Learning Objective 7

Question 1

Reasons for offering a retiree group benefit plan [Card 290]

Answer 1

Acronym - VFW SUCC

VALUABLE benefit for those currently covered
FINANCIAL security in a tax-effective manner
Helps WORKPLACE planning and growth opps for EEs

SOCIAL responsibility
UNION demands
COMPETITIVE COMPENSATION
CASH COSTS are nominal relative to the benefit

Question 2

Methods for coordinating benefits with Medicare [Card 291]

Answer 2

Acronym - SEC’S COB

Standard COB

a. Plan pays the lesser of regular plan benefits or (covered expenses - Medicare pmt)
b. MIN [ (Cov exp * % paid employer), (Cov exp - Med) ]

Exclusion

a. Excludes the Medicare pmt, then apply benefit formula to the secondary plan
b. Plan usually must pay some benefit, since Medicare is less than the total covered expense amount
c. (C - M) * %

Carveout

a. Produces the smallest plan pmt
b. Apply benefit formula first, then subtract Medicare
c. (C * %) - M

Supplemental Plans (Medigap)

Question 3

Recent plan design changes to control retiree medical plan costs [Card 292]

Answer 3

Acronym - FRAYGE

FIXED dollar subsidy instead of percent of plan costs
RETIREE contributions are based on age @ retirement
ACCOUNT based benefits - get money each year to stash away for buying benefits when you retire
YEARS of service - employer portion of cost depends on how long you have been with the company
G - filler
E - Eligibility requirements are more strict
a. 60 with 15 years of service instead of 55 and 10

Question 4

Characteristics of the ideal vehicle for prefunding retiree benefits [Card 293]

Answer 4

Acronym - All 4 TAX FREE AIR

Company TAX deductions
TAX FREE savings mechanism for employees
TAX SHELTERED investment earnings
TAX FREE benefits for retirees

Funds are ASSETS under FAS106
No IMPACT on plan design provisions
REVOCABLE if obligations change

Question 5

Vehicles used to prefund benefits [Card 294]

Answer 5

Acronym - 4 I PAWS

401k

INCIDENTAL account in a profit sharing plan

PENSION
ANNUITIES
WELFARE benefits
STOCK ownership plan with a cash account

Question 6

FAS 106 attribution of costs [Card 295]

Answer 6

REVIEW TEXT

1. Expected future benefit payments must be accrued while employee is still working
2. Period while benefits are accrued is called the attribution period - begins at hire and ends at eligibility
3. Net Periodic Postretirement Benefit Cost = “Cost”, is the amount attributed to a specific financial accounting period
4. Expected Postretirement Benefit Obligation (EPBO)
   a. Actuarial PV of all future postretirement benefits
   b. Includes service before measurement date (APBO), service in current year and future service
5. Accumulated Postretirement Benefit Obligation (APBO)
   a. Expected APBO = (Current APBO + SC) * (1 + d) - (Benefit Payments) * ( 1 + .5d)
   b. SC = Service Cost
   c. d = discount rate

Question 7

Components of the FAS 106 net periodic postretirement benefit cost [Card 296]

Answer 7

Cost = Service Cost + Interest Cost - Expected Return on Assets + Amortizations

SC = cost of benefits accruing in current year
Int Cost = (APBO + SC)d - BP(.5d)

Expected return on assets = (Assets * i) - BP * (.5i)

Amortization of net transition obligation
a. When FAS 106 was first adopted, companies had a choice to recognize the difference between APBO and plan assets, or amortize it over 20+ years

Amortization of gains and losses

a. Gain or loss is the change in APBO due to changes in assumptions or different experience
b. Can delay recognition until amount > 10% of either APBO or plan assets
c. Amortize until expected retirement
d. Losses are changes in actual and expected APBO

Expected APBO - (Current APBO + SC) (1+d) - (BP)(1+.5d)

Question 8

Formula for accrued or prepaid expense for postretirement benefits [Card 297]

Answer 8

1. Accrued expense for postretirement benefits results when the cumulative amount expensed exceeds the cumulative cash outlay
2. A prepaid expense for postretirement benefit results when the cumulative cash outlay exceeds the cumulative amount expensed
3. Accrued expense = Prior period accrued expense + net periodic postretirement benefit cost - contributions (plan funding and benefit payments)

Question 9

Footnote disclosures for FAS 106 [Card 298]

Answer 9

Acronym - TRADA

TREND assumptions
RECONCILIATION of assets and APBO balances
ANNUAL cost breakdown
DISCOUNT rate
ALTERNATIVE methods used

Question 10

Plans covered by FAS 106 [Card 299]

Answer 10

Acronym - My SIGN

MULTI EMPLOYER group

SINGLE EMPLOYER group
INDIVIDUAL contracts - not covered under FAS 106, but may be applied if employer has multipl individual contracts with identical terms
GROUP of single employers - reduce admin, considered single plan under FAS 106
NON-US subsidiary plans

Question 11

Accounting for FAS 106 settlements and curtailments [Card 300]

Answer 11

TBD