ASC 965: Accounting for Health and Welfare Plans

Accounting Standards Codification (ASC) 965 directs the financial reporting for health and welfare benefit plans. Its objective is to ensure these plans provide consistent financial information, allowing stakeholders to assess a plan’s ability to meet its benefit commitments. The standard creates a uniform method for presenting a plan’s financial health and activities over a reporting period.

Scope and Applicability of ASC 965

ASC 965 applies to arrangements that provide benefits to employees and their beneficiaries. A health and welfare benefit plan is an employer-established agreement to provide benefits like medical, dental, vision, and life insurance. These plans can also cover disability, unemployment, vacation, and apprenticeship training. The standard governs these plans whether they are funded through a trust, an insurance contract, or paid from the employer’s general assets.

The guidance distinguishes between two types of health and welfare plans: defined contribution and defined benefit. A defined contribution plan maintains individual accounts for each participant, and benefits are based on the amounts contributed to that account. An example is a health savings account (HSA) where an employer and employee contribute funds for future medical expenses.

A defined benefit health and welfare plan promises a specific benefit not directly tied to individual contributions. For instance, a plan that promises to provide postretirement medical coverage to employees who meet certain eligibility requirements is a defined benefit plan. The accounting for these plans is more complex because it involves estimating the future cost of the promised benefits.

Required Financial Statements

The financial reporting for health and welfare plans under ASC 965 centers on two primary statements. The Statement of Net Assets Available for Benefits functions like a balance sheet, presenting a snapshot of the plan’s financial position at a specific point in time. It details the plan’s assets, such as cash, investments, and contributions receivable, as well as its liabilities for benefits and expenses.

The Statement of Changes in Net Assets Available for Benefits is similar to an income statement and shows the flow of resources over a period. It reconciles the beginning and ending balances of the net assets available for benefits. Additions to the plan’s assets come from employer and participant contributions and income from investments like interest and dividends.

Deductions from the plan’s assets are also detailed on this statement. These include the direct payment of benefits to participants for medical claims or insurance premiums. Other deductions include administrative expenses to operate the plan, such as fees for record-keeping, legal services, or investment management.

Key Measurement and Recognition Principles

Plan Investments

ASC 965 requires all plan investments to be reported at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. This applies to all investments held by the plan, including stocks, bonds, and mutual funds. The change in the fair value of investments is reported in the Statement of Changes in Net Assets Available for Benefits.

Contributions

Employer and participant contributions are a primary source of a plan’s assets and must be recognized when they are due. This means recording a contribution receivable for amounts earned by employees but not yet paid to the plan. For participants, contributions made through payroll deductions should be recorded as receivable if they have been withheld but not yet remitted to the plan.

Benefit Obligations

Accounting for benefit obligations is a complex area within ASC 965. A significant obligation for many health plans is for claims incurred but not reported (IBNR). This is an estimate of the liability for eligible services that have been rendered but for which claims have not yet been submitted. Determining the IBNR liability often requires actuarial estimates based on historical claims data and processing lags.

Other obligations include premiums due to insurance companies and accumulated eligibility credits. These credits arise when participants can maintain coverage during periods of unemployment by using credits earned during active employment. The plan must recognize a liability for the expected cost of future benefits related to these credits. For defined benefit plans, a significant obligation relates to postretirement benefits, which is the actuarially determined present value of future benefits promised to retirees.

Required Financial Statement Disclosures

The notes accompanying the financial statements provide context and detail. ASC 965 mandates several disclosures to ensure transparency for plan participants.

• A general description of the plan must be provided, outlining the benefits offered and the rules for participant eligibility.
• The plan’s funding policy is another required disclosure, including the sources of funding and the method for determining contribution amounts.
• Details about the plan’s investments are required, including the fair value of investments grouped by general type. The plan must also provide information about its benefit obligations and the methods and assumptions used to determine them.
• Any significant events affecting the plan must be disclosed, such as material plan amendments made during the year. Transactions with related parties, like the plan sponsor or administrator, must also be described.