Over the past 25 years, the percentage of companies with 200 or more employees that offer retiree health coverage has dropped from 66 percent to 28 percent. That shift has already left one in five workers without retiree health benefits.
Chances are your benefits clients are among the growing number of employers who have shifted – or plan to shift – the responsibility for covering health care costs in retirement to their employees. Clearly, millions of American workers will find themselves financially vulnerable in retirement.
If you offer health savings accounts (HSAs) or health reimbursement arrangements (HRAs) you might be able to address this problem, by giving employers a way to use proven benefits vehicles to help employees cover the post-retirement health care costs not covered by Medicare. Here are ideas about three ways to do that.
1.Give workers accurate information about what their post-retirement out-of-pocket costs might look like.
Most Americans are unprepared and uninformed about how these costs can add up. According to a 2013 survey conducted by AARP, few adults in their 50s and 60s have begun saving for the health care costs they may incur during their retirement years. Only about one-third (36 percent) report having a plan — and savings — in place to help cover health care costs in retirement.
The Fidelity Investments Retirement Savings Assessment found that, among pre-retirees ages 55-64, nearly half (48 percent) believe they only need about $50,000 to pay for their individual health care costs in retirement. Fidelity estimates the average couple retiring today could expect to spend more than $220,000 on health care expenses over the course of their retirement. That estimate does not include the cost of long-term care or dental care.
2. Help your employer client and the employees use an HSA as retirement savings tool
Paired with the required qualifying high-deductible health plan (HDHP), an HSA can be a smart health care financing tool. A client can use it both to cover medical expenses now and to help cover future Medicare Parts B and D premiums, co-pays, and deductibles on a tax-advantaged basis. Workers ages 55 to 65 can accelerate their HSA contributions by $1,000 a year, giving them the opportunity to “catch up” on savings for retirement health care. And, if a post-65 individual is not eligible for or enrolled in Medicare, coverage under a qualified HDHP lets the individual continue to be eligible to make HSA contributions.
Speaking of contributions, the employee, the employer, or a combination of both can make tax-free contributions to the account.
If an employee treats the HSA like a retirement savings vehicle by seeking out mutual funds and other investment options for unused funds that roll over year-to-year, making maximum allowed contributions at the start of each year to make the most out of tax-free interest earned, and delaying withdrawal of funds if they enjoy good health, they can accrue a sizeable nest egg for retirement. That’s a nest egg that belongs to the individual employee, because the HSA is portable.
3. Help an employer client and the employees use retirement health reimbursement arrangements (RHRAs).
An RHRA gives an employer the ability to provide workers with tax-free money to help them pay for qualified medical expenses incurred during retirement. In many cases, those expenses could include insurance premiums. The account, which is solely funded by the employer and does not need to be paired with a health insurance plan, offers a tremendous amount of flexibility for both the employer and the employees.
The employer can define the contribution level, which health care expenses will be covered, and if unused funds will roll over at the end of the year. The employer also has the option to establish an RHRA as a notional account while an employee is active, establish the RHRA after the worker retires and contribute funds each year throughout the worker’s retirement, or both.
For employees, the RHRA offers flexibility with health insurance choices. Once workers reach retirement age and have ceased employment, they can choose to use the employer-provided RHRA funds to continue on their employer’s retiree health group plan, or choose other options including private and public exchanges. And, depending on the employer’s plan design, they can access RHRA funds to cover qualified retiree medical expenses that could include COBRA premiums, copays, deductibles and premiums for health care coverage. Retirees over age 65 can use their RHRAs to cover costs such as dental and vision programs, or premiums for Medicare Part B coverage, Medicare Part D prescription drug plans, or Medicare Advantage plans.
American workers can’t bank on Medicare to cover all their healthcare costs in retirement. In fact, according to the Employee Benefit Research Institute, Medicare only covers about 60 percent of the cost of benefits. Not covered are Part B premiums, Part D drug coverage, premiums for supplemental coverage, dental, vision, hearing, or any portion of long-term care costs. Those who can’t afford supplemental coverage will find deductibles and copays quickly adding up. .
Employers are in a unique position to help their workers prepare for retiree healthcare expenses long before they reach retirement age. HSAs and RHRAs offer tax-advantaged incentives that provide flexibility – and benefits – for both the employer and the employee to accrue a comfortable nest egg to help pay for healthcare in retirement.