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Medicare Prescription Drug, Improvement and Modernization Act of 2003

February 5, 2004

FASB Staff Position Paper (FSP) Approved

In January 2004 the FASB approved its FASB Staff Position (FSP) Paper on Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act (the Act) of 2003.

The Act introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. The federal subsidy will be 28 percent of beneficiaries’ drug costs between $250 and $5,000. Both public and independent institutions of higher education can be eligible for the federal subsidy. However, because only the FASB addresses accounting treatment for the subsidy, accounting rules discussed below apply to independent colleges and universities.

Because Medicare existed when FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, was issued, it is a governmental program that must be considered in measuring the accumulated post retirement benefit obligation and net periodic postretirement benefit cost. Detailed regulations necessary to implement the Act and specific regulations regarding the documentation requirements and reimbursement mechanism have not been issued. The magnitude of the subsidy for a plan sponsor depends on how many Medicare-eligible retired plan participants choose not to enroll in the voluntary Medicare Part D plan.

Pending final authoritative guidance from the FASB (late 2004), the FSP allows employers with a postretirement heath care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effect of the Act. The election must be made before net periodic postretirement benefit costs for the period that includes the Act’s enactment date are first included in reported financial information. The deferred accounting election requires disclosure.

Institutions making the one-time election to defer accounting for the effect of the new Medicare Act need to disclose that:

  • The Act exists;
  • Any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost do not reflect the effects of the Act;
  • Specific authoritative guidance on accounting for the federal subsidy is pending; and,
  • The issued guidance could require the plan sponsor (employer) to change previously reported information.

Employers that account for the effect of the Act before final FASB guidance is issued would have to show the amount of the benefit as a separate line item on the face of the statement of activities and disclose the following information:

  • The effect of the Act on the reported measure of the accumulated postretirement benefit obligation,
  • How the effect has been or will be reflected in the net postretirement benefit costs of current or subsequent periods,
  • The Act’s effect on estimates of participation rates or per capita claim costs,
  • That specific authoritative guidance on accounting for the federal subsidy is pending, and
  • That the issued guidance could require the sponsor to change previously reported information.

The guidance in the FSP is effective for financial statements with of fiscal years ending after December 7, 2003, i.e., fiscal years ending June 30, 2004 for most institutions.