As an increasing number of household name corporations like IBM, General Electric, DuPont, Caterpillar, and Time-Warner move retirees off of company-sponsored health insurance and on to Obamacare exchanges, accounting experts are warning companies to consider the accounting consequences.

PwC published an alert from its human resources accounting advisory practice to let companies know if they are considering a similar move to manage their overall health care costs, the accounting consequences may hit profit and loss in some surprising ways. “You have to make sure you are thinking about the accounting, as this could change your P&L,” says Nicole Berman, a director at PwC. “It's a facts-and-circumstances analysis for each company.” 

Terminating health insurance benefits for retirees could lead to negative plan amendments, PwC says, which are required under accounting standards when a company reduces a benefit that has already been earned by plan participants based on past services. If a company can reasonably expect to face litigation over that decision, then it must consider the possibility of reversing such amendments in the future and whether to disclose possible liabilities down the line associated with such litigation.

In addition, companies should consider the curtailment, or the elimination of the accrual of defined benefits for some or all future service for a significant number of active employees. If active employees won't be getting the benefit as retirees, that means some of that accrued benefit must be measured as a net gain or loss when the plan is amended. Post-retirement benefit guidance provides detailed rules on how the gain or loss associated with such a curtailment is determined, PwC says. If the company is replacing the insurance with a subsidy that will enable retirees to purchase insurance on an exchange, that may constitute a defined benefit plan that must be accounted for accordingly.

The shift away from employer-sponsored health care for retirees is synonymous with the corporate trend to move away from defined benefit pension plans toward defined contribution plans, where individuals take on increased responsibility for the management of their benefits. “As companies make these changes they should consider the substance of the change and the related accounting implications,” PwC warns.

A Towers Watson survey in 2013 indicated 25 percent of companies expect to shift retirees off of employer sponsored health coverage in 2014, 44 percent expect to be there in 2015. Economists are predicting an increasing number of companies will move in the coming year to shift all employees off of corporate plans.

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