Thirty-five percent of organizations offered retiree health benefits in 2007, up from 29% the year before, according to the Society for Human Resource. Even so, benefits analysts say organizations are under pressure to drop the coverage to save money and to lessen a costly liability line on their financial statements.
“CFOs will say this will save us money. However, there are some work force dynamics that might come into play if you eliminate those benefits,” warns John Asencio, senior vice president of The Segal Co., anconsulting firm.
Before you decide to ditch retiree health benefits to save money, think twice. The cost of cutting coverage may be higher than you think. For one thing, you might find yourself stuck with unproductive employees with poor health who fear they won’t be able to afford their medical bills without employer-provided health insurance. They probably will decline any early retirement offers you make that don’t include health coverage.
On the other hand, trimming post-retirement health coverage could benefit organizations prone to labor shortages. Without the cushion of company-paid insurance, experienced baby boomers may well opt to continue working.
Asencio urges employers to view retiree health coverage as more than an all-or-nothing proposition. Consider these options:
- Offer retirees younger than 65 the same benefits as active employees. Then when Medicare kicks in, lower it by the amount Medicare covers. The EEOC late last year ruled that this common practice does not violate the Age Discrimination in Employment Act.
- Place a cap on the organization’s annual contribution to the cost of coverage. Once the cost of coverage exceeds the cap, the retirees’ contributions increase to make up the difference.
- Switch from defined benefits to defined contributions. With defined contributions, the organization pays the employee a set amount to be spent on medical benefits after retirement.
- Adopt a Medicare Advantage (MA) plan. These plans provide medical coverage for a monthly premium through an HMO, PPO or other entity, an arrangement that offers Medicare-eligible retirees broad coverage options.
- Establish a retiree health voluntary employees’ beneficiary association (VEBA). A VEBA is a trust fund that protects retiree medical benefits at their current levels. Employees and the organization both can contribute to the fund, and the employees can use those post-tax dollars to pay for health care when they retire. (Note that VEBAs are typically limited to unionized work forces.)
“The key change is that employers are taking a more defined-contribution approach to retiree health,” says Asencio. “It’s a good way to structure an arrangement with the retiree.”