Financial Reporting Alert 10-6: Health Care Legislation — Impact on Employee Benefits Accounting
April 20, 2010
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. Seven days later, the president signed into law a reconciliation measure, the Health Care and Education Reconciliation Act of 2010. The passage of the Patient Protection and Affordable Care Act and the reconciliation measure (collectively, the “Act”) has resulted in comprehensive health care reform legislation.
This Financial Reporting Alert (1) addresses certain of the Act’s provisions that affect benefits employers provide to employees and retirees and (2) discusses their accounting implications. Given the complexities associated with accounting for the Act’s provisions, entities should consider consulting with their actuarial, tax, legal, and accounting advisers regarding their specific facts and circumstances.
Elimination of Annual and Lifetime Benefit Caps
The Act includes provisions that require group health plans and health insurance issuers to eliminate annual and lifetime benefit caps for health benefits that are considered essential under Section 1302(b) of the Act:
SEC. 10101. AMENDMENTS TO SUBTITLE A.
(a) Section 2711 of the Public Health Service Act, as added by section 1001(5) of this Act, is amended to read as follows:
“SEC. 2711. NO LIFETIME OR ANNUAL LIMITS.
(1) IN GENERAL.—A group health plan and a health insurance issuer offering group or individual health insurance coverage may not establish—
(A) lifetime limits on the dollar value of benefits for any participant or beneficiary; or
(B) except as provided in paragraph (2), annual limits on the dollar value of benefits for any participant or beneficiary.
(2) ANNUAL LIMITS PRIOR TO 2014.—With respect to plan years beginning prior to January 1, 2014, a group health plan and a health insurance issuer offering group or individual health insurance coverage may only establish a restricted annual limit on the dollar value of benefits for any participant or beneficiary with respect to the scope of benefits that are essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act, as determined by the Secretary. In defining the term ‘restricted annual limit’ for purposes of the preceding sentence, the Secretary shall ensure that access to needed services is made available with a minimal impact on premiums.
(b) PER BENEFICIARY LIMITS.—Subsection (a) shall not be construed to prevent a group health plan or health insurance coverage from placing annual or lifetime per beneficiary limits on specific covered benefits that are not essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act, to the extent that such limits are otherwise permitted under Federal or State law.’’
The Act appears to indicate that the prohibition on annual and lifetime caps for essential health benefits applies to all medical plans, including retiree medical plans. We understand that a retiree-only plan exemption historically has been applied to certain patient protection and affordable care mandates that have previously been added to the Public Health Service Act. Entities should consult with their legal advisers when assessing whether the provisions of the Act apply to their health plans.
The impact of prohibitions on annual and lifetime caps will depend on the provisions of an entity’s particular health plan. This provision will most likely have a more significant impact on plans with a lower cap on benefits in situations in which the benefit limitations are considered in the measurement of the accumulated postretirement benefit obligation (APBO).1 We understand that in certain circumstances, entities did not take the benefit limitation into account when measuring the APBO because, for example, in situations in which the plan did have a low benefit limitation and they reset the cap periodically, the plan was substantively deemed not to have a cap.
Entities may determine that the Act’s prohibition of lifetime and annual benefit caps requires an upward adjustment to the APBO. These entities should consider whether the upward adjustment resulting from the Act’s provision that eliminated benefit limits for essential health benefits (or in combination with other provisions) is deemed a significant event that triggers a remeasurement (see Remeasurement Considerations Related to Plan Obligations and Plan Assets section below). As noted above, this provision is most likely to have a significant impact on plans with a lower cap on benefits in situations in which the benefit limitations are considered in the measurement of the APBO. An entity should consider its specific facts and circumstances on a plan-by-plan basis when performing its analysis. When making this determination, the entity may consider the impact on the APBO, net periodic pension cost, other comprehensive income, and qualitative factors.
Excise Tax on High-Cost Employer Health Plans (“Cadillac Plans”)
Beginning in 2018, Section 9001 of the Act imposes a nondeductible 40 percent excise tax on the “excess benefit” provided to an employee or retiree in any month under any employer-sponsored health plan. For an employer plan provided through insurance coverage, the issuer of the coverage is liable for the tax. In the case of a self-insured group health plan, a health flexible spending arrangement, or a health reimbursement arrangement, the plan administrator must pay the tax. The employer must also pay the tax for employer contributions to a health savings account or medical savings account. Employer-sponsored health coverage is considered health coverage offered by an employer to an employee, regardless of whether the employer provides the coverage or the employee pays some or all of the cost of coverage with after-tax dollars.
For further discussion of this provision of the Act, see Deloitte’s March 23, 2010, article, Prescription for Change “Filled” — Tax Provisions in the Patient Protection and Affordable Care Act.
Questions have arisen about whether the excise tax should be accounted for as part of the APBO. ASC 715-60-35-22 states, in part, that “measurement of the expected postretirement benefit obligation is based on the expected amount and timing of future benefits, taking into consideration the expected future cost of providing the benefits and the extent to which those costs are shared by the employer, the employee . . ., or others (such as through governmental programs)” (emphasis added). Generally, because the excise tax represents a direct cost of providing the postretirement benefit, it should be considered in the measurement of the APBO. The change associated with the initial recognition of the excise tax should be recognized as an actuarial gain/loss in accumulated other comprehensive income and recognized (amortized) in accordance with ASC 715-60-35-29.
An entity may consider consulting with its advisers as it interprets this provision of the law and measures the value of its benefits and what constitutes the “excess benefits.” In addition, an entity should consider whether the increase in the APBO from this provision of the Act (or in combination with other provisions) is considered a significant event that triggers a remeasurement (see Remeasurement Considerations Related to Plan Obligations and Plan Assets section below). An entity should consider its specific facts and circumstances on a plan-by-plan basis when performing its analysis.
Medicare Prescription Drug “Donut Hole”
Retirees currently pay 100 percent of prescription drug costs once their out-of-pocket prescription drug expenses reach an initial coverage limit ($2,830 in 2010) in the plan year, until they reach an out-of-pocket cost limit ($4,550 in 2010), at which point Medicare provides the retiree with catastrophic coverage. The Act offers a $250 rebate in 2010 to Medicare beneficiaries who incur prescription drug costs in excess of the employer plan coverage but are not yet at the threshold where they have catastrophic Medicare prescription drug coverage (a gap in coverage commonly known as the “donut hole”). The Act also includes other provisions to address this gap in coverage, including a pharmaceutical manufacturers’ 50 percent discount on brand-name drugs beginning in 2011, increasing to a 75 percent discount on brand-name drugs and expanding to include discounted generic drugs by 2020.
Questions have arisen about whether these provisions of the Act negatively affect an employer’s assessment of whether its retiree prescription drug benefit coverage is actuarially equivalent to Medicare Part D coverage (e.g., whether the provisions affect the employer’s entitlement to the federal drug subsidy). The reconciliation measure included a provision clarifying that the assessment of actuarial equivalence does not change as a result of the passage of the Act (e.g., actuarial equivalence is still determined by comparing the employer’s plan to Medicare Part D coverage without considering the measures to close the donut hole).
Any effect this provision has on participation rates for the plan would be addressed through the actuarial assumptions used to calculate the benefit obligation.
Early Retiree Reinsurance Program
The Act allows for a $5 billion early retiree reinsurance program to provide temporary financial help for employer-sponsored plans (self-funded and insured) that provide medical, surgical, hospital, and prescription drug coverage to certain early retirees (i.e., individuals aged 55 and older who are not active employees and are not eligible for Medicare). The plan can receive up to 80 percent of retiree costs (less negotiated price concessions) for health benefits between $15,000 and $90,000. The program is effective beginning on June 23, 2010, and ends on January 1, 2014. The Act requires that the reinsurance payments be used to lower premium costs for a plan sponsor or to reduce retiree cost-sharing.
Entities should determine whether (1) they are eligible for the financial assistance, (2) they intend to participate in the program, (3) amounts available under the program will be sufficient to pay eligible participants in the program (i.e., whether amounts are collectible), and (4) they are able to use the reinsurance funds to reduce the plan’s cost. As discussed in ASC 715-60-35-90, when developing the APBO, an entity should reflect the impact of expected reimbursements or the sharing of health care costs with other parties. The availability of funds under the reinsurance program will be affected by the number of participants availing themselves of the program and their claims. There may be uncertainties regarding the amount of funds the entity will actually receive or the ability to use the funds to reduce postretirement health care costs. The implications of this provision, if any, should be addressed through the actuarial assumptions used to calculate the benefit obligation.
Elimination of the Tax Deduction for the Medicare Part D Subsidy
An employer offering retiree prescription drug coverage that is at least as valuable as Medicare Part D coverage is currently entitled to a federal retiree drug subsidy. Employers can claim a deduction for the entire cost of providing the prescription drug coverage even though a portion of the cost is offset by the subsidy they receive. The Act repeals the current rule permitting deduction of the portion of the drug coverage expense that is offset by the Medicare Part D subsidy.
This provision of the Act is likely to have tax accounting implications in the quarter ended March 31, 2010, for employers that offer prescription drug coverage and benefit from the subsidy. For a discussion of the tax accounting implications associated with this provision of the Act, see Deloitte’s March 31, 2010, Financial Reporting Alert.
ASC 715-60-35-126 states that “if a significant event occurs, such as a plan amendment, settlement, or curtailment, that ordinarily would call for remeasurement, the assumptions used for those later measurements shall be used to remeasure net periodic postretirement benefit cost from the date of the event to the year-end measurement date” (emphasis added). Entities will need to assess whether the Act’s provisions (individually or collectively) are considered a significant event for a plan and trigger a remeasurement. This assessment is on a plan-by-plan basis. Because ASC 715 does not define the term “significant event,” entities will need to use judgment in determining whether a significant event has occurred. When making this determination, entities may consider the impact on the APBO, net periodic pension cost, other comprehensive income, and qualitative factors.
An entity is not permitted to adjust just one assumption in an interim-period remeasurement. An entity that determines that the Act is a significant event must perform a complete remeasurement. A remeasurement of the obligation and plan assets may be performed at any time as long as both are remeasured (i.e., it is not acceptable to remeasure just the obligation or just plan assets). ASC 715-30-35-68 states, in part, “Measurements of net periodic pension cost for both interim and annual financial statements shall be based on the assumptions used for the previous year-end measurements unless more recent measurements of both plan assets and obligations are available” (emphasis added). An entity should carefully consider interim remeasurements, since the entity may create an accounting policy for determining a significant event under ASC 715-60-35-126.
Characterization as Prior Service Cost or Actuarial Gain/Loss
When completing its remeasurement, an entity should also consider, on the basis of its facts and circumstances, whether the effects of the Act’s various provisions should be characterized as prior service costs or actuarial gains/losses. Generally, plan changes (including legislative changes) that result in an increase or decrease in participant benefit levels are viewed as prior service cost, while changes in plan assumptions (including changes in the expected costs the employer will incur to provide benefits) are considered actuarial gains/losses.
The Act’s various provisions related to an entity’s APBO may affect the timing and recognition of the change in net periodic postretirement benefit costs. For guidance on amortization of prior service cost as a component of net periodic postretirement benefit costs, see ASC 715-60-35-17; for guidance on amortization of a net gain or loss as a component of net periodic postretirement benefit costs, see ASC 715-60-35-29.
In response to the Act, some employers may be considering amending their plans. Plan amendments should be accounted for in accordance with ASC 715-60-35. For guidance on criteria that must be met for a plan amendment to be considered adopted, see ASC 715-60, including ASC 715-60-35-21 and 35-22. In addition, for implementation guidance, see ASC 715-60-55-19 through 55-21 and ASC 715-60-55-140 through 55-160.
Period of Accounting for the Act
For accounting purposes, the provisions of passed legislation generally are not accounted for until the period of enactment of the legislation. However, the enactment of the Act through two separate laws raises a question about what period entities should use when they have a period-end between March 23, 2010, and March 30, 2010. On April 14, 2010, the SEC announced at a FASB meeting that it would not object if a public entity (whose period-end was between March 23 and March 30) accounted for the impact of the reconciliation measure as if it had been enacted together with the Patient Protection and Affordable Care Act in the financial statements for the period ended before March 30, 2010.
Any entity that chooses not to follow this approach and account for the enactment of the two laws in different financial statement periods should consult with its auditors and accounting advisers. The nearly simultaneous enactment of two laws that affect the same financial reporting item over different accounting periods is very unusual; accordingly, the accounting for the enactment of a law in a financial statement period that precedes the enactment date of the law (i.e., including the change to the effective date as a result of the reconciliation measure in financial statements for periods ending before March 30, 2010) is not to be analogized to in other circumstances.
As entities consider the accounting implications of certain provisions of the Act that affect benefits they provide to their employees and retirees, entities may also want to consider any documentation required to support their analysis of the applicable provisions.
1 The Accounting Standards Codification Master Glossary states that the APBO represents the “actuarial present value as of a particular date of all future benefits attributed to an employee’s service rendered to that date assuming the plan continues in effect and that all assumptions about future events are fulfilled.”
2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”