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3.3 Net periodic benefit cost — other elements of income or expense
Publication date: 31 Oct 2023
us Pensions guide
Other elements of income or expense include accounting for deviations from the substantive OPEB plan and employer contribution taxes.
3.3.1 Deviations from the substantive OPEB plan
Under ASC 715-60, the impact of an employer’s temporary deviation from the provisions of a substantive OPEB plan are recognized immediately rather than deferred and amortized. This provision does not apply to pension plans. For example, some OPEB plans include terms (either written or substantive) that provide that shortfalls resulting from benefit payments in excess of the employer's share of incurred claims cost and participant contributions for a year are to be recovered through the subsequent year's participant contributions (i.e., a retrospective adjustment). If an employer forgives that retrospective charge on a one-time basis, that decision is required to be recognized as a current period loss rather than be deferred and amortized. If, however, the facts and circumstances indicate that the employer had in substance made a decision to continue to bear the shortfall in future years as well, the effect of that change on the APBO would be calculated and accounted for as a plan amendment.
The theory behind the requirement for immediate recognition is that the change results from a temporary change in intent rather than a change in estimate or permanent plan change.
3.3.2 Accounting for employer contribution taxes
In certain jurisdictions, the tax authority imposes a tax on contributions made by the employer to the pension plan. ASC 715 does not directly address the accounting for this type of tax.
Example PEB 3-3 describes the treatment of taxes paid on employer contributions to a pension plan.
EXAMPLE PEB 3-3
Taxes paid on employer contributions to a pension plan.
Taxes paid on employer contributions to a pension plan.
PEB Corporation sponsors a defined benefit pension plan. The local tax jurisdiction imposes a 16% tax on the pension plan on all tax-deductible contributions paid by the employer. In other words, for a contribution of $100, the pension plan incurs a $16 tax; therefore, an employer needs to contribute $119 to the plan so the plan can pay $100 in pension benefits, net of the 16% tax ($19).
How should PEB Corporation account for the contribution tax?
Analysis
The contribution tax should be recognized as a component of net periodic pension cost in the period in which the contribution is made. ASC 715 does not directly address the accounting for this type of tax; however, ASC 715-60 contains guidance on the accounting for internal and external costs directly associated with administering a non-pension postretirement benefit plan.
ASC 715-60-35-90 states that several assumptions are required to be used in measuring an employer's postretirement health care obligation. According to ASC 715-60-35-93, the assumed per capita claims cost, one of the key assumptions affecting the amount and timing of future benefit payments, is the best estimate of the expected future cost of the benefits covered by the plan. ASC 715-60-35-98 further indicates that, if significant, the internal and external costs directly associated with administering the postretirement benefit plan is also considered a component of assumed per capita claims cost.
The employer contribution tax is not a direct cost of providing or administering the benefits as contemplated by ASC 715-60 because additional contributions can be avoided if the fair value of the plan assets increases, for example, and the plan becomes fully funded or overfunded. If the additional contributions can be avoided, the tax on these contributions is also avoidable. Therefore, the employer contribution tax should not affect the value of the benefit obligation or service cost, nor should the service cost be grossed up for the effects of the tax. PEB Corporation should account for the contribution tax on a “pay-as-you-go basis," and should include the tax as part of pension cost in the income statement.
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