GASB 45 covers a variety of OPEB (Other Post Employment Benefits) such as retiree medical, dental, and vision benefits. Although retiree medical insurance gets most of the attention and generally has some of the largest liabilities, dental coverage has the potential to create a significant liability too.
Just as with retiree medical benefits, retiree dental coverage can have an implicit subsidy if premiums paid by retirees (often the active employee rates) aren’t high enough to cover the cost of benefits they receive. However, actuarial opinions differ about the magnitude of dental implicit subsidies and one actuarial study found no consensus regarding the steepness of dental aging curves.
Some actuaries believe that dental implicit subsidies are relatively minor and that the cost of coverage for a young employee isn’t that much greater than the cost of coverage for an early retiree. For example, this might be true for a dental plan that excludes major restorative work such as crowns or dentures (which would be a significant cost for retirees). Compared to medical plans, dental premiums are also often quite low and are therefore less likely to create a significant implicit subsidy.
Nevertheless, it is usually best practice to consider the following items before concluding that your retiree dental plan has no GASB 45 liability.
- Direct subsidies. If you directly pay for a portion of retirees’ dental coverage, then you will automatically have a GASB 45 dental liability.
- Plan benefit coverage. There is a greater likelihood of a large implicit subsidy if your plan covers high-cost procedures utilized by retirees, such as major restorative work.
- High retiree participation. Some dental plans can have higher retiree participation rates than the medical plan, especially for post-65 coverage.
If the magnitude of your dental plan’s implicit subsidy is unclear, then it is a good idea to measure it or at least have the actuary estimate its size. This provides the plan sponsor with a clearer picture of the liability’s materiality. Then you and your auditor can decide whether the retiree dental liability is large enough to be included in the GASB 45 valuation. If it is excluded, then the actuary will have to disclose this in the valuation report.