ASC 965: Incurred Claims Journal Entries for Health and Welfare Benefit Plans

Posted In | ASC Education | Gridlex Academy

Health and welfare benefit plans are an essential part of employee compensation packages, providing benefits such as medical, dental, and life insurance coverage. The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 965, "Plan Accounting - Health and Welfare Benefit Plans," governs the accounting for these plans. One of the key aspects of ASC 965 is the recognition of incurred claims. This article will explore the guidelines for recognizing incurred claims under ASC 965 and provide examples of journal entries to illustrate the accounting process for health and welfare benefit plans.

 

ASC 965 Overview

ASC 965 provides guidance on the accounting and reporting requirements for health and welfare benefit plans, including the recognition, measurement, and disclosure of the plan's financial position and changes in its financial position. The primary objective of ASC 965 is to ensure consistent and transparent financial reporting for health and welfare benefit plans.
 

Key Elements of Incurred Claims under ASC 965

 

1. Incurred claims: The total cost of claims that have been incurred by the plan during a given period, regardless of whether they have been paid or are still outstanding.

 

2. Claims payable: The liability for unpaid claims that have been incurred by the plan.

 

Journal Entries for Incurred Claims Transactions

To illustrate the accounting process for incurred claims under ASC 965, let's consider a hypothetical health and welfare benefit plan that incurs claims of $500,000 during the year, out of which $400,000 has been paid, and $100,000 remains outstanding at the end of the year.

 

Here's how the journal entries for these incurred claims transactions would look:
 

Record incurred claims:

    Dr. Benefit Claims Expense $500,000

    Cr. Claims Payable $500,000
 

Record payment of claims:

    Dr. Claims Payable $400,000

    Cr. Cash $400,000
 

At the end of the year, the remaining $100,000 of unpaid claims will be reported as a liability (Claims Payable) on the plan's balance sheet.

ASC 965 provides a standardized framework for accounting for incurred claims in health and welfare benefit plans, ensuring consistency and transparency in financial reporting. By recognizing incurred claims as an expense and a corresponding liability, plan sponsors can accurately reflect the plan's financial position and changes in its financial position on their financial statements. Understanding the journal entries involved in incurred claims transactions is crucial for health and welfare benefit plan sponsors to maintain accurate financial records and comply with accounting standards.