Employers are increasingly considering shifting retirees out of their health plans and into Medicare because of the Patient Protection and Affordable Care Act. But plenty of hurdles stand in the way.
Aon Hewitt’s latest retiree health care survey revealed, perhaps unsurprisingly, that more than 60 percent of employers are reassessing their long-term retiree health strategies because of the PPACA.
Aon said it found that more than a quarter of companies would consider a retiree health care “settlement strategy” for all or a portion of their retiree group, “if the market environment could support it on a cost-effective basis.”
The survey was designed “to understand plan sponsors’ current thinking and future expectations with respect to U.S. retiree health care strategies, approximately 30 months after the passage of federal health care reform.”
The data reflected an ongoing trend toward reducing or eliminating retiree health care coverage, which generally began in the early 1990s.
But now, more change is expected because, as Aon Hewitt noted, “under the new law, employer-sponsored welfare plans that cover both actives and retirees are subject to new group insurance market reforms, such as the extension of dependent coverage to age 26 and no lifetime-dollar limits on essential health benefits.”
“About half of plan sponsors have stand-alone retiree health care plans and can avoid the new group insurance market reforms for their retiree populations,” the report said. “Going forward, more plan sponsors may choose to split their legal plans in order to exempt retiree-only plans from any new group insurance market requirements that may be introduced in the future.”
Avoiding the group market will, of course, mean shifting these retirees into Medicare.
But that’s not as easily done as it might sound.
Aon retirement actuary Milind Desai said the obstacles fall into three basic categories: tax, legal and market.
Employer-provided health benefits for retirees, said Desai, can be tax-free to employees and retirees.
“(But) when you convert out of a group health model and provide cash benefits in some form,” said Desai, “those benefits are subject to tax.”
As a result, he said, “to provide comparable value, (employers) need to consider the tax consequences and potentially gross up the cash buyout to compensate for that.”
In other words, employers should be ready to cough up some extra dollars.
Legal issues also can crop up around legacy retiree populations.
Employers, as Desai noted, “may not feel comfortable dramatically changing benefits (for retirees) because they may feel they have a contractual obligation.”
Employers may hesitate to disturb the status quo for retirees, even if they’re “considering settlement strategies for the broader (employee) population.” That’s because companies primarily may be restricted legally as to how they handle retiree benefits.
The potential for legal issues could arise if an employer were to “engage an insurer to take on the benefit commitment in some fashion — to transfer that benefit commitment.”
Desai said employers need to consider “legal aspects of this … where you’ve jeopardized the tax advantage (that existed when) you were providing benefits through a group plan.”
Then there are market limitations. Each option currently available comes, of course, with a price.
Said Desai, “A cash buyout option has a one-time administrative cost; there are cost aspects when considering tax consequences to individuals; there’s the risk premium (to consider) when purchasing an annuity, and tax consequences; those are one-time things.”
One possibility he suggested is a Voluntary Employee Benefit trust, though there are high costs to consider in going that path, too.
Such a trust has ongoing expenses to cover the trustee or trustee body, which has “oversight responsibility, hires various service providers to administer the benefits, to provide actuarial services, calculate liabilities and perform various (other) functions.”
Desai said that while this approach worked for the auto companies – the United Auto Workers Retiree Medical Benefits Trust, with more than $54 billion in assets, is the world’s largest VEBA – they had the benefit of economies of scale.
The bigger factor for employers to consider is, in fact, the scarcity of options.
A company that wanted to move its commitment for health care to an insurer would have to find one willing to take into account the benefits level the group health plan provides.
“There haven’t been very many situations, if any, that have moved in that direction; the market for that kind of insurance is fairly small, if not nonexistent,” Desai said.
Why so little interest in the insurance industry? “The key here is that when you’re talking about pension commitments, they’re pretty fixed, and insurers are ready to take that on with risk premiums in the market. But with health care, the cost, the possibility of a government program like Medicare changing and what impact that might have on the cost, and other (possible) changes … would make this market much more of a challenge.”
Desai mentioned yet another possibility, although again, it’s rarely used: trust-owned heath insurance policies. “They’re more a funding vehicle,” said Desai, “but the market for that is really small.”
The changes coming about because of PPACA mean that things will be in flux for some time, and that will affect how employers approach the possibility of offloading retiree health benefits.
Said Desai, “The answer … on (the tax front) is crystal clear, and some legal aspects are clear, but as you look to the market and the possibilities, it becomes a little vaguer, because this is an area of continued exploration.”
The bottom line?
“The market would need to devise a way to move through these hurdles to manage them to a sufficient level,” he said. “I can see activity around that as the market explores this more deeply, given the interest.
“Whether that exploration will lead to new products or an evolution in the products that are able to get us past these hurdles, that remains to be seen.”