Even on their best days, FASB and GASB accounting rules can be hard. These are complex, jargon filled documents that outline rules for recognizing expenses that are often quite esoteric. And sometimes, what seem like minor changes can result in drastic shifts in liabilities and unexpected expenses.
For example, SFAS 106 and GASB 45 require accounting and recognition of post-retirement medical benefits while employees are still active, despite the fact that no money is actually being paid out. The benefits are rarely pre-funded, and in many cases the employer can choose to eliminate those benefits with little or no notice, if they should so choose.
But there is a logic to it all. Given the opportunity to choose between two identical jobs, with identical pay, whose only difference is Job A offers post-retirement medical benefits while Job B does not; a prospective employee is more likely to choose Job A because there is an added benefit to Job A (albeit deferred).
One of the most counter-intuitive ideas in both FASB and GASB accounting, however, is the concept that even by allowing an employee to remain in the medical plan at their own expense in retirement you are offering an employee benefit, and may even be incurring an expense under FASB/GASB rules just by doing so.
Consider the following two statements:
- Retirees may not participate in the medical plan upon retirement.
- Retirees may participate in the medical plan upon retirement by paying 100% of the premium.
Intuitively, it looks like both statements are zero cost prospects for an employer. Whether you forbid retirees from participating in the plan, or require them to pay the full premium, the employer is not putting any money into the plan. FASB and GASB disagree.
(It should be noted that a Person choosing statement B above is considered a “plan participant” under GASB’s 200 person threshold, while a Person choosing statement A is not. This is because Person B is still getting a benefit, access to health insurance, which is not available to Person A.)
How could there possibly be a cost in this situation? The cost is due to something which is informally known as the “Experience Subsidy.”
To understand what the experience subsidy is, we need to begin by defining a few basic terms and concepts.