Objective 6 - Retiree Health Plans

Question 1

Reasons for offering retiree group benefit plans

Answer 1

1. Retiree group benefit plans are 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 retire
3. The benefits can support workforce planning and growth opportunities for EEs
4. Providing ongoing health care coverage is a social responsibility of the ER
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 demands

Skwire, Chapter 8, Page 118

Question 2

Methods for coordinating benefits with Medicare

Answer 2

C = Covered Expenses
M = Medicare Payment
% = Application of ER's benefit provisions

1. Standard Coordination of Benefits: Plan payment = lesser of (C * %) or (C - M). The plan pays the lesser of (regular plan benefits) or (covered expenses - medicare). Also called Full COB in ASOP #6
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. Produces the smallest ER cost of these 3 methods
4. Supplemental plans (Medigap)

Skwire, Chapter 8, Page 119

Question 3

Plan Design Changes to Control Retiree Medical Plan Costs

Answer 3

1. Introducing or slightly (I)ncreasing retiree contributions
2. Adopting policies that set retiree contributions as a (F)ixed % of plan costs
3. Changing the method of (C)oordinating benefits with Medicare
4. Making eligibility requirements more (S)tringent (e.g., age 60 with 15 years of service)
5. Introducing (S)ervice-related benefits (i.e. varying the ER cost share based on length of service)
6. Adjusting retiree contributions based on the employee’s age at retirement (i.e., (E)arly retirement reductions)
7. Setting the ER subsidy as a (F)ixed dollar amount rather than as a percentage of plan costs
8. Providing an (A)ccount-based ER subsidy (e.g., the EE earns a set amount for each year of service)

SAFE FISC (SAFE FISCal decision to control costs)

Skwire, Chapter 8, Page 121

Question 4

Characteristics of the idea vehicle for prefunding retiree benefits

Answer 4

1. Company tax deduction - for contributions that adequately fund retiree health benefits
2. Tax-free or tax-deferred savings mechanism for EEs
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 obligation decreases

Skwire, Chapter 8, Page 123

Question 5

Vehicles used to prefund retiree benefits

Answer 5

1. Welfare benefit funds - such as VEBAs or continuance funds held by an insurance company
2. 401(h) funding in a qualified pension trust
3. Incidental account in a profit sharing plan
4. EE-purchased group annuities
5. EE stock ownership plans with a money pruchase plan account
6. Qualified retirement trust funds - pension plan or 401(k) profit sharing plan

Skwire, Chapter 8, Page 124

Question 6

Underwriting considerations for retiree medical plans

Answer 6

1. Pre-age-65 retires cost much more than active EEs and their dependents
2. Post-65 retirees normally have Medicare coverage, so they may cost less than active EEs
3. Post-age-65 claims can be more difficult to process because of CoB, 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 EEs, ,they are typically 40-60% of benefits paid for retirees
7. Due to selection issues, retiree plans that 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

Skwire, Chapter 8, Page 128

Question 7

Definitions of EPBO, APBO, and Service Cost

Answer 7

1. Expected postretirement benefit obligation (EPBO) is the actuarial present value as of a particular date of expected future benefit payments to be paid to or for an EE
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

APBO and Service Cost as defined above are based on the projected unit credit method

GHFV-816-16, Page 1

Question 8

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

Answer 8

1. Project each year’s future expected benefit beginning at retirement using assumptions for inflation and survival. This produces a benefit stream starting at retirement that reflects mortality
2. Calculate the present value (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 EE that is past his or her full eligibility date, the service cost will be 0

GHFV-816-16, Page 3

Question 9

Factors that can influence assumptions used for ASC 715 calculations

Answer 9

Accounting Standards Codification (ASC) 715-60 provides guidance for postretirement benefits other than pensions, based on generally accepted accounting principles

1. Provisions governing the plan
2. Characteristics of current and past EEs 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 changes in government legislation that directly or indirectly affect the plan
9. Assumptions used to determine obligations for other plans sponsored by the entity

GHFV-816-16, Page 4

Question 10

Long-term assumptions for ASC 715 valuations

Answer 10

1. Discount rate - should reference market yields t valuation date on high quality corporate bonds. Should also reflect the estimated timing of 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 tables. Allowance should be made for mortality improvement
4. Other decrements - rates for retirement, termination, and disablement

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

GHFV-816-16, Page 4

Question 11

Healthcare assumptions for ASC 715 valuations

Answer 11

1. Per-capita claim costs - may be calculated from actual plan experience. Should consider:
   a) May need separate claim costs for different populations
   b) EE caps on the subsidy
   c) Claims experience is different for retirees than for actives
   d) future changes in benefits
2. Health 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 increases at lower 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. Medicare 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. Percentage of EEs with covered dependents, and their ages

GHFV-816-16, Page 7

Question 12

Factors that affect health care trend rates for ASC 715 valuations

Answer 12

1. Interactions with general (I)nflation - medical inflation follows general inflation plus a positive margin
2. Changes in (U)tilization
3. (B)ehavioral patterns of the general population and EE group
4. Growth in (G)DP since that may impact government health care financing
5. (T)ype of benefit
6. (G)eographical location of health care services
7. Integration with (G)overnment programs
8. Plan (P)rovisions

PIG BUT - GG
(So many of these… but this one is for ASC715 trend! )

GHFV-816-16, Page 11

Question 13

Formulas for Funded Status, NPPBC, and APBO at yearend

Answer 13

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 Amts (transition obligation, prior service cost, and net gain/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 * (APBO-boy + current service cost - benefit_pmt / 2). Assumes service cost is measured at start of year and benefit payments are paid uniformly throughout the year
   b) Prior service costs are changed in the APBO due to plan amendments
   c) Actuarial (gains)/losses are changes in the APBO from any changes in actuarial assumptions or from the difference between actual and expected experience

GHFV-816-16, Page 14

Question 14

Definitions and accounting for ASC 715 Settlements and Curtailments

Answer 14

1. Settlements are transactions the eliminate the plan’s future obligations
   a) They are measured at the date the event occurs
   b) The maximum gain or loss is the unrecognized net gain or loss plus any remaining unrecognized transition assets
   c) The actual amount recognized equals this maximum amount multiplied by the percentage reduction in the APBO due to the settlement
2. Curtailments are events that significantly reduce the 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 extent 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 EEs terminate or the plan amendment is adopted

GHFV-816-16, Page 16

Question 15

Procedures for Measuring Retiree Group Benefits Obligations and Determining Program Costs and Contributions

Answer 15

1. Identify the Purpose of the measurement
2. Identify the measurement date
3. Develop a model that represents the plan provisions, covered population, and 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 benefits assets
9. Consider how to measure accrued and 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 approximations and estimates
16. Consider the sources of significant volatility
17. Review the test and results of the calculations and reasonableness
18. Evaluate prescribed assumptions and methods set by another party

ASOP #6, Page 8

Question 16

Considerations in modeling plan provisions for retiree group benefits

Answer 16

1. Components of the modeled plan
   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 purposes, 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 reitree 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)

ASOP #6, Page 10

Question 17

Considerations in modeling the covered population for retiree group benefit plans

Answer 17

1. Census data - collect sufficient census date ot 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 individuals 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 measruement results
7. Hypothetical data - when appropriate, the actuary may prepare measurements based on assumed demographics of current or future plan participants

ASOP #6, Page 13

Question 18

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

Answer 18

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 claim 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

ASOP #6, Page 15