Other postretirement benefits (OPRBs) are forms of benefits
provided to former employees after their retirement, other than
pensions (Whalen, 2017, ch. 19-5). Health insurance is one OPRB
that can be offered by an employer. This can be very beneficial for an
employee however it can be rather difficult to account for with the
company since healthcare benefits generally present the greatest
measurement difficulties for an employer (Whalen, 2017, ch. 19-5).
Healthcare plans require an estimate of such items as the medical-
cost trend rate and marital and dependency status during retirement
(Whalen, 2017, ch. 19-5a). Companies that offer these plans incur a
higher risk since these plans agree to pay for some or all of a service,
of which the amount and timing are unknown (Whalen, 2017, ch. 19-
5a).
There are similarities and differences GAAP requires of a company
when accounting for OPRBs and pensions. Accounting for OPRBs and
pensions are similar in that they both involve a liability, and the
company accrues the cost of both. There are three major differences
between healthcare OPRBs and pensions. The first difference deals
with the beneficiary. The retired employee is generally the
beneficiary for a pension plan. A company may provide OPRBs to not
only the retired employee but also their spouse or even their
dependents if they meet the requirements. The second difference can
be seen in the benefits available between a pension plan and an
OPRB. The pension benefit is a fixed amount that is paid monthly,
whereas OPRBs are not limited in an amount since the benefits are
paid no matter the circumstance (Whalen, 2017, ch. 19-5a). The
benefits for a healthcare plan are only paid once they are used. The
third difference deals with how each postretirement plan is funded.
Companies fund pension plans because of ERISA requirements, and
the contributions are tax-deductible (Whalen, 2017, ch. 19-5a). For
OPRBs, companies have no legal requirement forcing them to fund
these benefit plans, so they generally won’t. Companies also lose the
benefit of tax-deductible contributions, but gain a deduction for
payments made for the healthcare services.
When deciding between offering a pension plan and a healthcare
OPRB, I think that a company would more than likely select a pension
plan to offer their employees. It would be less risky on their end,
easier to make assumptions and estimates for, and contributions
made by the company into the pension plan would be tax-deductible.
Reference
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017).
Intermediate
Accounting: Reporting and Analysis
(2nd ed.). Cengage Learning
