The Benefits of Prefunding Retiree Healthcare in a Section 115 Trust
Setting aside assets in a Section 115 Trust to cover future retiree healthcare or ‘OPEB’ costs is becoming increasingly popular. However, many local governments and educational entities still hold misconceptions about how these trusts operate and the advantages they offer. At PARS, we frequently hear the same concerns.
Here’s a closer look at the most common misconceptions—and the facts that refute them:
Fact:
While setting aside funds in your General Fund shows good intent, it doesn’t offer the same benefits as a dedicated Section 115 Trust because:
- Funds in the Trust are considered “assets” that help to reduce OPEB liabilities and the impact of GASB 75 on financial statements.
- Prefunding in a trust typically enables actuaries to use a higher discount rate, which in turn reduces reported liabilities.
- Funds are legally restricted for OPEB use and cannot be diverted to other purposes.
- Credit rating agencies often view agencies with a Section 115 Trust more favorably, potentially improving ratings and lowering borrowing costs.
Fact:
Section 115 Trusts are flexible. If retiree healthcare benefits are eliminated and no liabilities remain, the trust can be terminated and all remaining assets returned to your agency.
Fact:
Prefunding does not limit your agency’s ability to change or eliminate OPEB benefits in the future.
Fact:
With the PARS OPEB Trust Program, your agency can contribute as much—or as little—as it chooses, whenever it chooses. There are no mandatory contribution schedules.
Fact:
Trust assets can be utilized for any OPEB-related expenses, covering the current year, prior year, and future costs.
Beyond premiums, these assets may also be used for administrative expenses, actuarial valuations, and retiree reimbursements (provided your OPEB policy allows).
Fact:
No matter what amount your agency can contribute, every dollar makes a difference. Even small contributions demonstrate fiscal responsibility and proactive planning.
Actuaries often award those who are actively taking steps to prefund with higher discount rates and credit rating companies view it favorably in rating considerations.
Take Control of Your OPEB Strategy
With 20+ years of experience administering Section 115 Trust programs for public agencies, PARS can help design a flexible, strategic OPEB prefunding program that aligns with your agency’s goals and resources. Contact Our Team to get started.