ASC 715 Compensation—Retirement Benefits

This Subtopic provides guidance on defined benefit pension accounting for an employer that offers pension benefits to its employees. This Subtopic focuses on an employer’s accounting for a single-employer defined benefit pension plan.

Many of the provisions in this Subtopic are the same as or are similar to the provisions of Subtopic 715-60. Consequently, the guidance provided in that Subtopic may be useful in understanding and implementing many of the provisions of this Subtopic. However, there are differences between the specific requirements of the two Subtopics, and therefore the specific guidance in one Subtopic shall not be used to override guidance of the other.

A postretirement benefit is part of the compensation paid to an employee for services rendered. In a defined benefit other postretirement plan, the employer promises to provide, in addition to current wages and benefits, future benefits during retirement.

Generally, the amount of those benefits depends on the benefit formula (which may include factors such as the number of years of service rendered or the employee’s compensation before retirement or termination), the longevity of the retiree and any beneficiaries and covered dependents, and the incidence of events requiring benefit payments (for example, illnesses affecting the amount of health care required).

In most cases, services are rendered over a number of years before an employee retires and begins to receive benefits or is entitled to receive benefits as a need arises. Even though the services rendered by the employee are complete and the employee has retired, the total amount of benefits the employer has promised and the cost to the employer of the services rendered are not precisely determinable but can be estimated using the plan’s benefit formula and estimates of the effects of relevant future events.

Although this Subtopic applies to all defined benefit postretirement plans other than pensions, postretirement health care benefits are likely to be the most significant in terms of cost and prevalence, and certain of the issues that arise in measuring those benefits are unique.

Many of the provisions in this Subtopic are the same as or similar to the provisions of Subtopic 715-30. Consequently, the guidance provided in that Subtopic may be useful in understanding and implementing many of the provisions of this Subtopic. However, there are differences between the specific requirements of this Subtopic and that Subtopic, and therefore the specific guidance in one Subtopic shall not be used to override guidance of the other.

This Subtopic provides guidance on the accounting and reporting of defined contribution plans.

An employer’s present obligation under the terms of a plan is fully satisfied when the contribution for the period is made, provided that costs (defined contributions) are not being deferred and recognized in periods after the related service period of the individual to whose account the contributions are to be made.

In a postretirement health plan, an employer may establish individual postretirement health care accounts for each employee, each year contributing a specified amount to each active employee’s account. The balance in each employee’s account may be used by that employee after the employee’s retirement to purchase health care insurance or for other health care benefits. Rather than providing for defined health care benefits, the employer is providing a defined amount of money that may be used by retirees toward the payment of their health care costs.

This Subtopic provides guidance on the accounting and reporting of multiemployer pension and other postretirement benefit plans. For purposes of this Subtopic, a multiemployer plan is a pension plan or other postretirement benefit plan to which two or more unrelated employers contribute, usually pursuant to one or more collective-bargaining agreements.

In a multiemployer setting, eligibility for benefits is defined by the plan; retired employees continue to receive benefits whether or not their former employers continue to contribute to the plan.

However, in a multiemployer postretirement benefit plan, plan participants not yet eligible for benefits may lose accumulated postretirement benefits if their current or former employer withdraws from a plan unless they take or have a job with other employers who participate in the plan.

While the postretirement benefit plan may have the option of canceling the accrued service credits that apply toward the required service, within the bargaining unit, of plan participants who were employed by a withdrawing employer and who become or are employed by another participating employer, that rarely occurs because of the difficulty of matching employees to specific employers. For example, in certain industries, an employee may work for more than one employer in a single day and different employers on different days, making it difficult to associate any portion of that employee’s past service with a specific employer.