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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Unfortunately, his employer just rescinded the coverage offer and the subsidy.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).

COBRA allows employees to remain in the group plan by paying the coverage cost out-of-pocket plus a small administrative mark-up. In cases where the employee or a family member had a serious pre-existing condition, the COBRA option could be a lifeline.

COBRA remains available under PPACA but John Barrett of Health Insurance Brokers LLC in Pasadena, Calif., does not view it as an attractive option for most early retirees, especially since the pre-existing conditions hurdle has been removed.

In his experience with the California health insurance market, employer-based coverage is 50 percent to 150 percent more expensive than individual coverage. Unless the employer’s plan offers significantly better benefits than the available individual or exchange plans, it won’t make economic sense to stay on the employer’s plan. “Why would an employee remain in COBRA if the premiums were higher than he would obtain out of COBRA and for individual coverage?” Barrett asks.

Dan Mathews, CFP, a financial planner with Stepp & Rothwell, Inc. in Overland Park, Kan., echoes that sentiment. He maintains that most early retirees don’t need the level of benefits their employer’s plan provides.

“When it comes to health insurance for clients in the (Medicare) gap, I prefer that they drive over the bridge to age 65 in a Taurus versus a Cadillac,” he says. “By that I mean they don’t need the bells and whistles that many company-provided plans offer. They just need basic coverage that avoids a catastrophe.”

Evaluating the options
Despite the federal exchange’s website fiasco, early figures indicate strong interest in the exchange policies.

CNN reported that roughly 500,000 applications had been completed on the federal and state exchanges in the first three weeks of availability. That number certainly would have been much higher had the federal site worked properly.

If the COBRA option is unattractive, early retirees will need to compare the coverage available to them from individual policies and the public exchanges. The exchanges’ “metals” plans—bronze, silver, gold and platinum—are tiered and will offer a scale of coverage and cost choices. For example, a bronze plan will pay 60 percent of covered medical expenses while a platinum plan covers 90 percent. In other words, the more expensive the metal, the lower the out-of-pocket costs but the higher the premium for the plan member.

The plan-selection analysis will need to consider an individual’s risk tolerance, health and finances, says Jennifer Borislow, CLU, with Borislow Insurance in Methuen, Mass., and immediate past president of the Million Dollar Round Table (MDRT).

“You really have to evaluate what the individual absolutely needs covered,” says Borislow. “If you’re an individual who has some personal savings, you may be able to take a high deductible health plan, which would make for a lower premium contribution. Somebody who may need broad coverage and doesn’t want any out-of-pocket expense may pay more in premium and get a richer program.”

From the advisor’s perspective, gathering coverage information and comparing benefits on the available individual and exchange plans will require an initial investment of time. Once the details are collected, though, updating the data won’t require as much work. There is a payoff: Being able to help early-retiree clients understand their health insurance options could be a valuable service to offer.

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