GASB 45 & 43 FAQs
- Does my organization need to hire a special firm to assist with this process?
- How can I prepare for GASB 43 AND 45?
- How long does the GASB 43 AND 45 process take to complete?
- How often do GASB 43 and GASB 45 Benefits need to be valued?
- What assumptions are used in the valuation?
- What benefits will I be required to include in my GASB 43 AND 45 calculation?
- What discount rate should be used in my valuation?
- What does OPEB mean?
- What information is needed for an actuary to complete an actuarial valuation?
- What is an implicit rate subsidy?
- What types of benefits are considered Under GASB 45 (43)?
- What types of post-employment benefits count as OPEB?
- What will GASB 45 accomplish?
- When Does GASB 43 AND 45 become for effective for my organization?
- Who calculates the liability for OPEB benefits?
- Why would a plan sponsor choose to fund the ARC?
- Why would I choose early implementation? liability?
- Will my organization be required to pay the ARC?
Your organization should engage a firm that specializes in valuing OPEB. Your interests will be best served if this firm understands the intricacies of your organization and has specialized skills in your particular sector.
There are several steps you should take prior to implementing GASB 43 AND 45 :
- Understand the benefits offered to your retirees
- Gather union contracts and plan descriptions
- Assess the quality of the data contained in your human resource software. All active employees, former employees and retirees that are entitled to benefits should be in your database
This will depend on the quality of the data that you have for your actuarial consultant and the amount of upfront planning that your organization dedicates to this task. A typical engagement can span 6 to 8 weeks; once your organization has provided a clean demographic profile to it consultants.
If a plan has more than 200 participants (active and retired combined) it must have an actuarial valuation provided at least every two years. If a plan has fewer than 200 participants it must have an actuarial valuation provided at least every three years. NOTE – the disclosure requirements of GASB 45 / 43 are required in all annual financial statements.
There are several assumptions that the actuary will provide guidance with. These include – Turnover and retirement assumptions; Cost increase assumptions; Mortality (death) assumptions; Discount rate assumptions – probably one of the most critical factors impacting the actuarial calculation; and the Probability assumptions with respect to covered dependents.
Benefits that will be paid at retirement other than pension. This could include:
- Health Insurance
- Life Insurance
- Dental Insurance
The answer depends on whether the plan is funded or not.
Other Post Employment Benefits
Data elements generally include:
Employee name or identification number
Date of birth
Date of hire
Employment status: active / retired / surviving spouse
Spousal and dependent information
Contribution to the cost of the premium
Type of benefit plan: individual or family with specific information on each plan
In some instances, organizations do not actually share in the cost of providing benefits to employees in retirement. These benefits are typically known as access only plans or retiree-pay-all plans. If these benefits are provided under the same rate structure as the benefits for active employees, an implied subsidy may exist. This is due to the fact that the cost for benefits for most retirees is at a greater rate than the active population. This will require the plan sponsor to determine the cost for subsidizing the retirees’ benefits. GASB 45 requires a plan sponsor to use actual experience or actuarial adjustments in order to calculate the present value of retiree benefits for both current retirees and future retirees. This means that even if retirees pay 100% of the premiums there will still be likely still be an OPEB liability.
GASB 45 applies to benefits offered in retirement. Benefits covered under GASB 45 include medical, prescription drug, dental, vision, hearing, life insurance, long-term care benefits, and long-term disability benefits. This answer assumes that these benefits are not provided under a pension plan. OPEB does not include pension benefits or termination benefits, which are covered under other GASB accounting standards.
Retiree medical and dental insurance clearly count; other benefits aren’t so obvious and a professional should be consulted to get the right answer.
Disclosure of liabilities and costs associated with OPEB will result in improved accountability. This can lead to better informed policy decisions about the level and types of benefits provided by employers and potential methods of financing and managing those benefits.
The answer depends on the size of your organization.
- If your revenues exceed $100 million, you will most likely have to implement GASB 43 AND 45 for fiscal years beginning in 2007
- If your revenues are between $10 and $100 million, you will most likely have to implement GASB 43 AND 45 for years beginning in 2008
- If your revenues are below $10 million, GASB 43 AND 45 would be implemented in years beginning in 2009
For plans covering fewer than 100 participants, the plan sponsor or auditor can use a simplified approach known as the Alternative Measurement Method. We recommend that the plan sponsor engage a specialist for this calculation. Plans with more than 100 participants must use an actuarial firm with to perform an actuarial valuation of the OPEB benefits.
There are a number of reasons to consider funding the ARC and prefunding the OPEB benefits. The biggest reason for funding the ARC is an increase in discount rate. A funded plan may be permitted to use a significantly higher discount rate. This will result in lower OPEB liabilities and lower annual OPEB expenses.
Another compelling reason to prefund the ARC is to preserve the organizations credit rating. Because OPEB is costly, the cumulative deficiency for a plan sponsor that does not prefund grows quickly. This growth can have a negative impact the plan sponsor’s bond rating.
GASB 43 AND 45 costs are already inherent in your costs of operations and future obligations. You are just not required to determine the amount. You may want to adopt early implementation under the following circumstances:
- Your organization is negotiating union contracts – Understanding the impact of GASB 43 AND 45 is critical to arriving at a fair and accurate agreement
- Your organization is entering into a large capital project – Bank and lending institutions are aware that GASB 43 AND 45 implementation is only a year or two away. They may require you organization to establish its liability prior to making commitments to fund additional obligations.