Employer Accounting for Post-Retiree Health Care

The regulatory frenzy swirling about health care and employer plan accounting, coupled with our aging population and demographic shifts has created a perfect storm. The news is not good for many aging Americans. ["Will Healthcare Costs Bankrupt Aging Boomers?" Richard W. Johnson, Corina Mommaerts, Urban Institute, Feb. 2010.] But this is obviously not breaking news. We are besieged with commentary that Medicare is bankrupt, and the new accounting standards for employers require transparency to market and present value calculations of long-term liabilities, which creates havoc for employers for tax-planning and compliance purposes. [FASB Initiates Projects to Improve Measurement and Disclosure of Fair Value Estimates, FASB announcement 2.18.09; Proposed FASB Staff Position (FSP) FAS 107-b and APB 28-a.]

However, in spite of the burden that these recent regulatory and accounting standard announcements impose, there is a “silver lining” that can help employers avoid burdensome disclosure. From a planning standpoint, state and local governments (“SLGs”), for-profit and nonprofit employers, and their unions can now use a tool that will:

• Create an immediate cost savings to the Plan Sponsors;
• Roll Back any charge to earnings that would otherwise be booked before year end; and
• Provide Ongoing benefit savings over the long run and reduce Plan Sponsors' administrative costs and human resources drain.

The Problem

Employers that provide post-retiree medical and/or drug coverage are faced with increasing costs, while at the same time they must report the present value of the expected liability to comply with generally accepted accounting principles. This is true whether using Financial Accounting Standards Board (“FASB”), International Financial Standards Board (“IASB”) or Governmental Accounting Standards Board (“GASB”) standards.

The Pieces of the Puzzle

In order to reduce employer health care costs for retirees, legislation was passed to provide savings to the employer earlier this decade. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established The Retiree Drug Subsidy (“RDS03″) for employers that sponsored group health plans providing prescription drug benefits to retirees. The RDS03 created the Medicare Part D Program to provide prescription drug coverage to Medicare participants. The purpose was to encourage employers to continue offering prescription drug benefits to their retirees as opposed to terminating their retiree prescription drug benefit plans. If the employer dropped its former employees, the retirees would be channeled to seek benefits through Medicare. Additionally, many of the benefits were guaranteed through the collective bargaining process or local law and were therefore largely not modifiable.

Under the RDS03, employers were qualified to receive a subsidy equal to 28% of covered prescription drug costs for their retirees. Employers were entitled to an income tax deduction upon receipt of the subsidy, and were still permitted to include this deduction when accounting for their retiree prescription drug expenses.

New legislation passed in March of this year, The Patient Protection and Affordable Care Act (“OHCA10″), retained the Retiree Drug Subsidy, but eliminated the employer's ability to deduct the amount of the subsidy. This change increased the employer's tax liability, which increased the employer's cost of providing prescription drug coverage to retirees. The amount by which an employer's tax liability increased depends on the total amount of the subsidy and the employer's applicable corporate tax rate (15-35%).

While employers do not incur the higher tax liability until 2013, under financial accounting rules, (ASC 715, formerly FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions), employers must now include the present value of the future taxes as a current liability charged against earnings. Because of the increased cost of providing retiree prescription drug coverage, employers may consider eliminating their retiree prescription drug benefits. If an employer decides to eliminate these benefits, retirees who were previously covered by the employer's prescription drug plan would be eligible to enroll for prescription drug coverage under Medicare Part D.

Although Medicare Part D has historically left covered individuals with a gap in coverage (the donut hole) that made the program a much more expensive option for retirees compared to coverage under an employer's prescription drug plan, OHCA10 established a system to eliminate this gap. Essentially, before the OHCA10, the program provided expansive benefits for the initial $2,830 in prescription drug costs and for prescription drug costs above $6,440, but required enrollees to bear the full cost of prescription drugs within the donut hole (between $2,830 and $6,440). The OHCA10 provides for enhanced Medicare Part D coverage, which progressively narrows this gap between years 2011 and 2020, thus making Medicare Part D a more financially viable alternative to employer-provided prescription drug coverage. This enhanced Medicare Part D coverage provides many employers with an additional reason to consider eliminating retiree drug benefits. By terminating its retiree drug benefits, an employer would avoid the increased tax liability and current accounting hit to earnings.

However, naturally this course of action could make the employer vulnerable to legal and reputational liability. Because of this, employers must carefully weigh the increased future tax liability and the current accounting charges necessary to retain retiree prescription drug coverage against the practical and legal risks of eliminating this benefit. Employers need to consider the probability of litigation when terminating a retiree drug plan. Relying on provisions of the Employee Retirement Income and Security Act of 1974 (“ERISA”), as amended, lawsuits can be filed by affected unions, retirees and plan participants. While challenges to retiree benefit changes may not be successful when the company has been careful to reserve the right to amend or terminate health benefits, terminating retirement benefits does not lead to a happy result for retirees under any circumstances, and can result in negative media coverage for the employer.

The Rules

The accounting guidance for postretirement benefits under ASC Codification Topic 715, Compensation ' Retirement Benefits (formerly FAS 106) requires that measurements of benefit obligations be based on facts and circumstances that exist at the measurement date. The measurement of the Accumulated Post Retirement Benefit Obligation (“APBO”) for accounting purposes after March 23, 2010 (effective date of OHCA10) must be included for financial statements. This requirement caused a great deal of confusion for employers shortly after the passage of the new health care law. Additional regulatory guidance is required to clarify this matter. In ASC 715-60-35-142 through 35-143, the FASB stated employers must disclose the impact of the laws on their benefit obligations, including any significant changes to their measurement assumptions.

• If the effect of the changes in the APBO is significant, it should be measured in the period in which the legislation was signed into law ' March 23, 2010 ( e.g., first quarter 2010 for a calendar year-end company). This would affect benefit expense for the remainder of the year.
• If the effect of the changes in the APBO is not significant, it should be reflected in the APBO at the next measurement date ( e.g., Dec. 31 for a calendar year-end company, unless a significant event occurs before year end such as a curtailment that would require an interim measurement).
• When reflecting the effect of the changes in either of the above cases, the effects would be included even if the changes are not yet effective. OHCA10 requires that certain conforming changes be made to individual plans in order for them to comply with the new law. Employers need to determine whether to account for the effect of those changes as a plan amendment that gives rise to prior service cost or an actuarial gain/loss.

The impact on the APBO is initially recognized in accumulated other comprehensive income. Plan changes, once adopted, should be accounted for as plan amendments with the effect on the APBO accounted for as prior service cost/credit.

Specific Aspects of the Legislation Benefit Mandates

The new health care law includes benefit mandate provisions that will modify post-retirement benefit obligations and expense. The law causes the elimination of lifetime and annual benefit maximums, covering dependent children to age 26, and first-dollar coverage for preventive services, among other changes. The fact that the new required benefits have a delayed effective date does not extend time for reporting and measuring post-retirement benefit obligations. It must be reported prior to the various effective dates. This is because the determination of obligations involves long-term projections of employer-provided benefits.

The new law also changes the tax treatment of federal subsidies paid to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the new law, these subsidy payments are taxable in tax years beginning after Dec. 31, 2012. Accounting rules under FASB ASC Codification Topic 740, Income Taxes, require the change in tax law to be immediately recognized in continuing operations in the income statement in the period that includes the enactment date, the date the change is signed into law, not when the rules are changed. That amount will reduce the deferred tax asset on the balance sheet with an offsetting charge to the income statement in the period that includes the enactment date (e.g., a calendar year-end public company would record the charge in the quarter ended March 31, 2010).

Different accounting for the change in tax treatment is required under IFRS; however, with the convergence of FASB and IASB there may no longer be a difference (See Bell, L. (2003) “Planning for Globalization of Employee Benefits: Is there 'Harmony' or a 'GAAP' in the Future?”, Journal of Compensation and Benefits, September/October 2003). By way of example, under Medicare Part D, retirees pay 100% of prescription drug costs once their drug claims accumulated in the plan year reach the Initial Coverage Limit (“ICL”) ' $2,830 in 2010 ' until an out-of-pocket cost limit ' $4,550 in 2010 ' has been paid, at which point Part D provides catastrophic coverage. The new law provides for a phased-in closing of this Part D “donut hole” starting in 2011, so that by 2020 the effective retiree coinsurance payment will be 25% for all covered drugs.

The loss of the deduction by closing the Part D donut hole is ignored for purposes of determining whether an employer's retiree prescription drug benefit is “actuarially equivalent” to Part D for purposes of determining eligibility to receive the Retiree Drug Subsidy (“RDS”). Therefore, employers' eligibility for the RDS is not directly affected by the closing of the donut hole.

Another Answer

The closing of the Part D “donut hole” may provide additional incentives for exploring alternative arrangements. Such arrangements include restructuring the employer-sponsored benefit plan to “wrap-around” a Part D plan, and providing coverage through a customized Part D plan offered exclusively to retirees (such a plan is also known as an Employer Group Waiver Plan (“EGWP”). For accounting purposes, the effect of any amendments to a plan on the APBO should be treated as prior service cost.

Employers with prescription drug benefit plans that are currently provided through a Part D plan or an alternate arrangement similar to those described above would integrate the effects of closing the Part D donut hole in measurements of post-retirement benefit obligations.

• Therefore, the effect of the changes in the APBO should have been measured in the period in which the legislation was signed into law (first quarter 2010 for a calendar year-end company). This affects benefit expense for the remainder of the year.
• When reflecting the effect of the changes, the effects would be included even if the changes are not yet effective.

OHCA10 requires changes to be made to individual plans in order for them to comply with the new law. Employers need to determine whether to account for the effect of those changes as a plan amendment that gives rise to prior service cost or an actuarial gain/loss. The decision to accept the requirements of the legislation and amend the plan will have an economic effect on the employer. There are differences in how the deferred amounts as reflected in the accounting are subsequently amortized and reported in the income statement. The future income will differ depending on the treatment of the impact on the APBO.

If the employer intends to amend its plan in the near future to mitigate the impact of the law, thereby reducing benefits, the effects of the intended amendment should not be reflected currently. The amendment should be accounted for when it is formally adopted and communicated to plan participants in a reasonable period of time, in line with ASC Codification Topic 715-60-35-21.

When the law change impacts the level of active employees' health care benefits and the cost to the employer of providing those benefits, the impact will be recognized in the period the related benefit cost is recognized. The fact that these new benefit mandates have a delayed effective date does not modify the requirement to report the measurement of post-retirement benefit
obligations currently because the determination of obligations requires projections of employer-provided benefits over the working life expectancies.

The costs and the financial reporting impact of these new requirements will vary from employer to employer based on each employer's plan provisions. These benefit changes will apply to each separate retiree medical plan. If the retiree medical plan is part of the active employee plan, the new requirements will also apply to it. If the employer is providing a separate, isolated and independent retiree plan, it may avoid having the benefit mandates apply to its employee medical benefits by restructuring its plans so that retiree medical benefits are provided under a stand-alone plan. In order to maintain the separateness of the plan, employers must obtain a separate group number and file a separate Form 5500.

Additionally, the new law imposes an excise tax on the aggregate value of employer-sponsored health insurance coverage for a plan participant exceeding a threshold amount. The tax is equal to 40% of the excess over the threshold. In most circumstances, the tax will be levied on insurers or third-party administrators (“TPAs”), not directly on employers. It is anticipated that these additional costs will be passed-through to employers, by way of increased premiums, thus increasing the net cost of providing benefits by the amount of the expected excise tax. This provision will be effective for tax years beginning after Dec. 31, 2012.

Under the accounting rules, the additional costs employers expect to incur as a result of the excise tax will be included in current period measurements of the benefit obligation, even though the excise tax does not become effective until 2018 and is not levied directly on the employers, but rather reflected as an increased premium.

Significantly below typical long-term health care cost trend levels are assumed in APBO measurements.

The Act effectively changes the tax treatment of federal subsidies paid to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the Act, these subsidy payments will effectively become taxable in tax years beginning after Dec. 31, 2012.

Employers with prescription drug benefits that are currently provided through a Part D plan or an alternate arrangement similar to those described above should consider the effects of closing the Part D donut hole in measurements of post-retirement benefit obligations and utilize this tool for a substantial savings. In all cases, the employer/Plan sponsor should review this tool with its advisers to determine that this will meet its needs. Many advisers have reviewed this approach to date and support it. There is a specific procedure that a TPA must follow to be qualified with CMS to provide the benefit and that further assures the results. The changes in health care rules, accounting standards, and the financial situations we find ourselves in further emphasize the need to address liabilities in the most economically efficient manner.

Larry Bell, a member of this newsletter's Board of Editors, is the principal of Advisors, LLC, which provides solutions for underfunded pensions and OPEB liabilities. He teaches business and estate planning to actuaries, attorneys, accountants, financial planners, and insurance professionals. He is a qualified expert, and testifies on taxes and benefits. Bell works with entrepreneurial, profit, nonprofit, and government organizations in strategic planning on a regional, national, and international basis. He served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, BOLI, GASB, FASB, IASB, and OPEB solutions. He authors articles and speaks nationally about Decision Trees on COLI Best Practices, 409A, and Benefit Planning.

The regulatory frenzy swirling about health care and employer plan accounting, coupled with our aging population and demographic shifts has created a perfect storm. The news is not good for many aging Americans. ["Will Healthcare Costs Bankrupt Aging Boomers?" Richard W. Johnson, Corina Mommaerts, Urban Institute, Feb. 2010.] But this is obviously not breaking news. We are besieged with commentary that Medicare is bankrupt, and the new accounting standards for employers require transparency to market and present value calculations of long-term liabilities, which creates havoc for employers for tax-planning and compliance purposes. [FASB Initiates Projects to Improve Measurement and Disclosure of Fair Value Estimates, FASB announcement 2.18.09; Proposed FASB Staff Position (FSP) FAS 107-b and APB 28-a.]

However, in spite of the burden that these recent regulatory and accounting standard announcements impose, there is a “silver lining” that can help employers avoid burdensome disclosure. From a planning standpoint, state and local governments (“SLGs”), for-profit and nonprofit employers, and their unions can now use a tool that will:

• Create an immediate cost savings to the Plan Sponsors;
• Roll Back any charge to earnings that would otherwise be booked before year end; and
• Provide Ongoing benefit savings over the long run and reduce Plan Sponsors' administrative costs and human resources drain.

The Problem

Employers that provide post-retiree medical and/or drug coverage are faced with increasing costs, while at the same time they must report the present value of the expected liability to comply with generally accepted accounting principles. This is true whether using Financial Accounting Standards Board (“FASB”), International Financial Standards Board (“IASB”) or Governmental Accounting Standards Board (“GASB”) standards.

The Pieces of the Puzzle

In order to reduce employer health care costs for retirees, legislation was passed to provide savings to the employer earlier this decade. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established The Retiree Drug Subsidy (“RDS03″) for employers that sponsored group health plans providing prescription drug benefits to retirees. The RDS03 created the Medicare Part D Program to provide prescription drug coverage to Medicare participants. The purpose was to encourage employers to continue offering prescription drug benefits to their retirees as opposed to terminating their retiree prescription drug benefit plans. If the employer dropped its former employees, the retirees would be channeled to seek benefits through Medicare. Additionally, many of the benefits were guaranteed through the collective bargaining process or local law and were therefore largely not modifiable.

Under the RDS03, employers were qualified to receive a subsidy equal to 28% of covered prescription drug costs for their retirees. Employers were entitled to an income tax deduction upon receipt of the subsidy, and were still permitted to include this deduction when accounting for their retiree prescription drug expenses.

New legislation passed in March of this year, The Patient Protection and Affordable Care Act (“OHCA10″), retained the Retiree Drug Subsidy, but eliminated the employer's ability to deduct the amount of the subsidy. This change increased the employer's tax liability, which increased the employer's cost of providing prescription drug coverage to retirees. The amount by which an employer's tax liability increased depends on the total amount of the subsidy and the employer's applicable corporate tax rate (15-35%).

While employers do not incur the higher tax liability until 2013, under financial accounting rules, (ASC 715, formerly FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions), employers must now include the present value of the future taxes as a current liability charged against earnings. Because of the increased cost of providing retiree prescription drug coverage, employers may consider eliminating their retiree prescription drug benefits. If an employer decides to eliminate these benefits, retirees who were previously covered by the employer's prescription drug plan would be eligible to enroll for prescription drug coverage under Medicare Part D.

Although Medicare Part D has historically left covered individuals with a gap in coverage (the donut hole) that made the program a much more expensive option for retirees compared to coverage under an employer's prescription drug plan, OHCA10 established a system to eliminate this gap. Essentially, before the OHCA10, the program provided expansive benefits for the initial $2,830 in prescription drug costs and for prescription drug costs above $6,440, but required enrollees to bear the full cost of prescription drugs within the donut hole (between $2,830 and $6,440). The OHCA10 provides for enhanced Medicare Part D coverage, which progressively narrows this gap between years 2011 and 2020, thus making Medicare Part D a more financially viable alternative to employer-provided prescription drug coverage. This enhanced Medicare Part D coverage provides many employers with an additional reason to consider eliminating retiree drug benefits. By terminating its retiree drug benefits, an employer would avoid the increased tax liability and current accounting hit to earnings.

However, naturally this course of action could make the employer vulnerable to legal and reputational liability. Because of this, employers must carefully weigh the increased future tax liability and the current accounting charges necessary to retain retiree prescription drug coverage against the practical and legal risks of eliminating this benefit. Employers need to consider the probability of litigation when terminating a retiree drug plan. Relying on provisions of the Employee Retirement Income and Security Act of 1974 (“ERISA”), as amended, lawsuits can be filed by affected unions, retirees and plan participants. While challenges to retiree benefit changes may not be successful when the company has been careful to reserve the right to amend or terminate health benefits, terminating retirement benefits does not lead to a happy result for retirees under any circumstances, and can result in negative media coverage for the employer.

The Rules

The accounting guidance for postretirement benefits under ASC Codification Topic 715, Compensation ' Retirement Benefits (formerly FAS 106) requires that measurements of benefit obligations be based on facts and circumstances that exist at the measurement date. The measurement of the Accumulated Post Retirement Benefit Obligation (“APBO”) for accounting purposes after March 23, 2010 (effective date of OHCA10) must be included for financial statements. This requirement caused a great deal of confusion for employers shortly after the passage of the new health care law. Additional regulatory guidance is required to clarify this matter. In ASC 715-60-35-142 through 35-143, the FASB stated employers must disclose the impact of the laws on their benefit obligations, including any significant changes to their measurement assumptions.

• If the effect of the changes in the APBO is significant, it should be measured in the period in which the legislation was signed into law ' March 23, 2010 ( e.g., first quarter 2010 for a calendar year-end company). This would affect benefit expense for the remainder of the year.
• If the effect of the changes in the APBO is not significant, it should be reflected in the APBO at the next measurement date ( e.g., Dec. 31 for a calendar year-end company, unless a significant event occurs before year end such as a curtailment that would require an interim measurement).
• When reflecting the effect of the changes in either of the above cases, the effects would be included even if the changes are not yet effective. OHCA10 requires that certain conforming changes be made to individual plans in order for them to comply with the new law. Employers need to determine whether to account for the effect of those changes as a plan amendment that gives rise to prior service cost or an actuarial gain/loss.

The impact on the APBO is initially recognized in accumulated other comprehensive income. Plan changes, once adopted, should be accounted for as plan amendments with the effect on the APBO accounted for as prior service cost/credit.

Specific Aspects of the Legislation Benefit Mandates

The new health care law includes benefit mandate provisions that will modify post-retirement benefit obligations and expense. The law causes the elimination of lifetime and annual benefit maximums, covering dependent children to age 26, and first-dollar coverage for preventive services, among other changes. The fact that the new required benefits have a delayed effective date does not extend time for reporting and measuring post-retirement benefit obligations. It must be reported prior to the various effective dates. This is because the determination of obligations involves long-term projections of employer-provided benefits.

The new law also changes the tax treatment of federal subsidies paid to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the new law, these subsidy payments are taxable in tax years beginning after Dec. 31, 2012. Accounting rules under FASB ASC Codification Topic 740, Income Taxes, require the change in tax law to be immediately recognized in continuing operations in the income statement in the period that includes the enactment date, the date the change is signed into law, not when the rules are changed. That amount will reduce the deferred tax asset on the balance sheet with an offsetting charge to the income statement in the period that includes the enactment date (e.g., a calendar year-end public company would record the charge in the quarter ended March 31, 2010).

Different accounting for the change in tax treatment is required under IFRS; however, with the convergence of FASB and IASB there may no longer be a difference (See Bell, L. (2003) “Planning for Globalization of Employee Benefits: Is there 'Harmony' or a 'GAAP' in the Future?”, Journal of Compensation and Benefits, September/October 2003). By way of example, under Medicare Part D, retirees pay 100% of prescription drug costs once their drug claims accumulated in the plan year reach the Initial Coverage Limit (“ICL”) ' $2,830 in 2010 ' until an out-of-pocket cost limit ' $4,550 in 2010 ' has been paid, at which point Part D provides catastrophic coverage. The new law provides for a phased-in closing of this Part D “donut hole” starting in 2011, so that by 2020 the effective retiree coinsurance payment will be 25% for all covered drugs.

The loss of the deduction by closing the Part D donut hole is ignored for purposes of determining whether an employer's retiree prescription drug benefit is “actuarially equivalent” to Part D for purposes of determining eligibility to receive the Retiree Drug Subsidy (“RDS”). Therefore, employers' eligibility for the RDS is not directly affected by the closing of the donut hole.

Another Answer

The closing of the Part D “donut hole” may provide additional incentives for exploring alternative arrangements. Such arrangements include restructuring the employer-sponsored benefit plan to “wrap-around” a Part D plan, and providing coverage through a customized Part D plan offered exclusively to retirees (such a plan is also known as an Employer Group Waiver Plan (“EGWP”). For accounting purposes, the effect of any amendments to a plan on the APBO should be treated as prior service cost.

Employers with prescription drug benefit plans that are currently provided through a Part D plan or an alternate arrangement similar to those described above would integrate the effects of closing the Part D donut hole in measurements of post-retirement benefit obligations.

• Therefore, the effect of the changes in the APBO should have been measured in the period in which the legislation was signed into law (first quarter 2010 for a calendar year-end company). This affects benefit expense for the remainder of the year.
• When reflecting the effect of the changes, the effects would be included even if the changes are not yet effective.

OHCA10 requires changes to be made to individual plans in order for them to comply with the new law. Employers need to determine whether to account for the effect of those changes as a plan amendment that gives rise to prior service cost or an actuarial gain/loss. The decision to accept the requirements of the legislation and amend the plan will have an economic effect on the employer. There are differences in how the deferred amounts as reflected in the accounting are subsequently amortized and reported in the income statement. The future income will differ depending on the treatment of the impact on the APBO.

If the employer intends to amend its plan in the near future to mitigate the impact of the law, thereby reducing benefits, the effects of the intended amendment should not be reflected currently. The amendment should be accounted for when it is formally adopted and communicated to plan participants in a reasonable period of time, in line with ASC Codification Topic 715-60-35-21.

When the law change impacts the level of active employees' health care benefits and the cost to the employer of providing those benefits, the impact will be recognized in the period the related benefit cost is recognized. The fact that these new benefit mandates have a delayed effective date does not modify the requirement to report the measurement of post-retirement benefit
obligations currently because the determination of obligations requires projections of employer-provided benefits over the working life expectancies.

The costs and the financial reporting impact of these new requirements will vary from employer to employer based on each employer's plan provisions. These benefit changes will apply to each separate retiree medical plan. If the retiree medical plan is part of the active employee plan, the new requirements will also apply to it. If the employer is providing a separate, isolated and independent retiree plan, it may avoid having the benefit mandates apply to its employee medical benefits by restructuring its plans so that retiree medical benefits are provided under a stand-alone plan. In order to maintain the separateness of the plan, employers must obtain a separate group number and file a separate Form 5500.

Additionally, the new law imposes an excise tax on the aggregate value of employer-sponsored health insurance coverage for a plan participant exceeding a threshold amount. The tax is equal to 40% of the excess over the threshold. In most circumstances, the tax will be levied on insurers or third-party administrators (“TPAs”), not directly on employers. It is anticipated that these additional costs will be passed-through to employers, by way of increased premiums, thus increasing the net cost of providing benefits by the amount of the expected excise tax. This provision will be effective for tax years beginning after Dec. 31, 2012.

Under the accounting rules, the additional costs employers expect to incur as a result of the excise tax will be included in current period measurements of the benefit obligation, even though the excise tax does not become effective until 2018 and is not levied directly on the employers, but rather reflected as an increased premium.

Significantly below typical long-term health care cost trend levels are assumed in APBO measurements.

The Act effectively changes the tax treatment of federal subsidies paid to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the Act, these subsidy payments will effectively become taxable in tax years beginning after Dec. 31, 2012.

Employers with prescription drug benefits that are currently provided through a Part D plan or an alternate arrangement similar to those described above should consider the effects of closing the Part D donut hole in measurements of post-retirement benefit obligations and utilize this tool for a substantial savings. In all cases, the employer/Plan sponsor should review this tool with its advisers to determine that this will meet its needs. Many advisers have reviewed this approach to date and support it. There is a specific procedure that a TPA must follow to be qualified with CMS to provide the benefit and that further assures the results. The changes in health care rules, accounting standards, and the financial situations we find ourselves in further emphasize the need to address liabilities in the most economically efficient manner.

Larry Bell, a member of this newsletter's Board of Editors, is the principal of Advisors, LLC, which provides solutions for underfunded pensions and OPEB liabilities. He teaches business and estate planning to actuaries, attorneys, accountants, financial planners, and insurance professionals. He is a qualified expert, and testifies on taxes and benefits. Bell works with entrepreneurial, profit, nonprofit, and government organizations in strategic planning on a regional, national, and international basis. He served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, BOLI, GASB, FASB, IASB, and OPEB solutions. He authors articles and speaks nationally about Decision Trees on COLI Best Practices, 409A, and Benefit Planning.