Postretirement Health Care and Insurance Costs

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Posted on 19th September 2011 by admin in Uncategorized

Most large companies cover a portion of the health care and insurance costs incurred by employees after retirement.  Similar to pensions, such coverage is part of employee compensation and is earned over an employee’s years of service.  According to the matching principle, therefore, such costs should be accrued over the employee’s tenure with the company, and then the associated liability should be written off as the benefits are paid after the employee’s retirement.  the issues of estimating this liability, providing adequate funds to meet required future payments, and accounting for such transactions are actually very similar to those involved with pensions, and accordingly, the appropriate accounting methods are basically the same.

Until recently, however, most companies neither established funds to pay these future costs nor accrued the related liabilities as the employees earned the coverage.  Unlike pensions, federal laws have been slow to be established like the (ERISA) which requires employers to establish funds for these liabilities.  Standard practice in this area has been to expense these costs simply as they are paid.  Such a policy, which is contrary to the matching principle, is referred to as the pay-as-you-go approach.  The FASB, in  a very controversial standard passed back in 1990, required that companies accrue postretirement health care and insurance costs.  Not only did the companies have to accrue a liability in the future as employees earned their benefits, but they were also required to recognize existing liabilities they had failed to accrue in the past.  While studying how to become a CPA in the health care industry, health care plans, and insurance costs will be one of the most important things to learn.  Most allied health employees are granted coverage, and it is the accountant’s responsibility to track, plan and document accurately how these expenditures will be incurred.