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Wallach
CEO, Lance
Wallach
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teaching
professionals. - AICPA author,
instructor &
national speaker. - National Society of
Accountants
Speaker of the
Year. - Writes financial
articles for over 50
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68 Keswick Lane
Plainview, NY 11803
ph: 516-938-5007
fax: 516-938-6330
Email:
LaWallach@aol.com
Plainview, NY 11803
ph: 516-938-5007
fax: 516-938-6330
Email:
LaWallach@aol.com
| Copyright (C) 2009 Veba Plan LLC All rights reserved. |
June 16, 2008
Reduce Other Post-Employment
Benefits Liability with a VEBA
By Lance Wallach
Other Post-Employment Benefits
In 1994, the Government Accounting Standards Board (GASB)
established standards for public employee pension plans.
Government and public employers have to report and account for
pension benefits costs.
However, until recent years, there was no such standard in place
for other post-employment benefits (OPEBs) for state and local
government workers.
Private sector employers have been required to report OPEBs for
over 15 years under the FASB Standards106/158.
Government and public sector employers have been required to
report OPEBs since August 2004 after the issuance of GASB
Statement 45. This means that all government employers must
now keep their promise of providing retiree benefits.
They need to be calculated accurately, accrued during the
employee’s years of work with the employer, and recognized as a
financial obligation as OPEB costs.
These costs are to be reported on financial statements of large
public sector employers beginning with the first financial report
period after December 15, 2006, and on small employers
beginning in 2008.
The intent of GASB 45 was to bring government and public
accounting standards into line with private company standards.
This requires reporting pensions as well as non-pension post-
employment benefits. As the name states, OPEBs are
benefits other than pensions. Many state and local governments,
public schools, public universities and other public and government
agencies provide post-employment benefits that are non-pension-
related. These benefits can include health care benefits including
vision, dental, prescription and health insurance; life insurance;
legal benefits and other non-pension-related work benefits.
Until these changes were put in place with GASB 45 and enforced,
readers of government and public financial statements had
incomplete information on the costs of services provided by state
and local governments and public employers, and were therefore
unable to analyze the financial position and long-term health of
these government and public agencies.
OPEB Cost
Actuarial calculations are used to derive the OPEB cost. In order
to keep the calculations up to date, they must be recalculated every
two to three years depending on the size of the employer. For
example, employers with less than 100 employees can use a
simplified alternative method for measuring the OPEB cost, but
these employers still need to re-evaluate and re-assess every three
years. The costs and obligations for post-employment benefits are
determined using the actuarial present value of the post-
employment benefits - in other words, the present value on term of
service and the terms of the OPEB plan that are presently in place.
There are assumptions that are made in the actuarial evaluations.
They include:
After the actuarial evaluations are completed, each employee
gains a different attribution period, which is based on their period
of eligibility – date of hire to date of full eligibility (i.e. retirement).
With all this said, GASB only requires that employers report
OPEBs; employers are not required or even obligated to fund the
OPEB cost. However, not doing so can affect significantly an
employer’s credit rating and cost of issuing debt financing.
The largest OPEB cost for an employer is health care benefits.
The majority of public sector employers, with more than 200
employees, offer some form of post-employment health benefits.
Unfortunately, with the uncontrollable increases in
health care costs happening annually, and severe budget cuts
being put in place across nearly all public and government
agencies, the continuing use of “pay-as-you-go” will become more
difficult and create new financial liabilities for
employers. Add to this state laws that require employers to allow
retirees to remain on the active health plan until Medicare steps in,
and the reduction in federal and state subsidies, and employers
are struggling to subsidize the gap
between the blended plan cost (active employees and retirees)
and the actual retiree cost. Even if the employer is not contributing
to the retiree health care plan, this amount adds additional liability.
In December 2004, a report from Standard and Poor’s, stated that:
“The new [GASB 45] reporting may reveal cases in which the
actuarial funding of post-employment health benefits would
seriously strain operations, or, further, may uncover conditions
under which employers are unable or unwilling to fulfill these
obligations. In such cases, these liabilities may adversely affect the
employer's creditworthiness. All Standard & Poor's rated
employers will be monitored closely in terms of their reporting
under GASB 45. Upon implementation of these new standards, we
will include the new information as part of our ongoing analytical
surveillance of ratings."
The following year, in June 2005, Fitch Ratings released its report,
saying: “Fitch's credit focus will be on understanding each issuer's
[GASB 45] liability and its plans for addressing it. Fitch also will
review an entity's reasoning for developing its plan. An absence of
action taken to fund OPEB liabilities or otherwise manage them will
be viewed as a negative rating factor. Steady progress toward
reaching the actuarially determined annual contribution level will be
critical to sound credit quality."
Everyone is working towards a solution that will benefit both
employers and employees. But it takes constant monitoring by
both employers and employees. However, one solution that could
benefit everyone is considering a VEBA plan.
Benefits of a VEBA plan
VEBAs have been successfully established to help reduce health
costs and establish financially sound OPEB plans that have proven
to be both efficient and effective. The VEBA can help employers
develop strategies that can lower their liabilities. Many private
sector employers have benefited from the introduction and use of a
VEBA for their OPEB plan.
A well designed GASB 45 OPEB involves many different risk
management strategies and funding techniques. Any benefit
promise made by an employer should be partially or fully funded in
a qualified trust to enable actuaries the use of long-term discount
rates during the calculations. One approach to this funding
source could be issuing OPEB obligation bonds or finance pools.
The employer can then successfully take these finance strategies
and blend a defined-benefit approach with a defined-contribution
strategy to create a successfully managed OPEB plan with
reduced liabilities. These two basic forms of post employment
benefit plans specify either the amount of benefits to be provided to
an employee at the end of their employment period, or stipulate
only the amount to be contributed by the employer to a member’s
account for each year of active employment.
A defined-benefit OPEB plan is where the terms are specified and
the benefits provided from the time of retirement or other
employment separation. These benefits can be dollar-specific or
the type/level of coverage - for example, a dollar
payment based on a flat rate or years of service, or defined
medical coverage, prescription drugs or a percentage of the
premiums. Unfortunately, the defined benefit OPEB plan is
complicated where the reporting makes assumptions on
future medical costs, mortality rates, the availability of Medicare
and the probability of future events.
A defined-contribution OPEB plan considers the individual. It takes
into account individual contributions while active, rather than the
benefits the beneficiaries are to receive post-employment.
Benefits for the defined-contributionplan consist of contributions,
earnings on investments of these contributions, and forfeitures on
the member’s account. This makes the plan easier to report on,
but does not specify the amount of benefits received by the
employee after retirement.
GASB accrual standards only apply to defined-benefit OPEB
plans. Defined contributions are considered “funded,” as the
employer cost equals the required contribution. Therefore,
changing the way retiree healthcare and other post-employment
benefits are paid can lower or even eliminate the unfunded other
post-employment benefits liability.
Now that the public sector and government agencies have to report
other post-employment benefits, the VEBA can establish the best
plan for the least liability for employers. State and local
governments and public services can look at the private sector and
see the benefits it has gained from using VEBAs. They can see
how it can help soften the financial impact of the new, significant
reporting obligation.
___________________________________________
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about
benefit plans, tax reductions strategies, and financial plans. He has
authored numerous books for the AICPA, Bisk Total tape, and
others. He can be reached at (516) 938-5007 or lawallach@aol.
com. For more articles on this or other subjects, feel free to visit his
website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the
Year, speaks and writes extensively about retirement plans,
Circular 230 problems and tax reduction strategies. He speaks at
more than 40 conventions annually, writes for over 50 publications,
is quoted regularly in the press, and has written numerous best-
selling AICPA books, including Avoiding Circular 230 Malpractice
Traps and Common Abusive Business Hot Spots. He does
extensive expert witness work and has never lost a case. Contact
him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal,
accounting, financial or any other type of advice for any specific
individual or other entity. You should contact an appropriate
professional for any such advice.
----------------------------------------------------------------------
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about
benefit plans, tax reductions strategies, and financial plans. He has
authored numerous books for the AICPA, Bisk Total tape, and
others. He can be reached at (516) 938-5007 or lawallach@aol.
com. For more articles on this or other subjects, feel free to visit his
website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the
Year, speaks and writes extensively about retirement plans,
Circular 230 problems and tax reduction strategies. He speaks at
more than 40 conventions annually, writes for over 50 publications,
is quoted regularly in the press, and has written numerous best-
selling AICPA books, including Avoiding Circular 230 Malpractice
Traps and Common Abusive Business Hot Spots. He does
extensive expert witness work and has never lost a case. Contact
him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal,
accounting, financial or any other type of advice for any specific
individual or other entity. You should contact an appropriate
professional for any such advice.
Reduce Other Post-Employment
Benefits Liability with a VEBA
By Lance Wallach
Other Post-Employment Benefits
In 1994, the Government Accounting Standards Board (GASB)
established standards for public employee pension plans.
Government and public employers have to report and account for
pension benefits costs.
However, until recent years, there was no such standard in place
for other post-employment benefits (OPEBs) for state and local
government workers.
Private sector employers have been required to report OPEBs for
over 15 years under the FASB Standards106/158.
Government and public sector employers have been required to
report OPEBs since August 2004 after the issuance of GASB
Statement 45. This means that all government employers must
now keep their promise of providing retiree benefits.
They need to be calculated accurately, accrued during the
employee’s years of work with the employer, and recognized as a
financial obligation as OPEB costs.
These costs are to be reported on financial statements of large
public sector employers beginning with the first financial report
period after December 15, 2006, and on small employers
beginning in 2008.
The intent of GASB 45 was to bring government and public
accounting standards into line with private company standards.
This requires reporting pensions as well as non-pension post-
employment benefits. As the name states, OPEBs are
benefits other than pensions. Many state and local governments,
public schools, public universities and other public and government
agencies provide post-employment benefits that are non-pension-
related. These benefits can include health care benefits including
vision, dental, prescription and health insurance; life insurance;
legal benefits and other non-pension-related work benefits.
Until these changes were put in place with GASB 45 and enforced,
readers of government and public financial statements had
incomplete information on the costs of services provided by state
and local governments and public employers, and were therefore
unable to analyze the financial position and long-term health of
these government and public agencies.
OPEB Cost
Actuarial calculations are used to derive the OPEB cost. In order
to keep the calculations up to date, they must be recalculated every
two to three years depending on the size of the employer. For
example, employers with less than 100 employees can use a
simplified alternative method for measuring the OPEB cost, but
these employers still need to re-evaluate and re-assess every three
years. The costs and obligations for post-employment benefits are
determined using the actuarial present value of the post-
employment benefits - in other words, the present value on term of
service and the terms of the OPEB plan that are presently in place.
There are assumptions that are made in the actuarial evaluations.
They include:
- Healthcare cost factors: age, industry, family, geography,
gender. - Expected long-term and/or short term rate of return on plan
assets. - Projected salary scale.
- Death rates.
- Projected inflation of medical care costs.
- Employee turnover rate.
- Retirement rates; this can vary extensively from year to year.
- Any promises made to retirees.
- Discounts or benefits designed into the plan.
After the actuarial evaluations are completed, each employee
gains a different attribution period, which is based on their period
of eligibility – date of hire to date of full eligibility (i.e. retirement).
With all this said, GASB only requires that employers report
OPEBs; employers are not required or even obligated to fund the
OPEB cost. However, not doing so can affect significantly an
employer’s credit rating and cost of issuing debt financing.
The largest OPEB cost for an employer is health care benefits.
The majority of public sector employers, with more than 200
employees, offer some form of post-employment health benefits.
Unfortunately, with the uncontrollable increases in
health care costs happening annually, and severe budget cuts
being put in place across nearly all public and government
agencies, the continuing use of “pay-as-you-go” will become more
difficult and create new financial liabilities for
employers. Add to this state laws that require employers to allow
retirees to remain on the active health plan until Medicare steps in,
and the reduction in federal and state subsidies, and employers
are struggling to subsidize the gap
between the blended plan cost (active employees and retirees)
and the actual retiree cost. Even if the employer is not contributing
to the retiree health care plan, this amount adds additional liability.
In December 2004, a report from Standard and Poor’s, stated that:
“The new [GASB 45] reporting may reveal cases in which the
actuarial funding of post-employment health benefits would
seriously strain operations, or, further, may uncover conditions
under which employers are unable or unwilling to fulfill these
obligations. In such cases, these liabilities may adversely affect the
employer's creditworthiness. All Standard & Poor's rated
employers will be monitored closely in terms of their reporting
under GASB 45. Upon implementation of these new standards, we
will include the new information as part of our ongoing analytical
surveillance of ratings."
The following year, in June 2005, Fitch Ratings released its report,
saying: “Fitch's credit focus will be on understanding each issuer's
[GASB 45] liability and its plans for addressing it. Fitch also will
review an entity's reasoning for developing its plan. An absence of
action taken to fund OPEB liabilities or otherwise manage them will
be viewed as a negative rating factor. Steady progress toward
reaching the actuarially determined annual contribution level will be
critical to sound credit quality."
Everyone is working towards a solution that will benefit both
employers and employees. But it takes constant monitoring by
both employers and employees. However, one solution that could
benefit everyone is considering a VEBA plan.
Benefits of a VEBA plan
VEBAs have been successfully established to help reduce health
costs and establish financially sound OPEB plans that have proven
to be both efficient and effective. The VEBA can help employers
develop strategies that can lower their liabilities. Many private
sector employers have benefited from the introduction and use of a
VEBA for their OPEB plan.
A well designed GASB 45 OPEB involves many different risk
management strategies and funding techniques. Any benefit
promise made by an employer should be partially or fully funded in
a qualified trust to enable actuaries the use of long-term discount
rates during the calculations. One approach to this funding
source could be issuing OPEB obligation bonds or finance pools.
The employer can then successfully take these finance strategies
and blend a defined-benefit approach with a defined-contribution
strategy to create a successfully managed OPEB plan with
reduced liabilities. These two basic forms of post employment
benefit plans specify either the amount of benefits to be provided to
an employee at the end of their employment period, or stipulate
only the amount to be contributed by the employer to a member’s
account for each year of active employment.
A defined-benefit OPEB plan is where the terms are specified and
the benefits provided from the time of retirement or other
employment separation. These benefits can be dollar-specific or
the type/level of coverage - for example, a dollar
payment based on a flat rate or years of service, or defined
medical coverage, prescription drugs or a percentage of the
premiums. Unfortunately, the defined benefit OPEB plan is
complicated where the reporting makes assumptions on
future medical costs, mortality rates, the availability of Medicare
and the probability of future events.
A defined-contribution OPEB plan considers the individual. It takes
into account individual contributions while active, rather than the
benefits the beneficiaries are to receive post-employment.
Benefits for the defined-contributionplan consist of contributions,
earnings on investments of these contributions, and forfeitures on
the member’s account. This makes the plan easier to report on,
but does not specify the amount of benefits received by the
employee after retirement.
GASB accrual standards only apply to defined-benefit OPEB
plans. Defined contributions are considered “funded,” as the
employer cost equals the required contribution. Therefore,
changing the way retiree healthcare and other post-employment
benefits are paid can lower or even eliminate the unfunded other
post-employment benefits liability.
Now that the public sector and government agencies have to report
other post-employment benefits, the VEBA can establish the best
plan for the least liability for employers. State and local
governments and public services can look at the private sector and
see the benefits it has gained from using VEBAs. They can see
how it can help soften the financial impact of the new, significant
reporting obligation.
___________________________________________
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about
benefit plans, tax reductions strategies, and financial plans. He has
authored numerous books for the AICPA, Bisk Total tape, and
others. He can be reached at (516) 938-5007 or lawallach@aol.
com. For more articles on this or other subjects, feel free to visit his
website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the
Year, speaks and writes extensively about retirement plans,
Circular 230 problems and tax reduction strategies. He speaks at
more than 40 conventions annually, writes for over 50 publications,
is quoted regularly in the press, and has written numerous best-
selling AICPA books, including Avoiding Circular 230 Malpractice
Traps and Common Abusive Business Hot Spots. He does
extensive expert witness work and has never lost a case. Contact
him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal,
accounting, financial or any other type of advice for any specific
individual or other entity. You should contact an appropriate
professional for any such advice.
----------------------------------------------------------------------
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about
benefit plans, tax reductions strategies, and financial plans. He has
authored numerous books for the AICPA, Bisk Total tape, and
others. He can be reached at (516) 938-5007 or lawallach@aol.
com. For more articles on this or other subjects, feel free to visit his
website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the
Year, speaks and writes extensively about retirement plans,
Circular 230 problems and tax reduction strategies. He speaks at
more than 40 conventions annually, writes for over 50 publications,
is quoted regularly in the press, and has written numerous best-
selling AICPA books, including Avoiding Circular 230 Malpractice
Traps and Common Abusive Business Hot Spots. He does
extensive expert witness work and has never lost a case. Contact
him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal,
accounting, financial or any other type of advice for any specific
individual or other entity. You should contact an appropriate
professional for any such advice.
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