Learning Objective 7 - Retiree Benefits

Question 1

typical plan design for retiree benefits

Answer 1

1. The heath plan for pre-age-65 retirees is a continuation of the same program available while they were working.
2. Post-age-65 retirees convert to an indemnity plan using Medicare payment rates as the approved charge level
3. At retirement, dental coverage is terminated and life insurance benefits are reduced.

Question 2

When a retiree has both an employer plan & Medicare, which is the primary payer?

Answer 2

Medicare

Question 3

The following ACA provisions could affect retiree group benefits:

Answer 3

1. reduction in government payments to AM plans could result in higher premiums, lower benefits, or both
2. loss of tax deductibility of the retiree drug subsidy (RDS) will cause plan sponsors to reconsider alternatives to RDS
3. Most retiree plans will be subject to the excise tax on high-cost plans, begins in 2018
4. An early retiree reinsurance program provided a federal subsidy for the continuation of employer-based retiree medical coverage for pre-age-65 retirees
5. The closing of the coverage gap by 2020 for Medicare Par D will cause plan sponsors to revisit their retiree Rx benefit programs
6. The introduction of exchanges and the individual coverage mandate in 2014 increased coverage options for pre-age-65 retirees

Question 4

assumptions used for pension plans that overlap with retiree health plan assumptions

Answer 4

1. Economic
   a. inflation
   b. discount rate
   c. asset returns
   d. salary increase
   e. Social Security increases
2. Demographic
   a. turnover of employment
   b. mortality
   c. disability
   c. retirement incidence

Question 5

retiree health assumptions needed in addition to pension plan assumptions

Answer 5

1. Economic
   a. current retiree plan costs and contributions
   b health care cost trend rate
   c. Medicare Part B premium increases
   d. retiree contribution increases
2. Demographic
   a. plan participation
   b. spouse age
   c. marital status
   d. spouse plan continuation after death of retiree
   e. dependent children plan termination
   f. choice of health plan options

Question 6

Reasons for offering a retiree group benefit plan

Answer 6

1. Retiree group benefits are a tax-effective means of providing retirement financial security
2. Retiree benefits are a valuable benefit for those currently receiving the coverage or who are soon to retiree
3. The benefits can support workforce planning and growth opportunities for employees.
4. Providing ongoing health care coverage is a social responsibility of the employer
5. Retiree health care benefits help provide a competitive package of total compensation
6. The current cash costs are nominal relative to the total spending on benefits
7. Retiree benefits are often at the top of the list of union demand

Question 7

Methods for coordinating benefits with Medicare

Answer 7

C = covered expenses
M = the Medicare payment
% represents the application of the employer’s benefit provisions

1. Standard coordination of benefits:
   plan payment = the lesser of (C * %) or (C - M)
   (regular benefit plans) or (covered expenses - Medicare payment)
2. Exclusion:
   plan payment = (C - M) * %
   Exclude the Medicare payment then apply the benefit formula of the secondary plan
3. Carve-out
   plan payment = ( C * %) - M
   Apply the benefit formula first then subtract the Medicare payment
4. Supplemental plans (Medigap)

Question 8

Plan design changes to control retiree medical plan costs

Answer 8

1. Introduction or slightly increasing retiree contributions
2. Adopting policies that set retiree contributions as a fixed % of plan costs
3. Changing the method of coordinating benefits with Medicare
4. Making eligibility requirements more stringent (e.g., age 60 with 15 years of service opposed to age 55 with 10 years of service)
5. Introducing service-related benefits (i.e., varying the employer cost shar based on length of service)
6. Adjusting retiree contributions based on the employee’s age at retirement (i.e., early retirement reductions)
7. Setting the employer subsidy as a fixed dollar amount rather than a % of plan costs
8. Providing an account-based employer subsidy (e.g., the employee earns a set amount for each year of service)

Question 9

Characteristics of the ideal vehicle for prefunding retiree benefits

Answer 9

1. Company tax deduction - for contributions that adequately fund retiree health benefits
2. Tax-free or tax-deferred savings mechanism for employees
3. Tax-sheltered investment earnings
4. Tax-free benefits for retirees
5. There is no impact on plan design
6. Funds are counted as an asset in applicable accounting standards
7. Assets are revocable without penalty if the obligation decreases.

Question 10

Vehicles used to prefund retiree benefits

Answer 10

1. Welfare benefit funds - such as VEBAs (Voluntary Employees’ Beneficiary Associations) or continuance funds held by an insurance company
   2,401(h) funding inn a qualified pension trust
2. Incidental account in a profit sharing plan
3. Employee-purchased group annuities
4. Employee Sock Ownership Plans with a money purchase plan account
5. Qualified retirement trust funds - pension plan or 401(k) profit sharing plan

Question 11

Underwriting considerations for retiree medical plans

Answer 11

1. Pre-age 65 retirees cost much more than active employees and their dependents
2. Post-age-65 retirees normally have Medicare coverage, so they may cost less than active employees
3. Post-age-65 claims can be more difficult to process because of coordination of benefits, leading to more manual adjudication of claims
4. Retirees have a higher number of claims, so they use more claims and customer service resources
5. The choice of coordination type has an enormous financial impact on retiree plans
6. While pharmacy costs may be 15-20% of total health costs for active employees, they are typically 40-60% of benefits pad for retirees
7. Due to selection issues, retiree plans are subsidized may cost far less than plans that are not subsidized
8. The existence of the individual insurance exchange expands retirees’ options to obtain affordable health insurance coverage.

Question 12

Definitions of EPBO, APBO, and service cost

Answer 12

1. The expected postretirement benefit obligation (EPBO) is the actuarial PV as of a particular date or expected future benefit payments to be paid to or for an employee
2. The accumulated postretirement benefit obligation (APBO) at a particular date is the portion of the EPBO that is attributed to past service earned to that date.
3. The service cost is the portion of the EPBO that is attributed to the current year.

The APBO and service cost as defined above are based on the projected unit credit method

Question 13

Steps for calculating the EPBO, APBO, and service cost for an employee

Answer 13

1. Project each year’s future expected benefits beginning at retirement using assumptions for inflation and survival. This produces a benefit stream starting at retirement that reflects mortality
2. Calculate the PV of this benefit stream as of the retirement date by discounting the future benefits.
3. Discount this PV further to the valuation date, reflecting both interest and survival. This produces the EPBO
4. Spread the EPBO on a pro-rata basis over the attribution period (assumed to begin at date of hire and end at full eligibility date)
   a. Past service = the time between the valuation date and the date of hire
   b. Future service = the time between the full eligibility date and the valuation date
   c. Length of the attribution period = past service + future service
   d. APBO = EPBO * past service / length of the attribution period
   e. Service Cost = EPBO / length of the attribution period. For any employee that is past his or her full eligibility date, the service cost will be 0

Question 14

Factors that can influence assumptions used for ASC 715 calculations

Answer 14

Accounting Standards Codification (ASC) 715-60 provides the guidance for postretirement benefits other than pensions, based on GAAP

1. Provisions governing the plan
2. Characteristics of the current and past employees and the entity itself
3. Terms of collective bargaining agreements between the entity and the workforce
4. Past experience in the plan
5. Expectations on how the benefits change over time
6. Expectations about future experience in the plan
7. Expectations about the financial market
8. Expectations about the changes in government legislation that directly or indirectly affect the plan
9. Assumptions used to determine obligations for other plans sponsored by the entity

Question 15

Long-term assumptions for ASC 715 valuations

Answer 15

1. Discount rate - should reference market yields at the valuation data on high quality corporate bonds. Should also reflect the estimated timing of the benefit payments.
2. Salary escalation rate - to project current salary to the expected salary at retirement
3. Mortality - most plans are not large enough to have credible experience, so they use standard population t. Allowance should be made for mortality improvement.
4. Other decrements - rates for retirement, termination, and disablement.

Assumptions for the salary escalation rate, mortality, and other decrements should be consistent with the assumptions used for the company’s pension plan valuations.

Question 16

Healthcare assumptions for ASC 715 valuations

Answer 16

1. Per-capita claim costs - may be calculated from actual plan experience. Should consider:
   a. May need separate claim costs for different populations
   b. Employer caps on the subsidy
   c. Claims experience is different for retirees than for actives
   d. Future changes in benefits
2. Heath plan trend rates - usually consist of:
   a. A short-term rate which reflects recent experience
   b. An ultimate rate which reflects the long-term horizon
   c. A transitional rate that bridges the two rates
3. Administration expenses - generally increase at loer rates than healthcare costs, so a lower trend rate should be applied
4. Medicare considerations - Medicare fee schedules are usually lower than non-Medicare provider rates, and they usually increase at a slower rate. So separate assumptions are needed for those eligible for Medicare and those who are not eligible
5. Medical cost increases due to aging- to account for changes in the need for medical services as a person ages
6. Participation - to account for retirees who will not participate due to required cost sharing
7. % of employees with covered dependents, and their ages.

Question 17

Factors that affect health care trend rates for ASC 715 valuations

Answer 17

1. Interaction with general inflation - medical inflation follows general inflation plus a positive margin
2. Changes in utilization
3. Behavioral patterns of the general population and employee group
4. Growth in GDP since that may impact government health care financing
5. Type of benefit
6. Geographical location of health care services
7. Integration with government programs
8. Plan provisions

Question 18

Formulas for funded status, NPPBC, and APBO at yearend

Answer 18

1. Funded status = APBO - fair value of plan assets
2. Net periodic postretirement benefit cost (NPPBC)
   = service cost + interest cost - return on assets + amortization of unrecognized amounts (transition obligation, prior service cost, and net gain or loss)
3. APBO at end of year
   = APBO at beginning of year + service cost - benefit payments + interest cost + prior service costs - settlements - curtailment (gain)/loss + actuarial (gain)/ loss
   a. Interest cost = i (rate) * (APBO beginning of year _ current service cost - benefit payments / 2)
   Assumes service cost is measured at start of year and benefit payments are paid uniformly throughout the year
   b. Prior service costs are changes in the APBO due to plan amendments
   c. Actuarial (gains)/ losses are changes in the APBO from any changes in the difference between actual experience and expected experience

Question 19

Definitions and accounting for ASC 715 settlements and curtailments

Answer 19

1. Settlements are transactions that eliminate the plan’s future obligations
   a. They are measured at the date the event occurs
   b. The max gain or loss is the unrecognized net gain or loss plus any remaining unrecognized transition assets
   c. The actual amount recognized equals the max amount multiplied by the % reduction in the APBO due to the settlement
2. Curtailments are events that significantly reduce they years of future expected service of active plan participants or eliminate the benefit accrual for future service for a significant portion of the population.
   a. The curtailment effect recognized is the sum of:
   i. the unrecognized prior service cost and transition obligation for years of service no longer expected to be rendered.
   ii. The gain or loss due to the change in the APBO as a result of the curtailment, to the extend the gain or loss exceeds any previously unrecognized net gain or loss
   b. a loss is recognized when it is probable that a curtailment will occur and the effects are reasonably estimable
   c. a gain is recognized when the related employees terminate or the plan amendment is adopted

Question 20

Procedures for measuring retiree group benefits obligations and determining program costs and contributions

Answer 20

1. Identify the purpose of the measurement
2. Identify the measurement date
3. Develop a model that represents the plan provisions, the covered population, and the current benefit costs
4. Evaluate the quality and consistency of data used in the model and make appropriate adjustments
5. Identify administrative inconsistencies and make appropriate adjustments
6. Obtain from the principal other information necessary for measurement
7. Select actuarial assumptions
8. Evaluate retiree group benefit assets
9. Consider how to measure accrued or vested benefits
10. Consider how to measure market-consistent present values
11. Reflect how assets as of the measurement date are reported
12. select an actuarial cost method
13. select a cost allocation procedure or contribution allocation procedure
14. assess the implication of the contribution allocation procedure or plan sponsor’s funding policy
15. Consider the use of the approximations and estimates
16. consider the sources of significant volatility
17. review and test the results of the calculations for reasonableness
18. evaluate prescribed assumptions and methods set by another party

Question 21

Considerations in modeling plan provisions for retiree group benefit plans

Answer 21

1. Components of the modeled plans
   a. covered benefits
   b. eligibility conditions
   c. benefit limitations, exclusions, and cost-sharing provisions
   d. participant contributions - required contributions may affect participation rates and lead to adverse selection
   e. payments from other sources
   f. Health care delivery system attributes
   g. benefit options
   h. anticipated future changes - for most purposed, only changes that have been communicated to participants may be considered. But in some cases, the actuary may take into account future changes that the sponsor intends to implement.
2. Historical practices of the plan, such as:
   a. claim payment practices - consider whether there is a significant inconsistency between administrative practice and plan documents
   b. pattern of regular plan changes - consider any past practices of regular changes in the benefit plans
   c. governmental programs - if the retiree plan integrates with Medicare or other government programs, consider historical changes in these programs
3. Whether the model continues to reflect actual known plan provisions and practices
4. Whether the results need to be examined by category (e.g., medical vs dental)

Question 22

Considerations in modeling the covered population for retiree group benefit plans

Answer 22

1. Census data - collect sufficient census data to make a reasonable estimate of the obligation
2. Employees currently not accruing benefits - consider whether these employees might begin accruing benefits in the future
3. Contingent participants - examine census data to determine who may become participants in the future
4. Dependents and surviving dependents of participants - include these individual if they are eligible for coverage and participating
5. Appropriateness of pension plan data - if the plan sponsor maintains pension plan data but not retiree group plan data, the pension plan data may be used with proper adjustments
6. Use of grouping - the actuary may use grouping techniques when grouping is not expected to unreasonably affect the measurement results
7. Hypothetical data - when appropriate, the actuary may prepare measurements based on assumed demographics of current or future plan participants

Question 23

Considerations in modeling initial per capita health care costs for retiree group benefit plans

Answer 23

1. Plan experience (if credible) is the best source of data
2. Multiple costs (such as by gender) may be appropriate to reflect different plan provisions and demographics
3. Exposure data should be obtained for the same time periods and population as the claims experience
4. Multiple claim experience periods may be used, with smoothing
5. When plan data is not available or credible, use relevant databases or active plan experience on the same group (with proper adjustments)
6. May use premiums as the basis for initial per capita health care costs, with appropriate adjustment
7. Develop separate costs for participants eligible for Medicare
8. Age-specific costs should be used for projecting future costs
9. Adjust claims costs to reflect:
   a. Benefit plan design changes
   b. Changes in claim adjudication and enrollment practices
   c. The impact of large individual claims
   d. Trend, with separate rates for major cost components (such as medical and drug)
10. Include administrative and other expenses of the plan sponsor