Determining Your Annual Implicit Rate Subsidy Amount

Key Benefit Concepts Actuarial, OPEB

Now that you have a bit more background on the concept of Implicit Rate Subsidy, how should this amount be determined annually related to your current retiree population?  Since the amount isn’t actually paid to retirees and rather an implicit cost, it can often be missed in the OPEB payments being reported on the financial statements. There are a few key things to consider when going about determining and calculating your annual Implicit Rate Subsidy amount, which we will explore below.

First and foremost, is there an Implicit Rate Subsidy amount being incurred by retirees that requires such a calculation? In other words, are there current retirees continuing coverage on your group medical plan?  If so, and they are being charged the same Single and/or Family premium rate as your active population, an Implicit Rate Subsidy calculation will be required.  If retirees are being rated separately (i.e. if they are charged different premiums than active employees) or if premiums are age-based, this calculation would not be required as their expected costs are already reflected in the rates charged.  Further, if a retiree is Medicare-eligible, their premium rates are adjusted such that the adjusted rates represent the expected cost of coverage, since Medicare is typically primary.  For these Medicare-eligible participants, no Implicit Rate Subsidy would need to be calculated.

Once you’ve determined if an Implicit Rate Subsidy calculation is required, you can move forward with determining the amount needed for reporting purposes. Your OPEB report provided by your actuary should provide some guidance on how to calculate this amount.  In KBC’s reports, a cost-to-value factor is provided on the 30-year payout projection exhibit that should be used for determining your annual Implicit Rate Subsidy amount.  This factor minus one, multiplied by the total retiree premiums on behalf of all non-Medicare-eligible individuals results in the Implicit Rate Subsidy amount for the fiscal year.  Note that the ‘total retiree premiums’ should be the full premium amount regardless of whether it is paid by the employer or paid in full by the retiree.  Further, it’s important to note that this calculation applies only to fully-insured medical plans.  If your medical plan is self-insured, your retiree costs would be based on actual claims, fees and premium experience which will, in essence, capture any ‘Implicit Rate Subsidy’ amount being experienced by your retiree population.

If you have any questions on how to go about determining the amount related to Implicit Rate Subsidy or if you are unsure whether or not a calculation is even required, contact us today!