JP Morgan Chase 2005 Annual Report Download - page 98

Notes to consolidated financial statements
JPMorgan Chase & Co.
96 JPMorgan Chase & Co. /2005 Annual Report
Note 6 – Pension and other postretirement
employee benefit plans
New U.S.-based postretirement plans were introduced in 2005 after the
Bank One plans were merged into the heritage JPMorgan Chase plans as
of December 31, 2004.
The Firm’s defined benefit pension plans are accounted for in accordance with
SFAS 87 and SFAS 88. The postretirement medical and life insurance plans are
accounted for in accordance with SFAS 106.
The Firm uses a measurement date of December 31 for pension and other
postretirement employee benefit plans. In addition, as of August 1, 2005, the
U.S. postretirement medical and life insurance plan was remeasured to reflect
a mid-year plan amendment and the final Medicare Part D regulations that
were issued on January 21, 2005. For the Firm’s defined benefit pension plan
assets, fair value is used to determine the expected return on pension plan
assets. For the Firm’s other postretirement employee benefit plan assets, a
calculated value that recognizes changes in fair value over a five-year period
is used to determine the expected return on other postretirement employee
benefit plan assets. Unrecognized net actuarial gains and losses and prior
service costs associated with the U.S. defined benefit pension plan are amor-
tized over the average future service period of plan participants, which is
currently 10 years. For other postretirement employee benefit plans, unrecog-
nized gains and losses are also amortized over the average future service
period, which is currently 8 years. However, prior service costs associated with
other postretirement employee benefit plans are recognized over the average
years of service remaining to full eligibility age, which is currently 6 years.
Defined Benefit Pension Plans
The Firm has a qualified noncontributory U.S. defined benefit pension plan
that provides benefits to substantially all U.S. employees. The U.S. plan employs
a cash balance formula, in the form of salary and interest credits, to determine
the benefits to be provided at retirement, based upon eligible compensation
and years of service. Employees begin to accrue plan benefits after completing
one year of service, and benefits generally vest after five years of service. The
Firm also offers benefits through defined benefit pension plans to qualifying
employees in certain non-U.S. locations based upon eligible compensation
and years of service.
It is the Firm’s policy to fund the pension plans in amounts sufficient to meet
the requirements under applicable employee benefit and local tax laws. The
Firm did not make any U.S. pension plan contributions in 2005 and based
upon the current funded status of this plan, the Firm does not expect to make
significant contributions in 2006. In 2004, the Firm made a cash contribution
to its U.S. defined benefit pension plan of $1.1 billion, funding the plan to the
maximum allowable amount under applicable tax law. Additionally, the Firm
made cash contributions totaling $78 million and $40 million to fully fund the
accumulated benefit obligations of certain non-U.S. defined benefit pension
plans as of December 31, 2005 and 2004, respectively.
Postretirement medical and life insurance
JPMorgan Chase offers postretirement medical and life insurance benefits
to certain retirees and qualifying U.S. employees.These benefits vary with
length of service and date of hire and provide for limits on the Firm’s share of
covered medical benefits. The medical benefits are contributory, while the life
insurance benefits are noncontributory. As of August 1, 2005, the eligibility
requirements for U.S. employees to qualify for subsidized retiree medical
coverage were revised and life insurance coverage was eliminated for active
employees retiring after 2005. Postretirement medical benefits also are
offered to qualifying U.K. employees.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the “Act”) was enacted. The Act established a
prescription drug benefit under Medicare (“Medicare Part D”) and a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. The Firm has deter-
mined that benefits provided to certain participants are at least actuarially
equivalent to Medicare Part D and has reflected the effects of the subsidy in
the financial statements and disclosures retroactive to the beginning of 2004
(July 1, 2004 for Bank One plans) in accordance with FSP SFAS 106-2.
JPMorgan Chase’s U.S. postretirement benefit obligation is partially funded with
corporate-owned life insurance (“COLI”) purchased on the lives of eligible
employees and retirees. While the Firm owns the COLI policies, COLI proceeds
(death benefits, withdrawals and other distributions) may be used only to
reimburse the Firm for net postretirement benefit claim payments and related
administrative expenses. The U.K. postretirement benefit plan is unfunded.
The following tables present the funded status and amounts reported on the
Consolidated balance sheets, the accumulated benefit obligation and the
components of net periodic benefit costs reported in the Consolidated state-
ments of income for the Firm’s U.S. and non-U.S. defined benefit pension and
postretirement benefit plans: