Guest Article

(From the June 1, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

FASB Issues Guidance on Accounting for New Medicare Law

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The Financial Accounting Standards Board on May 19 issued guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act (P.L. 108-173) (The Act) for employers that sponsor retiree medical plans with prescription drug benefits. The new FASB Staff Position 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," supersedes FSP FAS 106-1, which the FASB published on January 12. For public entities the new FSP is effective for the first annual or interim period beginning after June 15, 2004, although companies can begin applying it immediately.

Background

In general, the Act creates a Medicare prescription drug benefit (Medicare Part D) and provides a 28 percent subsidy to employers that provide qualifying prescription drug coverage to Medicareeligible retirees. The subsidy will be available only with respect to Medicare-eligible retirees that opt for the employer's prescription drug plan instead of Part D, and only if the employer's plan is at least "actuarially equivalent" to Part D. The Department of Health and Human Services has not yet issued guidance on the actuarially equivalent standard, but is expected to do so in the very near future.

Overview of the FSP

The FSP "applies only to the sponsor of a single-employer defined benefit postretirement health care plan for which (a) the employer has concluded that prescription drug benefits available under the plan to some or all participants for some or all future years are 'actuarially equivalent' to Medicare Part D and thus qualify for the subsidy under the Act and (b) the expected subsidy will offset or reduce the employer's share of the cost of the underlying postretirement prescription drug coverage on which the subsidy is based."

Basically, FSP FAS 106-2 requires employers to initially account for the effect of the subsidy on the accumulated postretirement benefit obligation (APBO) as an actuarial experience gain. If subsequent estimates of the subsidy change-- as a result of changes in regulations or legislation, changes in the underlying estimates of postretirement prescription drug costs, or for reasons other than a plan amendment-- the effect of the change in estimate also is an actuarial experience gain or loss.

The FSP provides transition guidance for employers who deferred recognition of the Act, and for employers who initially recognized the Act in a manner that did not comply with the guidance in FSP FAS 106-2.

The FSP also specifies certain disclosure requirements for interim and annual financial statements before the employer can determine actuarial equivalence, and for the first period in which the employer includes the effects of the subsidy in measuring its APBO and net periodic postretirement benefit cost.

The FSP includes a brief mention of two other effects on employer-sponsored plans resulting from the Act; the impact of plan participant enrollment in the voluntary Medicare Part D plan, and the macro socio-economic effects of the Act. The voluntary Medicare Part D plan also offers a wraparound option, which the FSP does not discuss. The FSP does not address the accounting impact of a wraparound model because it is already covered through reference to cost sharing in paragraph 35 of FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Thus, changes in cost sharing will be incorporated into the actuarial calculations over time.

Similarly, the "macro socio-economic effects of the Act," i.e., supply and demand impacts on cost and consumption of outpatient prescription benefits, will be captured in the actuarial analysis of per capita claims costs as changes in participant behavior become apparent. Plan sponsors and actuaries need to estimate those effects in the early years, as they would for any shift in medical costs caused by an outside change.

For More Information

The FSP can be downloaded from the FASB's Web site, at www.fasb.org.

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The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Tom Brisendine 202.879.5365, Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955. Copyright 2004, Deloitte.

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