Retiree Medical Benefits Face Changes Due to De-Risking and Cost Control Efforts
A recent mortality study conducted by the non-profit Society of Actuaries indicates that life expectancies for both women and men have increased by roughly two years since 2000. To be precise, the study showed that the average 65-year-old woman in the U.S. is expected to live 88.8 years, up from 86.4 in 2000. Life expectancy for the average U.S. man age 65 is now 86.6 years, up from 84.6 in 2000.
While this may be good news for retirees and their families, it’s not necessarily good news for their retiree medical benefits. Also known as “post-retirement health insurance,” these benefits are typically employer-sponsored benefit plans for retired workers 55 and older.
Many baby boomers covered by retiree medical plans are relying on future employer-paid medical benefits, but are likely to be disappointed to learn that these benefit plans can be changed or terminated. ERISA-governed benefits plans typically contain a “reservation of rights” provision allowing the plan sponsor to change or terminate all or parts of the plan.
Escalating health care costs and increased risk concerns have forced many employers to reduce or eliminate retiree medical benefits. In a recent survey titled “2015 Survey on Retiree Health Care Strategies,” Towers Watson uncovered additional factors influencing employers to reconsider their approach to retiree medical benefits, including:
• Increased financial reporting requirements for benefit-related balance sheet liabilities
• Ongoing administrative expenses
• ERISA obligations, such as reporting, disclosure, and fiduciary responsibilities
• Lack of an efficient funding vehicle
Traditionally, employers have been able to control expenses and risk by such cost-cutting measures as, for example, shifting costs to retirees, limiting or ending benefits for new hires, capping the company subsidy, and changing retiree eligibility requirements. Employers are finding, however, that these conventional actions are still falling short of the amount of cost and risk control needed.
Passage of the Patient Protection and Affordable Care Act has created new ways for employers to meet the retiree medical needs, while still controlling cost and minimizing risk. For Medicare-eligible retirees, for example, nearly 80% of employers are either using or considering using the services of a private Medicare exchange to aid retirees with their individual coverage.
Additionally, new insurance products now allow employers to “de-risk” heir balance sheet by transferring the retiree medical benefit liability to an insurance company through the purchase of a group annuity. The annuity then allows retirees to receive tax-free funding for life, which they then can use for their medical benefits.
For pre-Medicare retirees, many employers have determined that the individual plan market and public health insurance exchanges will provide a functional alternative to employer-sponsored coverage. Towers Watson reports the following as part of their survey results:
• Eight percent of retiree medical plan sponsors are confident in the public exchanges as a viable alternative for 2015, with the confidence level rising to 35% by 2017.
• Fifty-three percent of employers surveyed said they will reassess their current approach to providing pre-Medicare health benefits by 2017 to take into account public insurance exchanges and federal subsidies.
• Seventeen percent of employers said they would consider ending coverage for pre-Medicare retirees altogether. When doing so, they would provide access via a private exchange which would then act as a coordinator to the public exchanges.
With public and private exchanges simplifying access to, and easing the process of buying individual plans, many employers will evaluate alternative retiree medical benefit strategies that will controls costs while still meeting retiree medical needs.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.