically crucial for OPEB.

Contributions to the VEBA may reduce the recognized OPEB liability since plan assets held in the VEBA offset the obligation

Under ASC 715, the fair value of assets in a VEBA must be recognized as part of the OPEB plan's assets. Contributions to a VEBA may reduce the recognized liability for OPEB since the plan assets held in the VEBA offset the liability. The employer must also recognize periodic benefit cost including service cost and interest on the accumulated liability.

The yield of high-quality corporate bonds

ASC 715 requires that the discount rate used for calculating present value of future OPEB obligations reflect the time value of money and be based on the yield of high-quality corporate bonds. This rate directly affects the size of the liability recognized on the balance sheet.

The increasing percentage of the population over age 65 and the trend toward early retirement

The course identifies several important factors contributing to growing postretirement healthcare liabilities, including rising healthcare costs, Medicare changes making it secondary to employer-provided coverage, demographic shifts (increasing population over 65 and early retirement trends), and emerging legal patterns making it difficult to escape retiree health commitments.

It focuses on how to account for each employer's share of the contributions and liabilities in those plans

ASC 715 provides specific guidance on accounting for multiemployer plans where multiple employers contribute to a single plan. The focus is on how to account for each individual employer's share of the contributions and liabilities, rather than requiring each employer to recognize the entire plan's obligations.

ASC 715 focuses on the accounting liability offset from contributions, while IRS regulations govern whether contributions are tax-deductible and ensure they are not excessive

The interaction of ASC 715 and IRS regulations shows different focuses: contributions to a VEBA may reduce the recognized OPEB liability under ASC 715, while under IRS rules the same contributions must be tax-deductible, reasonable, and not excessive in relation to future obligations. The timing and amount of contributions affect both the accounting and tax treatment.

The tax-exempt status of the trust could be jeopardized

IRS regulations require that employers ensure the VEBA does not accumulate excess funds that are not used to provide benefits, as this could jeopardize the tax-exempt status of the trust. Contributions must be reasonable in relation to the expected future costs of the benefits.

Retirees are set apart into their own separate risk pool, distinct from actives and COBRAs

COBRAs and active employees share the same risk pool and are treated similarly for cost-sharing purposes. Retirees, however, are set apart into their own separate risk pool. Actuaries demand this bifurcated pooling as part of their determination of the retiree accrued liability computations, ensuring that higher retiree healthcare costs do not unduly impact cost-sharing calculations for active employees.

He is treated as having continuous or unbroken coverage because as a COBRA participant he has not left the family plan

The course explains that a COBRA participant who returns as a rehire is treated as having continuous or unbroken coverage. While a COBRA, John has not left the family plan, so his rehire preserves continuity. This is one of the key benefit advantages COBRAs have over early retirees.

Mary may elect continuation coverage in her own right as a freestanding and independent plan participant

The course identifies this as a key benefit difference between COBRAs and retirees. At the time of John's qualifying event, John and Mary may elect separate or individual coverage as freestanding participants. If they later separate or divorce, Mary may elect continuation in her own right under COBRA regulations.

Early retirees are not afforded any federal protection because of ERISA preemption, while COBRA rights are federally governed

The course states that for government entities, COBRA rights are governed by federal statute (Public Health Service Act §§2201 et seq.), while early retiree rights are not afforded any federal protection because of ERISA preemption. This is a significant distinction in the level of protection available.

COBRA premiums must be actuarially determined and such computations are federally regulated

Where the COBRA premium is paid in whole or part by the participant, the COBRA participant knows that such premiums must be actuarially determined and are federally regulated. Retiree premiums, by contrast, are not subject to the same federal regulations. COBRA participants may pay the full cost plus a 2% administrative fee.

California allows for up to 36 months of continuation coverage, compared to the federal minimum of 18 months

The course uses California as an example of state-specific mini-COBRA regulations. California allows for up to 36 months of continuation coverage, which is double the federal minimum of 18 months. This extended period can affect total premium costs for participants.

All types of benefits provided to former or inactive employees after employment but before retirement, including salary continuation, severance, and disability benefits

ASC 715 establishes that postemployment benefits include all types of benefits provided to former or inactive employees, their beneficiaries, and covered dependents. These include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, job training and counseling, and continuation of healthcare and life insurance.

Attribution to prior service, vesting of benefits, probability of high payments, and amounts payable reasonably estimable

ASC 715 supplements FAS 43 guidance by applying a four-prong test: (1) attribution to prior service, (2) vesting of benefits, (3) probability of high payments, and (4) amounts payable reasonably estimable. This test originally addressed sick pay and vacation plans under FAS 43 and extends to postemployment benefits under ASC 715.

ASC 715 does not apply because the insurer bears the burden of risk spreading and recognizing emerging liabilities; the employer only pays premiums as invoiced

The course states that where fully insured funding is used, ASC 715 does not apply. The burden of risk spreading and recognizing emerging liabilities is the responsibility of the insurer. The employer's only burden is to pay the insurance premiums as invoiced.

When either the claim costs increase by the attained age of the participant or benefits increase significantly by years of service

The active life liability is only recognized where either the claim costs increase by the attained age of the participant or benefits are increased significantly by the participant's years of service. Absent both of these conditions, there is no active life liability to recognize.

Because participants may have repeated or intermittent short-term benefits but generally only one long-term benefit over a working lifetime

The course explains that long-term and short-term disability benefits should be treated separately because participants may have repeated or intermittent short-term benefits but generally only one long-term benefit over a working lifetime. This difference in frequency and duration affects the actuarial calculation of liabilities.

Contingency reserves, retired participants, special state statutes, and possible audit of COBRA premium computations

Government entities must give special attention to four areas: (1) contingency reserves, (2) retired participants, (3) special state statutes (such as those in Iowa, Florida, Ohio, Idaho, California, and New York), and (4) possible audit of COBRA premium computations. These entities are non-ERISA regulated, so there are no independent audits for Form 5500.

Because government entities are not taxpayers, so there would normally be no tax-related filings

Since government entity self-funded plans are non-ERISA regulated, there would be no independent audits for the Form 5500. Also, since such entities are not taxpayers, there would normally be no tax-related filings (IRS Form 990, for example).

Three: the plan itself must reorganize, an employer with a general asset plan must reorganize, and an employer supporting a trusteed plan must reorganize

The course identifies three circumstances for considering bankruptcy and self-funded healthcare plans: (1) plan itself must reorganize, (2) employer with a general asset plan must reorganize, and (3) employer supporting a trusteed plan must reorganize. Each has distinct implications.

No, the IBNR should have been recognized as a liability under generally accepted accounting principles, and choosing not to record it was not a legitimate option

The CPA commentary states that the $250,000 IBNR should have been recognized as a liability under generally accepted accounting principles. Accounting Research Bulletin No. 43 requires current liabilities to include estimated amounts for known obligations. Choosing not to record the liability is not a legitimate option of the employer.

Priority 5 — other unsecured claims

Normally, unpaid self-funded healthcare plan benefits will fall in Priority 5 (other unsecured claims). This means participants stand in line alongside the employer's regular creditors. Unpaid fixed costs like stop-loss premiums and administrative fees will normally fall in Priority 4.

Have stop-loss carriers extend coverage on a modified-paid basis to cover the balance of a hospitalization that commenced while stop-loss was in effect and was ongoing when the contract ceased

The plan supervisor commentary explains that services in the hospital after the plan termination date are not covered expenses, since no employer is well-advised to offer a plan benefit for which there is no recognition as a stop-loss claim. The solution is to have stop-loss carriers extend coverage on a modified-paid basis to cover the balance of a hospitalization that commenced while the stop-loss was in effect.