Allowable Defined Benefit Pension Plan Costs

A Potentially Overlooked Medicare Cost Report Calculation

Denis Houle, Senior Manager, and Janet Hodgdon, Director, Healthcare Consulting Practice
December 2014

On August 18, 2011, The Centers for Medicare and Medicaid Services (CMS) published the Medicare inpatient prospective payment system (IPPS) final rule in the Federal Register.  Within this document, CMS finalized two distinct policies related to the measurement of defined benefit pension plan costs (pension costs) for both Medicare cost-finding and the wage index.  These policies are effective for cost reporting periods beginning on or after October 1, 2011.  Many hospitals have adopted the new policy in respect to the wage index calculations but have not also updated the Medicare cost report allowable cost calculations.  This article specifically addresses pension costs for cost finding purposes.  It is applicable to both acute and critical access hospitals, as well as other provider types.

Pension Costs for Cost-Finding Purposes

Pension costs for cost-finding purposes are no longer based on actuarially determined measurements and are now on a cash basis as opposed to an accrual one.  Generally accepted accounting principles (GAAP) do not apply in this instance.

PRM-1, § 2142.5 states the current period pension cost is the sum of the provider contribution payments made to a defined benefit pension plan during the current cost reporting period plus any carryforward contributions, such total for the current year may not exceed the pension cost limitation.  Basically, allowable pension cost for cost-finding purposes will equal the actual cash basis contribution deposits (net of any that were reflected as a prior cost report period cost) plus any carryforward contributions, subject to a limitation.

The current period pension cost may not exceed 150% of the provider’s average contribution payments made to the plan during the three consecutive cost reporting periods out of the last five consecutive cost reporting periods (ending with the current cost reporting period) which produce the highest average.

An example of the limitation calculation is as follows for a provider with a September 30, 2012 year end:

Example from Federal Register

                                                                     
To Record Payments3 yr Average Payment 150% of Highest 3 Year
10/1/11-9/30/122,000,0003,666,667
10/1/10-9/30/115,000,0004,666,667
10/1/09-9/30/104,000,0005,000,000 7,500,000
10/1/08-9/30/095,000,000
10/1/07-9/30/086,000,000

As is evident, the three year average calculation from years three through five (2008-2010) yields $5,000,000 and sets the upper limit at $7,500,000.  Therefore, in 2012, this provider would have allowable pension costs of $2,000,000 because the actual contribution is less than the calculated limit.

These calculations can be complex and should be carefully reviewed for cost finding purposes.  If you would like to learn more, please contact Denis Houle or Janet Hodgdon.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.