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1.11 Determining the substantive benefit plan
Publication date: 31 Oct 2023
us Pensions guide
Postretirement benefit plans are not limited to legally enforceable contracts. Any arrangement that is in substance a postretirement benefit plan, regardless of its form, is covered by ASC 715. The plan may be written, based on statutory requirements, or there may be a substantive obligation - an unwritten promise to provide benefits that arises from a past practice of paying benefits or from oral representations made to employees. In certain instances, the written plan may not embody the entire agreement, but may be supplemented by provisions that exist in substance due to past practice or an employer's intended actions as communicated to participants.
An objective of ASC 715 is that the accounting for pension and OPEB plans reflects the substance of the arrangement between the employer and employee rather than its form. Therefore, ASC 715 requires employers to measure the obligation using the provisions that are understood by both the employer and employee to be the operative plan terms (the substantive plan), even when such provisions are not embodied in the written plan.
1.11.1 Cost sharing between employer and employee
In some plans the employee contributes to the cost of the benefit obligation. The consideration of certain cost sharing practices (i.e., policies that reduce the employer's cost) that are not embodied in the written plan is described in ASC 715-60-35-51. However, there are certain situations when such practices should not be considered part of the substantive plan, as described in ASC 715-60-35-52 through ASC 715-60-35-54.
ASC 715-60-35-55 discusses collectively bargained plans, noting that, because an employer does not have the unilateral right to change such a plan, the written plan would typically constitute the substantive plan. An exception exists when the employer can demonstrate its ability to maintain a consistent level of cost sharing or a consistent level of increasing or reducing its share of costs in past negotiations without making offsetting changes in other benefits or compensation, or incurring other significant costs. Many companies have added per capita limitations or other types of "caps" on annual OPEB benefits as part of collectively bargained plans. Even if these caps are not expected to come into play during the term of the contract, they form part of the substantive plan in determining the estimated benefit obligation.
In some situations, an employer’s past practice in successive union negotiations may provide evidence that the substantive plan is different from the written plan, even in situations when offsetting changes were made to compensation or other benefits. This will result in an accumulated postretirement benefit obligation (APBO) under ASC 715 that may be considerably different (generally higher) than an APBO based on the written plan. All of the relevant facts and circumstances should be considered in assessing whether the substantive plan in those situations differs from the written plan. For example, consistently waiving the caps as part of multiple successive contract negotiations may be an indicator that the plan should be accounted for as if it were an uncapped plan, despite the fact that such waivers are negotiated and are accompanied by offsetting negotiated changes. Further, increases in caps or other plan terms that occur as a result of multiple contract negotiations may be an indicator that the substantive plan includes such increases on an ongoing basis. Regardless of whether offsetting changes in other benefits or compensation have occurred or other significant costs have been incurred to maintain the cost-sharing arrangement, judgment is required to determine the substantive plan and whether it differs from the written plan.
The term "past practice" is not defined in ASC 715, although ASC 715-60-35-51 states: "Such a past practice would be indicated when the nature of the change and duration of the past practice are sufficient to warrant a presumption that it is understood by the plan participants." Each situation must be considered individually.
1.11.2 Limitations when determining the substantive plan
The requirement to consider past practice and communication to participants of intended changes is limited to a plan's cost-sharing provisions. Changes in other plan provisions, such as those that alter the types of benefits covered by the plan or the eligible participants, would not impact what is considered the substantive plan under ASC 715-60-35-51 and therefore, the written plan would govern. For example, an employer may have an established practice of limiting its annual increase in the cost of retiree health coverage to 5%, accomplished by various methods, including limiting hospital room coverage, eliminating surgical benefits for certain procedures, reducing dependent coverage, and changing cost-sharing provisions of the plan. The ability of the employer to maintain this level of cost increase in the future through these means is not reasonably predictable, because reductions in coverage and eligible participants cannot be made indefinitely. Therefore, in calculating the OPEB obligation, a presumption could not be made that the annual increase in the employer's cost of providing retiree health care coverage would always be limited to 5%. However, within the actions taken to achieve the 5% limitation, the cost-sharing actions would be considered part of the substantive plan if the employer has a past practice of cost-sharing (e.g., raising deductibles or retiree contributions, or changing co-insurance provisions) or has the ability (and has communicated to affected plan participants its intent) to institute different cost-sharing provisions.
1.11.3 Substantive commitment outside of written terms
ASC 715-30 describes situations when an entity has a history of regular increases of benefits. This or other evidence may indicate that an employer has a present commitment to make future amendments and that the substance of the plan is to provide benefits that are greater than the benefits defined by the written terms of the plan. In those situations, the substantive commitment would be the basis for the accounting. Accounting for substantive commitments is further discussed in PEB 4 with the accounting for plan amendments.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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