A plan termination is an event in which the benefit plan ceases to exist and all benefits are settled by the purchase of annuity contracts, the payment of lump-sum benefits, or by other means (see PEB 4.3
for a discussion of settlements). The plan may or may not be replaced by another plan (i.e., a successor plan as described in PEB 4.8
). At the point of final plan termination, all deferred amounts in accumulated other comprehensive income should be recognized in the income statement. Settlement accounting is not appropriate until all the criteria for settlement have occurred (as described in PEB 4.3
). However, if a reporting entity decides to terminate a plan at a future date, it may be appropriate at the next measurement date for the assumptions to incorporate certain estimates that reflect the pending settlement.
For example, if the plan termination is assessed to be probable, the measurement of the obligation should reflect the settlement rate at termination and the discount rate prior to termination should reflect the shorter duration until the termination date. Similarly, assumptions impacted by the decision to terminate the plan should be updated and reflected in the PBO if known. For example, lump sum versus annuity elections, other assumptions implicit in annuity purchase rates (e.g., mortality, administrative costs), retirement rates, increased utilization, opt-in rates (if applicable, for OPEB plans) and other assumptions (e.g., salary scale, turnover, COBRA) should be updated.
In addition, the amortization periods for gains and losses, as well as for new prior service cost (or negative prior service cost) arising from plan amendments, should be assessed to consider whether the amortization period should end at the planned termination date or should continue over the relevant average life expectancy or service period. In certain cases, it may be reasonable to amortize remaining amounts over the period until the plan is to be terminated. The underlying basis in the original guidance for pension and OPEB accounting to defer and amortize gains and losses and prior service cost is to acknowledge that gains and losses can offset over the lifetime of a plan during which benefits will be paid, making it more appropriate to spread the cost over the period that the participants will receive benefits. If a plan is anticipated to terminate, that period may now be shorter than previously anticipated if the payment of benefits will cease at that time.
Consider the case of an unfunded OPEB plan for which the reporting entity may unilaterally terminate the plan and there is no obligation to settle any accumulated benefits upon termination. In this case, it may be reasonable to view the remaining period of time until the plan is terminated as the only period during which benefit payments will be made and that gains and losses could offset. Assuming that the ability to terminate the plan and cease paying any benefits is solely within the control of the reporting entity, and termination is reasonably assured based on the planned timetable and surrounding circumstances, it may be appropriate to amortize remaining amounts in accumulated other comprehensive income over the period of time until the plan terminates and the benefit payments will cease. Alternatively, we believe it would also be appropriate to continue to follow the amortization model in ASC 715
as described in PEB 3.2.7
Example PEB 4-8 provides an example of the timing of the accounting for an amendment to terminate a plan with a future effective date.
EXAMPLE PEB 4-8
Timing of the accounting for an amendment to terminate a plan with a future effective date
PEB Corporation sponsors a postretirement healthcare plan that has no active employee participants, only retirees (i.e., all of the plan’s participants are inactive). The accumulated postretirement benefit obligation is approximately $100 million. On December 1, 20X1, PEB Corporation amended the plan to terminate all health care benefits effective April 1, 20X2, and also communicated that change to the participants in December 20X1. PEB Corporation has the authority to amend the plan at any time.
How should PEB Corporation account for the amendment to terminate the plan with a future effective date?
PEB Corporation should account for the amendment to terminate the plan as a negative plan amendment as of the date of the amendment (December 1, 20X1), which would require PEB Corporation to recognize the reduction in the liability as a prior service credit in accumulated other comprehensive income on December 1, 20X1. Because the plan has only inactive participants, the prior service credit would ordinarily be amortized over the average life expectancy of participants; however, as the plan will terminate on April 1, 20X2, with no further payments to be made to participants after that date, it would likely be acceptable to amortize the prior service cost over the period from December 1, 20X1 through March 31, 20X2.
For other plans that would require payment of accumulated benefits, such as via purchase of annuities or lump sum payments, the decision to terminate the plan in the future has not yet eliminated the obligation to pay benefits over an extended period of time, and so there has not yet been a reduction in the period of time over which benefit payments will occur. The reporting entity will still need to negotiate the settlement of accumulated benefits in the future. As settlement gains and losses should not be reflected until the actual settlement of the benefits occurs, it should not be anticipated and, therefore, the amortization period should not be adjusted from the base model under ASC 715
(average remaining service period or average remaining life expectancy).