(See my article in the CPA Journal )
The Department of Labor (DOL) has decided to end its nonenforcement of SOP 92-6, and to let the accounting profession set accounting standards without the confusion of conflicting DOL enforcement (or nonenforcement) policies.
The SOP changed accounting requirements for welfare plans, to require the measurement and reporting of the lifetime cost of benefits promised to retirees.
Issued in 1992, it was phased in for single employer plans for years beginning after 19921994, and was effective for multiemployer plans for plan years beginning after December 15, 1995.
When enough multiemployer plans complained about the cost and burden of adopting the SOP, DOL announced a "proposed nonenforcement policy," which, in effect, allowed multiemployer plans to ignore the SOP without risking DOL rejection of their Form 5500. Initially, the nonenforcement covered the 1996 and 1997 plan years. DOL then extended the nonenforcement policy to the 1998 plan year. Now, in announcing its graceful exit from the accounting standards-setting arena, DOL has allowed another year of grace period: The nonenforcement policy will extend to the 1999 plan year. After that, plan administrators beware: DOL is threatening rejection for plan years beginning on or after January 1, 2000, if failure to comply with the SOP results in a material qualification of the accountants' report on the financial statements. The nonenforcement only applied to multiemployer plans; for all other plans, the SOP is already required.
Background
The SOP was issued by the AICPA in order to improve accounting standards for welfare benefit funds. It requires plans to measure the actuarial cost of providing welfare benefits to retirees and to report that cost over the working lives of the participants.
In adopting the SOP, plans remove all benefit liabilities from their balance sheet, which causes most plans' net assets available for benefits to be much larger than the net assets previously reported. The benefit liabilities are now reported on two new parts of the financial statement, the statement of benefit obligations and the statement of changes in benefit obligations. Under the SOP, benefit obligations include liabilities such as those amounts previously reported as benefits payable, accumulated eligibility, and benefits incurred but not reported. In addition, benefit obligations include a portion of the cost of postretirement benefits. Postretirement benefits are computed using actuarial assumptions such as mortality, turnover, medical cost inflation rates, and discount rates. Given the high cost of medical care, postretirement medical benefits can represent a very large amount: Plans with 2,500 participants can have a postretirement benefit obligation of $50 million. Very often, total benefit obligations far exceed the net assets available for benefits.
Plan administrators (and others) complained to DOL that complying with the SOP was extremely costly, both in actuarial fees and in administrative burdens. They complained that the information was not meaningful, and would not be used in running the plans. Concerns were expressed that huge obligations in excess of assets might cause plans to cut back on benefits and that reporting these huge obligations might cause Congress to require their funding. Furthermore, there were fears that reporting these obligations would make such postretirement benefits vest, so that plans might not be permitted to reduce benefits at a later date.
In announcing it was abandoning nonenforcement, DOL acknowledged the questions raised by the multiemployer community about the usefulness of the SOP's required disclosures. It is encouraging the AICPA, as well as FASB, to "work with the multiemployer community to develop accounting methodologies for assessing postretirement benefit obligations to produce useful and meaningful financial information" for plan fiduciaries, participants, and beneficiaries, and DOL.
Observations
The information required by the SOP is already useful and meaningful financial information. Concerns about vesting should be addressed in plan documents, including the summary plan descriptions, and in the notes to the financial statements. The calculations do not have to be so complex, costly, and burdensome: I have written software that simplifies the calculations by focusing on only significant plan features. And benefit cutbacks? Unfortunately, when trustees see the lifetime cost of benefits offered, they will likely feel an obligation to choose between some measure of funding or cutbacks. These are tough choices, but that's why being a fiduciary is a tough job. My guess is that plans will shift more cost to retirees through higher deductibles, co-pays, and buy-ins.
What Next?
Plans that did not adopt SOP 92-6, based on DOL's temporary nonenforcement policy, will be required to adopt the SOP for 2000 plan year reporting. That means comparative financial statements for 2000 and 1999. And, to report on the change in benefit obligations during 1999, a calendar year plan will have to measure the obligation at January 1, 1999. In other words, SOP 92-6 calculations must be prepared now in order to comply by January 1, 2000.
