Addressing FAS 106 Guideline Retirement Liabilities

Post-retirement benefit plans maintained by employers must recognize these liabilities on their balance sheets in accordance with FAS 106 guidelines. Tax advantaged vehicles like a VEBA Trust or an Insurance Continuance Fund (ICF) DEFRA are generally used; they permit employer deduction of employer contributions (over the working lifetime) to a VEBA or ICF provided the plan does not discriminate, excludes key employees, and limits the amount of insurance to $50,000 per retiree. In accordance with DEFRA guidelines, plans that qualify incur no tax on interest gains, and death proceeds are protected under insurance taxation to plan beneficiaries. The fund represents a plan asset which is used as an offset to reduce net reported liabilities on the employer's balance sheet. 

Some employers have expressed interest in removing the liability from their balance sheet through a single premium insurance settlement. This arrangement transfers the liability for a defined group of retirees to an insurance underwriter. The underwriter assumes full risk for mortality and interest. Administration and retiree record-keeping are often transferred as well. The single premium insurance settlement (also known as a "buy-out") retains the same tax treatment for employers, retirees and beneficiaries as exists with VEBA or ICF funding arrangements. The buy-out approach is irrevocable to the employer and represents a guarantee of future payments to retired plan participants and beneficiaries. As such, this approach is often used to segregate liabilities in mergers, acquisitions and divestitures.

Buy-out quotations are interest sensitive, so in addition to normal census information on the defined group of retirees, a specific date when the single premium payment is to be made must be included. Price quotations will be adjusted to reflect a change in funds receipt date if different from the assumption.

For FAS 106 Buy-Out Quotations: Call 1-800-872-6684