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Other Post Employment Benefits (OPEB)

The term “other post employment benefits” refers to a type of deferred compensation. Certain specified non-pension benefits are promised after the employee retires or leaves a company, in exchange for their current service.

Health insurance for retirees and their dependents, life insurance, dental insurance, and long term disability or care coverage are representative benefits typically included in an OPEB program. Even though employment has ended, the OPEB sponsoring organization has a contractual obligation to deliver the promised benefits to eligible former employees and/ or their family members.

Why are Other Post Employment Benefits Important?

Companies and government agencies that wish to attract and retain qualified employees find that a blended compensation package of current and future benefits helps them maintain a skilled labor force.

Employees place a high value on future benefits that will enable them to create a financially secure life style in their retirement years. The perceived value of these non-pension benefits can be so great, in fact, that many employees (particularly in the government) are willing to accept a lower current compensation package in exchange for the promise of future benefits.

Now that the cost of health care coverage and other promised benefits has become so expensive, however, plan sponsors are finding it difficult to adequately fund their obligations. As a result, many plans are underfunded.

ERISA and Other Post Employment Benefits

“Retiree medical” and related benefits are not insured by Pension Benefit Guaranty Corporation (PBGC), nor is pre-funding of these obligations required by any regulatory agency. OPEB benefits are in most cases unfunded “pay as you go” liabilities of the sponsoring employer, although some employers, particularly unionized employers, pre-fund some OPEB liability through a VEBA (voluntary employees benefit association) trust.

The Employee Retirement Income Security Act of 1974 (ERISA) limits beneficiaries’ legal rights to require that OPEB sponsors meet their contractual obligations. Compensatory and punitive damages suits are prohibited, for example. If a company files for bankruptcy, OPEB contracts become subject to bankruptcy court proceedings and may or may not be modified.

Changes to Other Post Employment Benefits Agreements

U.S. health care costs surpassed $2.3 trillion in 2008, more than three times the $714 billion spent in 1990, according to the Kaiser Family Foundation. As life expectancy increases along with the cost of medical care, plan sponsors are looking for ways to protect their bottom line.

Common OPEB cost reduction efforts include increasing retiree cost sharing, restricting benefit eligibility, capping the annual cost of retiree health care expenditures, or revising prescription drug benefits. Unlike pensions, OPEB benefits do not vest. The summary plan descriptions and official plan documents will include a reservation of rights clause. This language gives the employer the right to amend or terminate the plan, even for those already retired and receiving benefits.

Whether or not proposed OPEB modifications are consistent with plan documents, litigation is always a possibility when it comes to benefit reductions. This was the case in the matter Rexam, Inc. v. United Steel Workers of America. The union sued over changes made to Rexam’s retiree medical plan. One of the Steel Workers’ assertions was that the collective bargaining agreements trumped the reservation of rights language in the plan.

How do Entities Account for Other Post Employment Benefits?

The Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 132(R)-1on December 30, 2008. Titled “Employers Disclosures about Postretirement Benefit Plan Assets,” this guidance document requires sponsors of defined benefit pension plans and other postretirement benefit plans (OPEBs) to disclose more detail regarding invested assets. The ruling is effective for fiscal years ending after December 15, 2009.

Other post employment benefits promised by municipalities and governmental agencies are governed by Government Accounting Standards Board (GASB) pronouncements 43 and 45 issued in 2003 for initial implementation in December 2006. These guidelines require government agencies to calculate and report the actuarial value of their other post-employment benefits (OPEB) liability.

Future Outlook for Other Post Employment Benefits

For the past 20 years the nationwide trend has been to reduce or eliminate OPEB. Given the current combination of poor economic conditions, competitive pressures, and the uncertainty caused by national healthcare reform, this trend is likely to continue.

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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