Title: Other Post-Employment Benefits (OPEB): What They Are, How They Work, and Practical Steps for Employers and Retirees
Overview
Other post-employment benefits (OPEB), also called other post-retirement benefits, are employer-provided benefits—other than pension distributions—that an employee may receive after leaving the workforce. Common examples include retiree health insurance, life insurance, deferred compensation, and other services such as dental, vision, and legal assistance. OPEB arrangements raise important tax, legal, actuarial, and accounting issues for both employers and retirees. (Investopedia; GASB; FASB)
Key takeaways
– OPEB covers benefits other than pension payments (most commonly retiree medical insurance).
– Types include retiree health insurance, retiree group life insurance, deferred compensation (qualified and nonqualified), and various supplemental benefits.
– Tax treatment depends on the benefit: retiree health coverage is generally non-taxable; group-term life above $50,000 can produce taxable imputed income; deferred compensation is typically taxed when the retiree actually receives payments. (IRS; CMS)
– Whether OPEB can be changed or eliminated usually depends on written plan documents and promises; absent explicit irrevocable commitments, employers may have discretion to modify benefits. (U.S. Department of Labor)
– Employers face significant funding, reporting, and actuarial responsibilities; accounting guidance differs for private companies (FASB ASC 715) and state/local governments (GASB standards). (FASB; GASB; ASPPA)
Types of Other Post-Employment Benefits
1. Health insurance (retiree medical)
– Usually offered as group coverage, either the same plan as active employees or a retiree-only plan.
– If the retiree is enrolled in Medicare, employer retiree coverage often acts as secondary payer (Medicare pays first). Terms vary—consult the plan Summary Plan Description (SPD). (CMS; Investopedia)
2. Life insurance
– Typically group-term life insurance continuing into retirement for a limited period or amount.
– Employer-provided life insurance premiums and benefits rules can create taxable imputed income when coverage exceeds $50,000 under IRS group-term life rules. (IRS)
3. Deferred compensation
– Arrangements that defer a portion of salary to be paid later (commonly at retirement or other specified date).
– Two broad categories:
– Qualified deferred compensation (e.g., governmental 457(b) plans): governed by IRC rules and specific statutory limits.
– Nonqualified deferred compensation: flexible but subject to different tax timing and rules (e.g., Section 409A for private plans).
– Generally, taxes are deferred until the retiree receives distributions. (IRS; Investopedia)
4. Other “other” benefits
– Dental and vision coverage, life and accidental death coverage, tuition reimbursement, legal services, wellness programs, and other perquisites may also be provided post-employment.
Which businesses and organizations offer OPEB?
– Private-sector employers (companies of many sizes).
– State, county, and municipal governments and government agencies (often substantial OPEB liabilities).
– Nonprofit, religious, and educational institutions.
– Labor unions or employee associations may also negotiate retiree benefits in collective bargaining agreements. (Investopedia; NASRA)
How are OPEB taxed?
– Retiree health insurance: generally not taxable to the retiree when paid or subsidized by the employer. (IRS; CMS)
– Employer-paid group-term life insurance: the cost of coverage in excess of $50,000 is taxable as imputed income to the retiree under IRS rules. (IRS)
– Deferred compensation: normally taxed as ordinary income in the year the retiree actually receives payments; timing and rules vary by plan type (qualified vs nonqualified). (IRS; Investopedia)
Important: Medicare and retiree health coverage
– Many employers require retirees age 65+ to enroll in Medicare Parts A and B when eligible; often retiree coverage is secondary to Medicare. Exact interactions depend on the employer’s plan and the SPD. (CMS; Investopedia)
Are OPEB guaranteed?
– Not automatically. Whether an employer can alter or terminate OPEB depends on:
– Plan documents and formal written commitments (the SPD and underlying plan instrument).
– Collective bargaining agreements or explicit contractual promises.
– Federal and state law may also impose protections in some circumstances.
– If the SPD or plan document reserves a right to change or terminate benefits, courts and regulators generally treat the benefits as non-guaranteed. If an employer explicitly promises lifetime or fixed-term retiree benefits without reservation, those promises are more likely to be enforceable. (U.S. Department of Labor; Investopedia)
Implications for employers
– Cost and funding: Retiree health and other OPEB can create large, often unfunded liabilities. Employers must decide whether to pay benefits on a pay-as-you-go basis or prefund through trusts.
– Accounting and disclosure: Private employers follow FASB ASC 715 (Compensation—Retirement Benefits—Defined Benefit Plans—General) for reporting retiree benefit obligations; state and local governments follow GASB standards (e.g., GASB 75) which require recognition and detailed disclosure of OPEB liabilities. (FASB; GASB; ASPPA)
– Actuarial work: Regular actuarial valuations are typically required to measure present value of obligations, set contribution policy, and comply with disclosure rules. ASPPA and actuarial resources can guide compliance. (ASPPA)
– Plan design and risk management: Employers may redesign benefits, require retiree contributions, limit eligibility, or offer alternative options (e.g., retiree health savings accounts, Medicare coordination). Effective communication and legal review are essential.
What is the biggest OPEB?
– Retiree medical (health insurance) is generally the largest component of OPEB liabilities for most employers and governments. (Investopedia; GASB)
How deferred compensation works (practical summary)
– Employer agreement defers a portion of current compensation until a future date (retirement, separation, or a fixed date).
– Qualified deferred compensation (e.g., public-sector 457(b)): subject to plan limits and special rules, allows tax deferral until distribution.
– Nonqualified deferred compensation: more flexible on amounts and timing but typically governed by 409A rules (timing of distributions and penalty risk) and is at greater risk of employer insolvency (creditor risk) prior to distribution.
– Taxes are generally due when the participant receives payments (ordinary income); understanding the plan type and distribution triggers is critical. (IRS; Investopedia)
Can your employer cut your retiree health benefits?
– Yes—unless there is a binding written commitment, a collective bargaining agreement, or other legal protection, employers commonly retain the ability to modify or terminate retiree health plans. Employers often include reservation-of-rights language in SPDs and plan documents. If your employer promised lifetime benefits in a formal, irrevocable plan document, the employer may be bound to provide them. Always consult the SPD and any written employment or union agreement. (U.S. Department of Labor; Investopedia)
Practical steps for employees (to protect and understand OPEB)
1. Obtain and read the Summary Plan Description (SPD) and any written plan documents or union agreements. These define your rights and the employer’s reservation-of-rights. (DOL)
2. Confirm whether benefits are “guaranteed” in writing (look for wording about right to change or terminate the plan).
3. If close to Medicare eligibility (age 65), contact the plan administrator and Medicare to understand coordination of benefits and enrollment requirements. (CMS)
4. Review any deferred compensation agreement carefully for distribution triggers, tax timing, and insolvency risk; get professional tax and legal advice if needed. (IRS)
5. Document any explicit employer promises in writing (offer letters, severance agreements, formal plan instruments).
6. Consider how employer-provided OPEB fits into your overall retirement plan—estimate potential out-of-pocket medical costs in retirement and consult a financial planner if necessary.
7. Keep copies of plan communications, enrollment forms, and correspondence in case disputes arise later.
Practical steps for employers (design, funding, and compliance)
1. Perform regular actuarial valuations to quantify OPEB obligations and set funding policy. Use qualified actuaries and follow professional guidance (ASPPA).
2. Decide on a funding strategy (pay-as-you-go vs prefunding in a trust) and document it. Prefunding reduces volatility and improves balance-sheet presentation. (GASB/FASB guidance)
3. Ensure plan documents and SPDs clearly state the terms of the plan, including any employer reservation-of-rights, eligibility rules, and coordination with Medicare.
4. Comply with accounting and disclosure rules: private employers—FASB ASC 715; state/local governments—GASB (e.g., GASB 75). Provide timely and accurate disclosures to stakeholders. (FASB; GASB)
5. Review tax compliance for deferred compensation (IRC 457(b), 409A considerations) and group-term life insurance taxation. Coordinate with tax counsel. (IRS)
6. Communicate changes transparently to employees and retirees; consider transition approaches for plan changes (grandfathering, phased changes, or premium-sharing arrangements).
7. Work with benefits counsel, actuaries, and auditors to design cost-effective and legally compliant retiree benefit programs.
The bottom line
OPEB are employer-provided benefits other than pensions that may continue into retirement—most notably retiree health insurance, life insurance, and deferred compensation. They carry important tax, legal, actuarial, and accounting implications. Retirees should closely review plan documents and understand whether benefits are guaranteed. Employers should plan carefully—actuarially, legally, and financially—to manage costs and reporting obligations.
Selected resources and guidance
– Investopedia — Other Post-Employment Benefits (OPEB)
– U.S. Department of Labor — “Can the Retiree Health Benefits Provided by Your Employer Be Cut?”
– Centers for Medicare & Medicaid Services (CMS) — Retiree Insurance & Medicare guidance
– Internal Revenue Service — IRC 457(b) Deferred Compensation Plans; Group-Term Life Insurance rules
– Financial Accounting Standards Board (FASB) — ASC 715 (Compensation—Retirement Benefits)
– Governmental Accounting Standards Board (GASB) — OPEB standards (e.g., GASB 75)
– American Society of Pension Professionals & Actuaries (ASPPA) — OPEB and actuarial guidance
– National Association of State Retirement Administrators (NASRA) — OPEB resources
If you’d like, I can:
– Review and summarize your employer’s SPD or deferred-compensation agreement (paste relevant excerpts).
– Provide a checklist tailored to your situation (age, Medicare status, union membership, type of deferred-compensation plan).
– Outline accounting or funding options for an employer considering prefunding OPEB.