Employers may provide benefits after an employee retires other than
a pension. These benefits are called other postretirement benefits
(OPRBs). A frequently offered OPRB is healthcare. Healthcare and
pensions share similarities in accounting. They are both liabilities
because the company will have to satisfy that responsibility in the
future. Companies are required to accrue the cost of OPRBs during
the periods in which their employees earn the benefits instead of
cash-basis accounting. The same is true for pensions.
They are different in how determining amounts to use
in accounting are less predictable than pension plans because of
healthcare plan agreements for full or partial payment of a service.
Also, “the pension benefit is defined as a fixed dollar amount that is
paid monthly. The OPRB, however, usually is not limited in amount
because benefits are paid no matter how long or serious the illness,
benefits are paid as used, and the amount of benefits varies
geographically. “(Whalen et al., p. 19-5a, 2017). Lastly, the
contributions for pensions are tax-deductible whereas healthcare
contributions are not.
A company is presented with two different benefits to
provide. Between a healthcare plan and a pension plan, it would
make the most sense to offer a pension to the retired employee only.
The expense is more defined for accounting purposes with a pension
plan whereas a healthcare plan comes with too many variables. For
example, a person can be expected to receive a pension for twenty-
five years after retirement, and the monthly payment amount is
fixed. The same person during that period may suffer accidents,
develop chronic illnesses, and require additional prescriptions over
time causing the cost of health coverage to increase.
Reference:
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate
accounting: Reporting and analysis. Boston, MA: Cengage Learning.
