Sick-pay, severance pay and short-term, disability benefits may all be affected by AICPA FAS 112; only short-term disability benefits are considered. The logic and aim of FAS 112 is different from those of FAS 106 (post-retirement benefits).
What triggers FAS 112 is any of these three conditions:
- The claim cost per participant is one which increases with attained age.
- The benefit is one which increases with the participant’s length of service.
- The benefit may be paid while the participant is not deemed an employed worker.
The factors create a recognizable liability for the plan sponsor which may be recognized in either of two ways:
The risks may be shifted to an insurer, in which event the post termination liability resulting from the above-cited factors is determined by the actuary of the insurer. In lieu of insurance, an employer-sponsored trust may be used in which event the actuary of the trust, following mandates of AICPA SOP 92-6 will compute the liability.
Where the risk is assumed by the plan sponsor by funding such as a general asset plan, the effects of FAS 106 are directly seen. The liabilities which are recognized by the insurer or trust must be actuarially-determined and reflected on the plan sponsor’s books.