Your client is on the phone and in shock.
He planned to retire in a few months when he turned 60 and until today, his employer’s health insurance coverage for early retirees was a good deal.
Although it wasn’t a contractual benefit, early retirees could stay on the company’s coverage at a subsidized cost until they qualified for Medicare.
Unfortunately, his employer just rescinded the coverage offer and the subsidy.
With the availability of the Patient Protection and Affordable Care Act’s (PPACA) exchange-offered policies, the company no longer will provide health benefits or subsidies for early retirees.
Your client is concerned about having to pay the entire premium for his family plan if he follows through on his decision to retire at 60. You do a rough calculation using the numbers he gives you and estimate that the company’s decision could cost him an additional $5,000 per year, or $25,000 total out-of-pocket between ages 60 and 65. It’s time to update the retirement plan.
This client’s situation is not unique. According to a 2012 Employee Benefit Research Institute report, the number of private-sector employers offering retiree health benefits is falling. In 2010, the study found, 17.7 percent of employees worked at establishments that offered health coverage to early retirees, down from 28.9 percent in 1997. Employees at large firms or with state governments have a better chance of receiving early-retirement coverage. Among private-sector firms with 1,000 or more workers, 37.5 percent offered coverage to early retirees. Seventy percent of state governments offered health insurance to early retirees, but that number is down substantially from the mid-90 percentages seen in the early 2000s.
It’s likely the public exchanges’ arrival will speed the move away from offering these benefits. A 2013 Towers Watson survey found that “the percentage of employers that are somewhat or very likely to discontinue their plan for pre-65 retirees will jump from 10 percent in 2014 to 38 percent in 2015.”
Bad news, good news
It’s increasingly likely that early retirees will have to find their own pre-Medicare health insurance—that’s the bad news. But there are positive aspects to the market’s changes as well.
Consider employees who would like to take early retirement but have a pre-existing condition. The difficulty of getting individual coverage they could afford—assuming they could find coverage—probably weighed heavily in their considerations.
Under PPACA, they’ll face age-based premiums but they’re guaranteed access to coverage regardless of pre-existing conditions. Also, early retirees might wind up paying lower premiums, depending on the exchange-plan features they select and their eligibility for a government subsidy.
Health insurance planning for early retirees is entering a new phase. We asked several experts for their advice on how senior market advisors should work through the coverage decisions with these clients.
The COBRA option
Early retirees typically have the option of staying on their employers’ plans through COBRA (Consolidated Omnibus Budget Reconciliation Act).