Objective 7 - Retirement Benefits

Question 1

Reasons for Offering a retiree group benefit plan

Answer 1

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 retire
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) demands

Mnemonic - P C V STUN (Potential Cash Value - STUN!)

Skwire, Chapter 8, Page 118

Question 2

Methods for Coordinating Benefits with medicare

Answer 2

C = Covered Expenses
M = Medicaid Payment
% = Application of the employer's benefit provision

1. Standard Coordination of Benefits: Plan pays the lesser of (regular plan benefits) or (Covered Expenses - Medicare); Full COB in ASOP #6

Plan Pmt = Min( C*%, C - M ).

2. Exclusion: Exclude the Medicare Payment, then apply the benefit formula of the secondary plan

Plan Pmt = ( C - M ) * %

3. Carve-out: Apply the benefit formula first, then subtract the Medicare Payment

Plan Pmt = ( C * % ) - M

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 increasing retiree contributions
2. Adopting policies that set retiree contributions as a fixed percentage 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)
5. Introducing service-related benefits (i.e, varying the employer cost share 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 as a percentage of plan costs
8. Providing a account-based employer subsidy (e.g., the employee earns a set amount for each year of service)

Skwire, Chapter 8, Page 121

Question 4

Characteristics of the ideal vehicle for pre-funding 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 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

Skwire, Chapter 8, Page 123

Question 5

Vehicles used to prefund retiree benefits

Answer 5

1. Welfare benefit funds - such as VEBAs for 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. Employee-purchased group annuities
5. Employee Stock Ownership Plans with a money purchase 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 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 paid for retirees
7. Due to selection issues, retiree plans that are not subsidized may cost far less than plans that are not subsidized
8. 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. EPBO - Expected Post-retirement Benefit Obligation - Actuarial PV as of a particular date of expected future benefit payments to be paid to or for an employee
2. APBO - Expected Post-retirement Benefit Obligation - At a particular date, the portion of EPBO that is attributed to past service earned to that date
3. Service Cost - 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

GHC-816-16, Page 1

Question 8

Steps for Calculating the EPBO, APBO, and Service Cost for an Employee

Answer 8

1. Project each year’s future expected benefit beginning at retirement using assumption for inflation and survival. This produces a benefit stream starting at retirement that reflect 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-rate basis over the attribution period (assumed to begin at the date of hire and end at full eligibility date)
   a) Past Service = Time between valuation date and the date of hire
   b) Future Service = 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 Attribution Period
   e) Service Cost = EPBO / Length of Attribution Period. For employee that is past his or her full eligibility date, the service cost will be 0.

GHC-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 post-retirement benefits other than pensions, based on generally accepted accounting principles

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 int he plan
7. Expectations about the financial [market]
8. Expectations about changes in government [legislation]
9. Assumptions used to determine obligations for [other] plans sponsored by the entity

Mnemonic - F M L OPEB CC (Far Most Likely OPEB ChoiCes)

GHC-816-16, Page 4

Question 10

Long-term assumptions for ASC 715 valuations

Answer 10

1. Discount Rate - Should reference market yields at the valuation date 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 tables. Allowance should be made for Mortality improvement
4. Retirement Decrements
5. Termination Decrements
6. Disablement Decrements

Mnemonic - SMRT DD (SMaRT to Discuss Duration)

GHC-816-16, Page 4

Question 11

Healthcare assumptions (short term) for ASC 715 valuations

Answer 11

1. Per-Capita [claim] costs - May be calculated from actual experience. Should consider:
   a) Separate claim costs may be needed for different populations
   b) Employer caps on the subsidy
   c) Retiree claims experience is different than active claims experience
   d) Future changes in benefits
2. Health plan [trend] rates - Usually consists 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 that two rates
3. [Administration] expenses - generally increase at lower rates than healthcare costs, so a lower trend rate should be applied
4. [Medicare] considerations - Medicare fee schedules usually lower than non-Medicare provider rates, and they usually increase at a slower rate. So separate assumptions are needed for those eligible.
5. [Aging]-related cost increases - 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 ages)

Mnemonic - ACA D PMT - (Think - ACA Decreases PayMenT)

GHC-816-16, Page 7

Question 12

Factors that affect health care trend rates for ASC 715 valuations

Answer 12

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

GHC-816-16, Page 11

Question 13

Formulas for NPPBC and APBO at yearend

Answer 13

1. Net Periodic Postretirement Benefit Cost (NPPBC) = Service Cost + Interest Cost - Asset Returns + Amortization of unrecognized amounts (transition obligation, prior service cost, and net gain/loss)
2. APBO at EoY = APBO at BoY + Service Cost - Benefit Pmts + Interest Cost + Prior service costs - settlements + Curtailment G/L + Actuarial G/L

a) Interest Cost = i * [APBO(boy) + current service cost - benefit pmt / 2). Assume service cost is measured at start of year and benefit payments are paid uniformly throughout the year.
b) Prior Service Cost are changes in the APBO due to plan amendments
c) Actuarial G/L are changes in the APBO from any changes in actuarial assumptions or from the difference between actual experience and expected experience

GHC-816-16, Page 14

Question 14

Definitions for Accounting for ASC 715 Settlements and Curtailments

Answer 14

1. Settlements are transactions that eliminate the plan’s future obligations
   a) They are measured at the date the event occurs
   b) The maximum gain/loss is 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 associated with 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
   b) A loss is recognized when it is probable that the curtailment will occur and the effects are reasonably estimable.
   c) A gain is recognized when the related employees terminate or plan amendment is adopted

GHC-816-16, Page 16