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Plan amendment accounting is to be followed when benefits are increased or decreased. See PEB 3.2.6 for the accounting for prior service cost that arises from plan amendments. If an amendment is deemed significant, the employer should perform an interim remeasurement of the benefit obligation and plan assets and would also develop a new measure of net periodic benefit cost for the period from the remeasurement to the next annual measurement date. If an amendment is not deemed to be significant, the effects of the amendment would be determined as of the date of the next annual measurement date. ASC 715 does not define the term "significant." The determination of whether an event is significant requires judgment. Employers should consider the specific facts and circumstances surrounding the event and their past practice of defining significance for previous events.

4.6.1 Negative plan amendments

A negative plan amendment occurs when a plan sponsor reduces or eliminates benefits already earned (or being earned) by plan participants for past services. ERISA and other retirement welfare laws often prohibit the reduction of retirement welfare benefits already earned by employees. However, there are no US federal laws prohibiting a reduction in postretirement healthcare benefits. The significant increase in the cost of healthcare has prompted many companies to amend the terms of their OPEB plans by reducing or eliminating benefits, which may be considered a "negative plan amendment."
However, reductions in benefits have sometimes resulted in litigation against the enterprise on behalf of the retirees. Such litigation may seek to retroactively reinstate the prior level of benefits. The possibility that negative plan amendments might be later reversed as a result of litigation or the threat thereof should be carefully considered. If it is probable (as used in ASC 450) that the negative plan amendment will be rescinded, the OPEB obligation should not be reduced by the effects of the negative plan amendment. Even if rescission is not probable, the possibility that a rescission could be compelled may, depending on specific facts and circumstances, represent a contingent liability requiring disclosure pursuant to ASC 450.
Negative plan amendments in OPEB plans could include increases in required participant contributions or deductibles not already part of the substantive plan, the institution of a dollar-defined cap on the employer's share of costs, reductions in benefit coverage, or total elimination of eligibility for benefits (e.g., a plan amendment that provides that all employees not currently eligible to retire will no longer be entitled to plan benefits).

4.6.1.1 Negative plan amendment - curtailment accounting

In the context of a postretirement healthcare plan, a curtailment could occur if an employer suspends or terminates an OPEB plan pursuant to which employees no longer earn defined benefits for future service to the employer but future service counts toward vesting of benefits accumulated based on past service (e.g., if a plan with a five-year vesting requirement is terminated, an employee with four years of service may vest with respect to the benefits accumulated to that date upon completing one more year of service). Such an amendment reduces or eliminates the accrual of defined benefits for some or all future years of service and could, therefore, also cause a curtailment. It is important to distinguish between a reduction in the APBO caused by a negative plan amendment and a reduction caused by a curtailment. See ASC 715-60-55-140 through ASC 715-60-55-160 for illustrations of the differences between a negative plan amendment and a curtailment.
In situations when a negative plan amendment reduces or eliminates benefits accumulated for past service, the reduction in the APBO would first be used to reduce any unrecognized prior service cost from previous plan benefit improvements and then to reduce any remaining transition obligation. The excess, if any, would be amortized to net periodic OPEB cost on the same basis as prior service cost arising from benefit increases. Even if the event also gives rise to a full or partial curtailment, only previously unrecognized prior service cost/negative prior service cost (i.e., from previous plan amendments) is accelerated in the curtailment and not the negative prior service cost arising from the current negative plan amendment.
Example 6 in ASC 715-60-55-146 through ASC 715-60-55-160 (Cases A through C) outlines the guidance for accounting for a negative plan amendment that causes a curtailment. These examples indicate that:
  • the effects of the negative plan amendment should be determined first,
  • after the effects of the negative plan amendment are recorded, the determination of any gain/loss on the curtailment should be made, and any negative prior service cost that results from the current negative plan amendment should not be included in the prior service cost recognized in the curtailment gain/loss calculation, unless the plan is simultaneously being terminated completely (see PEB 4.9 for further discussion of plan terminations).
ASC 715 does not provide guidance on the method (e.g., LIFO, FIFO, pro rata) to be used to reduce prior service cost when there have been several prior amendments that, in the aggregate, resulted in unamortized prior service cost exceeding the reduction in the APBO resulting from a negative plan amendment. Since prior service cost is amortized over the estimated remaining years of future service to full eligibility at the date of the amendment, each plan amendment will be amortized over a different period. Accordingly, the order of reducing the prior service cost will directly affect the amount of prior service cost amortized in each future period. Unless the negative plan amendment is related to a specific prior amendment, ASC 715-30-55-54 states that any systematic method, applied on a consistent basis, would be acceptable.

4.6.2 Timing of recognition of a plan amendment

The effects of a plan amendment, whether positive or negative, should be considered when measuring the benefit obligation only if it has been communicated to plan participants at the date the amendment is adopted or within a reasonable period of time thereafter (i.e., within the time period that would ordinarily be required to prepare information about the amendment and disseminate it to employees and retirees). Neither ASC 715-60-35-21 nor ASC 715-60-55-19 define "a reasonable period of time." They do, however, indicate that one year after the date of amendment is not a reasonable period of time. We believe that recognition of the amendment at adoption is appropriate if management’s actions demonstrate that it intends to communicate the changes in the normal time period typical for communications of other amendments of a similar nature or magnitude. Deferring the communication to the annual date on which plan changes and other information are communicated would generally not meet the "reasonable period of time" condition. As indicated in ASC 715-60-55-19, if the delay in communication is unreasonable, the existing written plan continues to be the substantive plan that would be accounted for because it represents the last plan whose terms were mutually understood by the employer and plan participants.
ASC 715-60-35-54 also states that an employer's communication of its intent to institute cost-sharing provisions that differ from the written plan or prior practice do not constitute the substantive plan if the plan participants would be unwilling to accept the change without adverse consequences to operations or if other modifications to the plan or offsetting benefits would be required to gain participants' acceptance.
Example PEB 4-6 provides an example of the timing of the accounting for negative plan amendments.
EXAMPLE PEB 4-6
Timing of the accounting for negative plan amendments when communication is delayed
During the third quarter of 20X1, the Compensation Committee of the Board of Directors of PEB Corporation, a calendar year-end reporting entity, approves changes to PEB Corporation’s defined benefit OPEB plan that will reduce the benefits provided to participants. The effect of the changes will be accounted for as a negative plan amendment and a curtailment that will result in a gain.
PEB Corporation's human resources department intends to communicate the changes to plan participants through the normal course of its annual benefits enrollment cycle, which will occur in the first quarter of 20X2. If PEB Corporation had chosen to communicate this change following the adoption of the resolution by the Compensation Committee, under its normal communication processes, it ordinarily would have taken approximately two to three weeks to prepare and distribute a communication to the active and retired plan participants.
When should PEB Corporation recognize the effects of the negative plan amendment?
Analysis
PEB Corporation should account for the negative plan amendment and curtailment in the first quarter of 20X2. Under the guidance in ASC 715-60, the effects of the plan changes should generally be incorporated into the measurement of the plans' obligations in the period that the amendments are adopted (ASC 715-60-35-171). However, ASC 715-60-35-21 clarifies that the effects of the plan amendment should be considered at the date the amendment is adopted only if it is communicated to plan participants at that time or within a reasonable period of time thereafter. A reasonable period of time is described as “the time period that would ordinarily be required to prepare information about the amendment and disseminate it to employees and retirees.” Under PEB Corporation’s normal process, it would take approximately two to three weeks from the date the Compensation Committee approved the changes to prepare and distribute a communication to the plan participants. Thus, communication of the changes two quarters later would not be deemed to occur within a reasonable period of time. Consequently, the effects of the amendments, including the curtailment gain, should only be recognized when the terms of the plan amendment are mutually understood by the employer and the employees (i.e., when communicated by PEB Corporation to the plan participants). This will occur during the first quarter of 20X2, once the benefits enrollment package is disseminated to active employees and retirees.

4.6.3 Series of interrelated benefit plan changes

It is not unusual for an entity to make amendments or other changes to multiple benefit plans or other employee compensation arrangements simultaneously (or within a relatively short period of time). Often, a benefit will be reduced under one arrangement, but the reduction may be compensated for, in whole or in part, under another arrangement. For example, an entity may eliminate benefits under a postretirement medical arrangement, but increase benefits under a pension plan to mitigate the reduction.
In these situations, we believe it is important to understand the economic substance of the entire series of interrelated changes in employee benefit arrangements. This is important in order to ensure that financial statement recognition is not distorted due to the different recognition models that exist under the various employee compensation standards. For example, the income statement impact of amendments to a defined benefit pension plan are generally deferred and amortized, while a change to a cash bonus arrangement would typically be reflected immediately in the income statement.
As a simple example, a reporting entity may reach an agreement with its employees to forgo paying a presently due bonus that the employees have earned, and in return will increase the benefits payable under its pension plan by an equal amount. If one were to view the two actions in isolation, the elimination of the bonus accrual would be reflected as a gain in the income statement immediately, while the benefit enhancement in the pension plan would be reflected as prior service cost and amortized over a future period. That accounting would not reflect the underlying economic substance of the exchange. ASC 715 contains several examples of concurrently negotiated changes in various benefit plans. Consistent with that guidance, in some circumstances, it may be appropriate to immediately recognize in income part or all of the change in the obligation under a defined benefit plan rather than reflecting such change as a positive or negative plan amendment that is amortized into income over future periods.
In another example from practice, the Pension Protection Act of 2006 caused situations affecting both qualified and non-qualified pension plans. For example, increasing the benefit and compensation limits that were scheduled to expire under the Economic Growth and Tax Reconciliation Relief Act of 2001 increased the PBO. However, since most entities have nonqualified excess benefit plans or Supplemental Executive Retirement Plans (SERPs), the increase in the PBO of the qualified plan was generally offset by a decrease in the PBO of the SERP. Accordingly, those entities found that the overall effect on total pension obligations was neutral. In that case, we generally concluded that the appropriate accounting treatment was to transfer the accrued liability from the SERP to the PBO of the qualified plan, along with a pro rata share of deferred items (prior service cost, gains and losses, and transition amount). Thus, rather than treat the events as separate events within each plan, the underlying economics were that the overall benefit to the individual was not changing; the source of the payment was merely shifting from one plan to the other.
Example PEB 4-7 illustrates how to account for the interrelated benefit changes resulting from an early retirement offer.
EXAMPLE PEB 4-7
Accounting for the interrelated benefit changes resulting from an early retirement offer
Medical benefits are provided to long-term disabled employees under a long-term disability (LTD) plan that is accounted for under ASC 712, Compensation—Nonretirement Postemployment Benefits. When the employee retires, the medical benefits are provided under the employer’s postretirement medical plan, which is accounted for under ASC 715. Because the reporting entity assumes that employees will retire at age 65, its ASC 712 obligation includes benefits for employees through age 64, and its ASC 715 obligation includes benefits for retired employees, age 65 and older. As a result of an employer-provided incentive to retire early, 55% of the long-term disabled employees elected to retire in the current year. Because many of these employees are under age 65, this event results in a decrease in the ASC 712 obligation and an increase in the ASC 715 obligation for the cost of benefits from the employee’s age at retirement (e.g., age 60) to age 65.
Should the decrease in the ASC 712 obligation be recognized as a gain and the increase in the ASC 715 obligation recognized as an actuarial loss?
Analysis
No. Although unanticipated early retirements can give rise to an actuarial loss under ASC 715 (and gain recognition under ASC 712), the early retirements in this case resulted from the overt actions of the employer to cause the employees to retire early. Further, the employees did not lose any benefits as a result of their decision to retire early. The employer’s obligation to pay their medical benefits remains unchanged; merely the source of funding changes. Because the economic substance of the employer’s obligation has not changed, any gain recognition under this fact pattern would cause the financial statements to be misleading. Accordingly, the portion of the ASC 712 liability that decreased due to the early retirement of the disabled employees should simply be transferred to the accumulated postretirement benefit obligation and included in the accrued postretirement benefit liability in the balance sheet. This is consistent with the conclusions in ASC 715-60-55-111.
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