Postretirement Benefits Flashcards
Postretirement Benefits
An employee covered by a post-retirement healthcare plan just completed her 18th year of service for a firm. Each year of employment to full eligibility provides credit for post-retirement healthcare benefits for this firm. She must work an additional seven years from today to be eligible for 75% healthcare coverage during retirement. She is expected to work ten more years from today. If this employee worked 15 more years from today, the firm would pay all her healthcare costs during retirement. Choose the correct statement.
The employee’s full eligibility date is reached when she has worked 33 years in total.
Accumulated post-retirement benefit obligation equals expected post-retirement benefit obligation for the employee, as of today.
Service cost will not be computed for the employee during her last three years of service to the firm.
Expected post-retirement benefit obligation reflects only 18 years of service, as of today, for the employee.
The correct answer is:
Service cost will not be computed for the employee during her last three years of service to the firm.
The employee’s full eligibility date occurs seven years from today. At that time, she is fully eligible for 75% coverage. The last three years of her service do not increase the level of her benefit. There is no additional service cost beyond that date, although interest cost will continue. If she were expected to work 15 years after today, her full eligibility would not occur until 15 years from now, at which time she would be fully eligible for 100% coverage and service cost would continue through that date.
The following information relates to a post-retirement benefit plan:
APBO beginning, $300mn
Plan assets beginning, $100mn
Net post-retirement benefit gain, beginning, $20mn
Amortization of net gain or loss is based on SL method, ten-year average remaining service period
Prior-service cost, initial amount, recognized four years ago, $50mn
Amortization of prior-service cost is based on SL method, ten-year average remaining service period
Service cost, $40mn
Discount rate, 5%
Expected rate of return, 6%
Actual return, $10mn
Change in estimated life expectancy caused a gain of $16mn, year-end
Funding contribution, $20mn
What amount will be reported in the ending balance sheet for post-retirement benefit liability?
$209mn
$213mn
$9mn
$212mn
The correct answer is: $209mn
Beginning post-retirement benefit liability equals $200mn ($300mn APBO − $100mn assets). Post-retirement benefit expense: $40mn SC + $15mn interest cost (.05 × $300mn) − $6mn expected return (.06 × $100mn) + $5mn amortization of PSC ($50mn/ten) − $2mn amortization of net gain ($20mn/10) = $52mn.
Entry: dr. post-retirement benefit expense 52, dr. postretirement gain/loss-OCI 2, cr. PSC-OCI 5, cr. post-retirement benefit liability 49. There is a $4mn asset gain = $10mn actual return − $6mn expected return.
Entry: dr. postretirement benefit liability 4, cr. postretirement gain/loss-OCI 4.
Entry for actuarial gain: dr. postretirement benefit liability 16, cr. post-retirement gain/loss-OCI 16.
Entry for funding: dr. post-retirement benefit liability 20, cr. cash 20.
From the entries: ending post-retirement benefit liability = 200 beginning + 49 − 4 - 16 − 20 = 209. Alternatively, ending post-retirement benefit liability = $200mn beginning post-retirement benefit + $40mn SC + $15mn interest cost − $10mn actual return − $16mn actuarial gain − $20mn funding = $209mn.
An employer’s obligation for post-retirement healthcare benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the
Benefits are paid.
Benefits are utilized.
Employee retires.
Employee is fully eligible for benefits.
The correct answer is:
Employee is fully eligible for benefits.
Post-retirement healthcare benefits often are provided in terms of percentage of total coverage. For example, an employee may have to work 20 years to attain 50% healthcare coverage during retirement, and 30 years to attain 100% coverage.
If the employee is expected to work 25 years, then the 50% coverage is the level built into the expense and liability computations, and the accrual period is the first 20 years of service. After serving 20 years, the employee earns no more benefit.
Therefore, the full eligibility date is the date by which the employee has served the required number of years to attain the level of benefits the employee is expected to attain.
Which of the following costs is unique to post-retirement healthcare benefits?
Per capita claims.
Service.
Prior service.
Interest.
The correct answer is: Per capita claims.
The per capital claims cost is the basis for computing the obligation reported for a post-retirement healthcare plan. These costs are estimated based on historical norms adjusted for estimated healthcare cost-trend rates and are affected by the estimated age of employees at retirement, their health, and other factors. Only post-retirement healthcare plans require this type of estimate. Pension benefits, for example, are based on variables such as age at retirement, number of years of service, and final salary. Both defined-benefit pension plans and post-retirement healthcare plans involve the other three answer alternatives. Both have service-cost and interest-cost components for their respective expenses, and both can incur prior-service cost.
An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a
Noncurrent liability.
Current liability.
Noncurrent asset.
Current asset.
The correct answer is: Noncurrent asset.
The excess of plan assets over the benefit liability (accumulated postemployment benefit liability or APBO) is reported as an asset and is classified as noncurrent. The plan assets and APBO are not reported separately but rather are offset. Given the long-term nature of such plans, the asset is classified as a noncurrent asset.
