Estimating & Accounting for Post-Retirement Healthcare Benefits

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  • 0:04 Post-Retirement…
  • 1:21 Estimating the EPBO
  • 3:06 Post-Retirement…
  • 4:12 Post-Retirement…
  • 4:40 Lesson Summary
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Lesson Transcript
Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

This lesson will explore the issues in calculating the cost of post-retirement healthcare plans for employees. We will also use an example to take you through the mechanics of accounting for these plans.

Post-Retirement Healthcare Benefits

Healthcare costs have become a front-burner issue in the U.S. due to their explosive increases over the last twenty years. Despite the presence of Medicare, there are still some companies that offer post-retirement healthcare plans to select employees that cover healthcare needs in a more comprehensive way.

In 2013, the Society of Actuaries estimated that a single 65-year-old retiring today would require on average $146,400 to cover healthcare expenses; $292,800 for a couple. More current estimates by financial planners are even higher. Providing health insurance for a population that is over the age of 65 is an expensive proposition. Companies that provide these plans typically buy a group insurance policy to cover eligible retirees. Estimating the premiums for health insurance, which is based on healthcare costs, is much more difficult than estimating pension obligations, which are usually known to the penny on an employee's retirement date.

The expected post-retirement benefit obligation (EPBO) for healthcare is the present value of the estimated benefits expected to be received by plan participants.

Estimating the EPBO

To estimate the EPBO, companies and insurers need to make some assumptions:

  1. Discount rate - The total post-retirement healthcare obligation is discounted to a present value for accounting purposes, so the discount rate is important.
  2. The expected return on plan assets - Funds set aside to pay for the post-retirement healthcare plan will earn a return, which will vary based on where the funds are invested.
  3. Employee turnover rates - This feeds into the number of recipients who will be eligible for the plan. Higher turnover reduces company obligations.
  4. Expected retirement age - This can be found in company records.
  5. Expected dates of death must be estimated - Actuaries can do this with some level of accuracy for a population. A rule of thumb is that a 65-year-old can expect to live 20 more years.
  6. Beneficiaries must be accounted for - Especially when the plan covers the whole family.
  7. Demographic characteristics of plan participants must be analyzed - Different groups have different levels of healthcare expenses.
  8. Benefit coverage provided by Medicare - These are determined by politicians. Smaller reimbursements from Medicare will mean more reimbursements from the company.
  9. The expected trends in the cost of providing healthcare - At some point the meteoric increases have to stop, but it's anyone's guess as to when.

All of these assumptions, along with average costs, will go into calculating a company's EPBO. Accounting rules say that the EPBO should be expensed as employees accrue service time towards becoming eligible for the plan.

Post-Retirement Benefit Obligation

The accumulated post-retirement benefit obligation (APBO) is the portion of the EPBO attributed to employee service to date. This is a key number for calculating expense for the period.

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