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GASB 45

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GASB 45, or Government Accounting Standards Board (GASB) Statement 45, imposes accounting rules for retiree medical, dental & life insurance expenses (and other retirement benefits) comparable to those already in place for pension benefits.

GASB 45, or Government Accounting Standards Board (GASB) Statement 45, imposes accounting rules for retiree medical, dental & life insurance expenses (and other retirement benefits) comparable to those already in place for pension benefits.

Prior to adoption of GASB 45, plan sponsors were only required to recognize the cost of retiree benefit payments on a “pay-as-you-go” basis on their financial statements. GASB 45 requires plan sponsors to recognize not only the value of retiree benefit payments for the current year, but also:

  • The value of benefit payments for retirees to be paid in the future;
  • Retiree benefits accrued by active employees during the current year; and
  • Retiree benefits accrued by active employees for their service in prior years

The total cost of retiree benefits reported under GASB 45 is normally much greater than the current year’s “pay-as-you-go” cost of retiree benefit payments for the current year.  GASB 45 does not and can’t require the creation of an Other Than Postemployment Benefits (“OPEB”) Trust nor require you to “pre-fund” the benefits.  However, this may be desirable to manage the financial statement impact, future cash flow needs and your relationship with the ratings agencies. Each year, an amount is accrued onto your balance sheet equal to the amount by which the annual required contribution (“ARC”) exceeds the year’s funding contribution (this includes current retiree payments)

 

“The GASB 45 Summary of Results letter helps management.”

Dan Haynes, Director of Finance & Operations – Ralph C. Mahar RSD

 

Am I subject to GASB 45? 

All government entities that offer other (than pension) postemployment benefits and follow GASB guidance must comply with GASB 45 if they are to issue GAAP accounting statements.  These municipal entities include municipalities, public schools, water districts, public utilities, and other entities that follow other Governmental Accounting Standards Board statements.

What types of benefits are included under GASB 45?

The benefits included under GASB 45 are those “Other than Pension” employee benefits provided to former employees such as:

  • Medical (Medicare-eligible retirees and early retirees)
  • Pharmacy / Rx
  • Dental
  • Vision
  • Life

What if I don’t provide benefits to those eligible for Medicare?

GASB 45 applies to benefits provided to retirees regardless of their Medicare eligibility status. You will need a valuation even if you only have retirees that are covered under your active medical plan.

I charge by retirees 100% of the premiums.  Does GASB 45 apply to me?

Under most circumstances, GASB 45 will still apply.  The issue is related to something called “implicit cost”.  This occurs if you are charging your non-Medicare eligible retirees the same premiums as paid by your “active” employees.  The issue is that as people age, they tend to use more medical services and therefore cost more.  However, if you are charging them based on the active premium, they are not paying their full “cost” as their premiums are subsidized by the younger & healthier active population.

Can my pension actuary do my GASB 45 valuation? 

While a GASB 45 valuation is similar in many respects to those done for pension plans, they do require specific qualifications as it relates to understanding the health & life insurance characteristics of the plan.

Is it necessary to set up a trust for OPEB benefits? 

It may be beneficial to establish a trust (each state has different rules), but it is not required under GASB 45.  One upside of pre-funding benefits is that it may allow for use of higher discount rate to value the plan liabilities which would reduce disclosed liabilities on your financial statement.

When I adopt are the OPEB liabilities immediately reflected on my financial statement? 

No.  GASB 45 allows plan sponsors to amortize the portion of the cost attributed to benefits earned prior to adoption of GASB 45 up to 30 years.  Each year, an amount is accrued onto your balance sheet equal to the amount by which the annual required contribution (“ARC”) exceeds the year’s funding contribution (this includes current retiree payments).  If you contribute an amount equal to the ARC each year, you will not have a balance sheet liability (however, normally the unfunded accrued actuarial liability is disclosed in a footnote comment).

What if I don’t have a formal plan document?

Under GASB 45, the substantive plan (i.e., the plan that is actually being provided and is likely to be provided based on past evidence) is what is valued for the purpose of determining the plan liabilities.  As an example – if the plan sponsor has no explicit COLA provision for life insurance or a “premium cap”, but increases benefits every two (2) years, that is a COLA provision in practice for purposes of valuing the plan.

My liability is too high.  What can I do?

The most common tools used by plan sponsors to reduce their OPEB liability include changes in the underlying plan design, updating contribution strategies and modifying eligibility requirements.

Why Odyssey?

Odyssey was founded in 1998 by Parker Elmore to bring the skills and tools used by larger employers to the small and middle market.  Our consultants have experience dating to the FASB 106 adoption in the corporate sector in the early 1990’s and work with hundreds of cities, towns, schools, housing authorities and more of varying sizes.  Odyssey’s GASB 45 team comprises health and pension actuaries and consultants who have a thorough understanding of the complex issues relating to GASB 45 and how they impact you and your organization.

Need help with your GASB 45 Statements?

Let us know how we can help below or give us a call at
(855) 401-GAIN and press option 1.

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