GASB 45 — FAQs


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The Governmental Accounting Standards Board began reviewing other-than-pension post-employment benefits (OPEBs) because of growing concern over the potential magnitude of employer obligations. The measuring and reporting of OPEB liabilities will:

  • recognize the cost of benefits in the period when services are received
  • provide information about the actuarial accrued liabilities for the promised benefits
  • supply information useful in assessing potential demands on future cash flows

What is the difference between GASB 43 and GASB 45?

GASB 43 applies to trusts that are established in order to prefund OPEB benefits and for trusts that are used as conduits to pay OPEB benefits. GASB 45 applies to the financial statements issued by employers that offer OPEB.

What types of benefits are considered OPEBs?

Benefits defined as OPEB include medical, prescription drug, dental, vision, hearing, life insurance, long-term care benefits, and long-term disability benefits (not covered under a pension plan) that are provided after active service by the plan sponsor. OPEB does not include pension benefits or termination benefits, which are covered under other GASB accounting standards.

How often do GASB 43 and GASB 45 require an actuarial valuation of the OPEB benefits?

If a plan has more than 200 participants (active and retired combined) it must have an actuarial valuation provided at least every two years. If a plan has fewer than 200 participants it must have an actuarial valuation provided at least every three years.

Who calculates the liability for OPEB benefits?

For very small plans covering fewer than 100 participants, the plan sponsor or auditor can use a simplified approach known as the Alternative Measurement Method. Milliman offers an online tool that delivers a complete valuation to qualified plans, GASBhelp. If a plan does not qualify for this exception, an actuarial firm with both pension and health actuaries will be needed to perform an actuarial valuation of the OPEB benefits.

What assumptions does the actuary use in the valuation?

  • Turnover and retirement assumptions: How likely is it that an employee will work for the plan sponsor long enough to qualify for post-employment benefits?
  • Medical inflation and claims cost assumptions: When an employee receives post-employment benefits many years from now, how much will the plan sponsor have to pay each year for the benefits?
  • Mortality assumption: How long is a retiree likely to receive the benefits?
  • Discount rate assumption: What is the present value of those future benefit payments in terms of today's dollars? The discount rate must reflect the expected investment income of whatever funds are set aside to prefund the benefits; if there is no prefunding, the discount rate will be much lower and the liabilities significantly higher than if the benefits are prefunded.
  • The probability of the participant and dependents electing coverage: How likely is it that participants will sign up for the plan?
  • The probability of coverage lapse: How likely is it the participant will cancel the coverage?

With the total liability recognizing the employee's total service, how is the liability divided for cost purposes?

The total liability is divided into three pieces: the part that is attributed to past years (the "Past Service Liability" or "Actuarial Accrued Liability"), the part that is being earned this year (the "Normal Cost"), and the part that will be earned in future years (the "Future Service Liability"). The Actuarial Accrued Liability is the amount disclosed on the financial statements.

What is an implicit rate subsidy?

GASB 43 and GASB 45 require that the true cost for retiree benefits be identified. Currently, many employers provide benefits for actives and retirees under one rating structure. Because retirees use benefits at a greater rate than the active population, the active employees are "implicitly" subsidizing the retirees' cost of the plan of benefits. GASB 43 and GASB 45 require that an employer utilize actual experience or actuarial adjustments in order to calculate the present value of retiree benefits.

GASB 43 and GASB 45 require that the implicit rate subsidy be recognized in calculating the OPEB liability. This means that even if retirees pay their own way for benefits, there will most likely still be an OPEB liability for them.

What is the Annual Required Contribution (ARC)?

This amount consists of the sum of two pieces:

  • Normal Cost (see above)—because the benefits earned each year should be paid for each year
  • Past Service Cost—a catch-up payment to fund the Past Service Liability over a period not to exceed 30 years

Is there a requirement to pay the ARC?

No. There is no requirement to actually fund the OPEB benefits, but the cumulative deficiency must be disclosed on the plan sponsor’s financial statements.

If there is no requirement to pay the ARC, why would a plan sponsor choose to do so?

There are a number of reasons to seriously consider paying the ARC and prefunding the OPEB benefits:

  • Because the discount rate must reflect the expected investment income of whatever funds are set aside to prefund the benefits, a funded OPEB plan could use a much higher discount rate than an unfunded plan (depending on how the assets are invested), and would therefore have a much lower liability. A funded OPEB plan invested with 60% equities/40% fixed income (typical of many pension plans) could have a discount rate of 8%, whereas an unfunded plan would have a discount rate based on the plan sponsor's general fund investments, which might be as low as 2%-3%. Liabilities are very sensitive to the discount rate, and the liability calculated at a 2% discount rate is likely to be three times larger than the liability calculated at 8%.
  • One of the disclosures on the financial statement is a cumulative accounting of the extent to which the plan sponsor is paying the ARC. Because the benefits are often costly, the cumulative deficiency for a plan sponsor that does not prefund is likely to grow very quickly, and is likely to negatively impact the plan sponsor's bond rating.
  • Prefunding the OPEB benefits provides security to the plan members. In most cases, it is taken for granted that pension benefits will be prefunded, and the same logic applies to OPEB benefits as well.
  • Prefunding post-retirement benefits does a better job of matching the payment for benefits with the services rendered for those benefits.

Why do GASB 43 and GASB 45 matter now?

While there may still be time before the deadline for GASB 43 and GASB 45 implementation, there are several reasons why plan sponsors should be thinking about GASB 43 and GASB 45 now:

  • to identify the extent of the liabilities and annual contributions
  • to plan for the cash flow needed in coming years to pay the OPEB benefits
  • to address the question of whether or not the plan sponsor should prefund the benefits
  • to examine ways in which the overall cost of providing medical benefits can be reduced, for instance through use of the new Medicare prescription drug subsidy
  • to evaluate the cost impact of proposed benefit changes in the context of labor negotiations

Disclaimer:The information contained on this Web page is provided for general informational use only and should not be relied upon for any specific plan application. Each user should consult with his or her own actuary or other qualified professional for any specific plan application. Milliman does not certify the information in this Web page, nor does it guarantee the accuracy, completeness, efficacy, or timeliness of such information. Use of such information is voluntary and should not be relied upon unless an independent review of its accuracy, completeness, efficacy, and timeliness has been performed.