What Are Other Post‑Retirement Benefits (OPEB)?
Other post‑retirement benefits (often called “other post‑employment benefits” or OPEB) are non‑pension benefits that an employer provides to employees after they retire. Common OPEB include retiree medical and prescription drug coverage, dental and vision plans, life insurance, legal services, tuition credits, and certain deferred‑compensation arrangements. These benefits are distinct from pension distributions and can be paid wholly by the employer, shared with the retiree, or paid entirely by the retiree (Investopedia).
Key Takeaways
– OPEB are non‑pension benefits provided to retirees, most commonly health and life insurance.
– Employers and retirees frequently share cost via premiums, co‑payments, and deductibles.
– OPEB can create material obligations on an employer’s balance sheet and require actuarial valuation and disclosure under accounting rules (ASC 715).
– Employers should manage OPEB with clear design, funding strategy, actuarial analysis, and communication; retirees should understand Medicare coordination and estimate future out‑of‑pocket costs.
Understanding Other Post‑Retirement Benefits
– What they include: retiree health (medical, prescription drugs), dental, vision, life insurance, long‑term care subsidies (rare), tuition credits, legal or other ancillary services, and certain deferred‑compensation plans.
– Why they matter: retiree benefits, particularly healthcare, tend to be more expensive than when employees were younger. If an employer guarantees retiree coverage (or a fixed employer contribution), the employer bears longevity and medical‑cost risk.
– Who offers them: public sector employers, private companies, nonprofits, and other institutions may offer OPEB. Public employers often have large OPEB liabilities because they historically provided generous retiree health benefits (Investopedia).
Cost Drivers and Funding
– Major cost drivers:
– Retiree age and health status: older retirees typically generate higher claims.
– Benefit design: richer benefits (low deductibles, broad networks) cost more.
– Coverage duration: benefits for early retirees (pre‑Medicare) are particularly costly until Medicare eligibility at age 65.
– Healthcare inflation and utilization trends.
– Demographic assumptions: mortality, retirement age, spouse coverage rates.
– Funding approaches:
– Pay‑as‑you‑go: employer pays current retiree claims from operating cash flow—common but can create large annual budget pressure.
– Prefunding via a trust: employer sets aside assets in a dedicated OPEB trust (similar to a pension trust) to match liabilities over time.
– Plan design changes: increase retiree cost sharing (premiums, deductibles), establish eligibility limits, or shift to Medicare‑primary arrangements.
– Buyouts and other risk transfers: lump‑sum buyouts or third‑party annuity purchases to transfer liabilities.
– Disclosure: OPEB obligations and funding status are typically disclosed in the notes to a company’s financial statements and summarized under accounting standards (see next section) (Investopedia).
Accounting, Reporting, and Compliance
– Primary accounting guidance: Companies report OPEB costs and obligations under Accounting Standards Codification (ASC) 715, Compensation—Retirement Benefits (this codified prior FASB statements including Statement No. 158). ASC 715 requires recognition and disclosure of the funded status, actuarial assumptions, and the net periodic benefit cost (FASB; Deloitte).
– Actuarial valuation: Employers generally must obtain periodic actuarial valuations to measure the OPEB obligation. Assumptions include discount rate, healthcare trend rates, mortality, retirement ages, and participation/coverage election rates.
– Disclosures: Financial statement footnotes typically disclose:
– The actuarial present value of projected benefit obligations.
– Plan assets (if any) and funded status.
– Components of net period benefit cost.
– Key discount and health care cost trend assumptions and sensitivity analysis.
– Policy changes and plan amendments.
– Regulatory and public‑sector specifics: Public employers may face additional reporting rules and transparency requirements; for example, many governments disclose OPEB liabilities in CAFR (Comprehensive Annual Financial Report).
Practical Steps for Employers — Designing and Managing OPEB
1. Inventory current OPEB commitments
– Compile plan documents, eligibility rules, historical claims, and current funding status.
2. Obtain an actuarial valuation
– Engage a qualified actuary to measure the liability under ASC 715, update assumptions, and perform sensitivity analysis (healthcare trend, discount rate).
3. Decide funding strategy
– Evaluate pay‑as‑you‑go vs. prefunding into an irrevocable OPEB trust (e.g., Voluntary Employees’ Beneficiary Association (VEBA) trust or other structures).
4. Consider benefit design changes (with legal review)
– Options: raise retiree premium contributions, increase deductibles, restrict eligibility (e.g., service or age requirements), implement Medicare as primary, or convert to defined‑contribution retiree health stipends.
– Ensure changes comply with employment contracts, collective‑bargaining agreements, and applicable laws (ERISA, state law).
5. Explore risk‑transfer solutions
– Liability buyouts, annuity purchases, stop‑loss reinsurance for pre‑Medicare cohorts.
6. Improve governance and budgeting
– Establish governance for OPEB funding decisions and integrate expected OPEB costs into long‑range financial planning.
7. Communicate with stakeholders
– Clear, timely communication with employees and retirees about current benefits, proposed changes, and timelines.
8. Monitor and update
– Reassess actuarial assumptions annually (or as required), rebalance funding strategy, and monitor healthcare cost trends.
Practical Steps for Retirees and Employees Approaching Retirement
1. Understand your plan documents
– Get a copy of the retiree‑benefits policy or plan summary that explains eligibility, costs, and covered services.
2. Determine Medicare coordination
– Know how employer coverage interacts with Medicare:
– Most retirees are eligible for Medicare at age 65; employers often coordinate benefits to make Medicare primary for those beneficiaries.
– Check whether employer plan requires enrollment in Medicare Parts A and B and whether it offers Medicare Advantage or retiree drug plans.
– See Medicare.gov for enrollment rules and timelines (Medicare.gov).
3. Estimate future out‑of‑pocket costs
– Project premiums, co‑pays, deductibles, and uncovered services. Consider how long you’ll be on employer coverage before Medicare starts.
4. Review alternatives
– Compare employer retiree coverage to options on the individual market, COBRA continuation, or Medicare plans (Part C/D and Medigap).
5. Ask about changes
– Confirm whether benefits are guaranteed or subject to change, whether they were bargained in a contract, and whether there are subsidies or caps.
6. Plan for contingencies
– If the employer is underfunded or facing financial stress, consider contingency plans (e.g., alternative coverage sources).
Managing the Cost and Risk — Practical Techniques
– Prefund when feasible: Prefunding via a dedicated trust reduces volatility and can be more cost‑effective over time.
– Implement cost control measures: Step‑increased retiree contributions, tiered benefits by hire date, and wellness programs to reduce medical claims.
– Use Medicare integration strategies: Coordinate retiree plans with Medicare to reduce employer exposure for post‑65 retirees.
– Hedging and insurance: Consider stop‑loss insurance for catastrophic claims or annuities to settle portions of liability.
– Negotiate in labor contracts: If benefits are part of collective bargaining, use the contract process to define retiree benefit cost‑sharing and changes.
Checklist for Employers (quick)
– Do you have an up‑to‑date plan document and benefits summary?
– Have you completed a recent actuarial valuation under ASC 715?
– Is there a written funding policy for OPEB?
– Have you considered prefunding via a trust or VEBA?
– Are retiree benefits coordinated with Medicare for post‑65 retirees?
– Do your financial statements adequately disclose OPEB obligations and assumptions?
– Have you evaluated plan design changes and legal/contractual constraints?
Checklist for Employees/Retirees (quick)
– Do you have the retiree benefits summary in writing?
– When will your Medicare eligibility begin and how does it interact with employer benefits?
– What monthly premiums and expected out‑of‑pocket costs should you budget for?
– Are there alternatives if employer coverage changes or ends?
Conclusion
OPEB can represent significant, long‑term obligations for employers and meaningful income‑replacement and risk‑mitigation items for retirees. Employers should treat OPEB as an integral part of total compensation and financial planning—using actuarial analysis, clear funding strategies, and careful design—to manage cost and disclosure obligations. Employees and retirees should actively review how employer benefits coordinate with Medicare, estimate future costs, and confirm the stability and terms of promised benefits.
Sources and Further Reading
– Investopedia — Other Post‑Retirement Benefits: https://www.investopedia.com/terms/o/otherbenefits.asp
– Medicare.gov — Get Started With Medicare: https://www.medicare.gov/basics/get-started-with-medicare
– Financial Accounting Standards Board (FASB) — ASC 715 and Statement No. 158 (see fasb.org for official guidance)
– Deloitte — ASC 715, Compensation—Retirement Benefits (implementation and insights): https://www2.deloitte.com
– American Society of Pension Professionals & Actuaries (ASPPA) — resources on ASC 715 and actuarial processes: https://www.asppa.org
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.