Accounting implications of the Affordable Care Act

Accounting

The Affordable Care Act (a.ka. Obamacare) has created some interesting implications for financial reporting. The issues revolve around the determination of benefits, particularly when companies opt to put their employees through Obamacare insurance exchanges where they had previously been on a company plan. The Affordable Care Act was signed into law in 2010, and reshaped the health care insurance industry in particular. With the creation of health care insurance exchanges, competition in health insurance was increased and some of the information asymmetry in the health care market decreased -- though not nearly enough for the market to be considered competitive.

One of the implications for accountants of the Affordable Care Act is that many employers have taken the opportunity to move their employees off of employer-sponsored plans and onto the exchanges as a means of reducing the cost of their benefits programs. As the ACA implementation process accelerates, the accounting implications are becoming more apparent. This paper will discuss some of those. In particular, there are several new ways that liabilities can arise under the ACA, usually with respect to retiree benefit plans. This new liabilities will need to be recorded, but there is also the possibility that the FASB will need to become involved in emerging issues, since the implementation of the ACA has just begun and its accounting implications are not yet clear.

Whitehouse (2014) notes that negative plan amendments might be required, when a company reduces a benefit that has already been earned. There may be litigation involved in some circumstances. For some workers, the insurance would be subsidized by the taxpayers, which improves the attractiveness of the idea for employers (Nussbaum, 2013). There had already been a decrease in retiree health care coverage as the result of FAS 106. FASB Statement No. 158 further strengthened the provisions regarding the reporting of underfunded or overfunded retirement benefits. Health care benefits are particularly unclear given the number of variables at work. For organizations with defined benefit plans, offloading their health care not only reduces a key element of complexity in their accounting, but a key long-term liability from their balance sheet as well. When the company needs to account for the decline in value of the plans, that could have an impact on that company's income statement, because of the clarity demanded of companies with respect to retirement benefits valuation under FASB Statement No. 158.

Companies that are keeping employees on in-house retiree health plans will also face changes to their accounting as the result of the Affordable Care Act. There are several implications noted. The first is that the changes to Medicare Advantage will affect the way that risk is pooled and calculated, resulting in actuarial changes that will be reflected on the balance sheet as expected future obligations change. There are also changes regarding accounting for reinsurance as well (Kastrup, 2013).

The FASB has also specifically addressed some other aspects of the ACA directly. Loss contingencies were addressed in 2010 with FASB ASC 450, wherein loss contingencies need to be reported, along with best estimations of their magnitude and likely timing (FASB, 2010). The ACA comes with an excise tax that creates a liability for many companies, in particular ones that prefer to move their employees onto the health exchanges rather than maintain coverage. This excise tax can be reasonably estimated, and this creates the need for internal controls within companies to mitigate this liability (CalCPA, 2014).

Whitehouse (2014) also notes that when company reduce a benefit that has already been promised to their employees -- as is certainly the case with retiree health benefits, this might open those companies up to legal action. Class action suits are likely, as retirees forced to look at other alternatives may choose legal action. While the company might reasonably determine that any settlement is likely cheaper than continuing to provide this benefit, the company also has to understand that if the threat of a lawsuit is real, and can approximately be quantified, that it creates a reporting obligation under ASC 450 -- this is a foreseeable liability that must be recorded. That will have a negative impact on the profits of the company, as the liability will need to be reported before it is even realized, as a foreseeable future expense. Certainly, should one or two such lawsuits be successful, the FASB will have no choice but to clarify that such legal risks need to be reported under ASC 450.