Implicit Rate Subsidy- Determining an Assumption

Key Benefit Concepts Actuarial, OPEB

Implicit Rate Subsidy – Determining an Assumption

Since Implicit Rate Subsidy (IRS) from continued medical coverage is considered an OPEB that requires valuation (per GASB), only offering the the ability to self-pay to continue medical coverage in retirement would technically be considered an OPEB even though the individual is paying the full premiums required. In these cases, the only OPEB is the IRS which may or may not amount to a material amount requiring valuation. There are a number of important factors that are considered when setting an assumption related to future retiree self-pay participation, which in turn affects the determined liabilities.

Of course, when the only benefit is the ability to self-pay for continued medical coverage, it is unreasonable to assume all future retirees will elect to participate. Typically, we can look at current and past retiree self-pay participation to determine a reasonable self-pay assumption for future participants, wherein only a certain percentage of active employees are assumed to self-pay in retirement. From past participation, we can also get an idea of the duration retirees are continuing on the group medical plan (if they are allowed to remain on beyond COBRA).  Other factors one might consider include reviewing the current level of premiums as compared to what a retired participant may be able to find in the marketplace for coverage as well as whether or not a benefit is provided that could be used to cover the cost of such continued coverage (i.e., a premium on HRA). All such factors can impact the overall liabilities determined.

A higher participation assumption will ultimately result in a larger Total OPEB Liability and vice versa.  That said, a liability solely in the form of Implicit Rate Subsidy resulting from self-paying retirees may in some instances result in an amount that is immaterial due to the selected assumptions. However, both the self-pay assumption and materiality threshold vary for each respective client.  Therefore, it’s best to provide your actuary with all necessary information (both current and past history) so that they are able to determine a reasonable assumption in regards to the expectation of self-paying participants on your group medical plan.