Retiree Health Coverage

Background

The availability of health benefits is a key factor in retirement decisions for most workers, and particularly for those not yet eligible for Medicare. Since the 1990s, the percentage of large employers offering retiree health benefits has dropped significantly both for retirees younger than age 65 and for Medicare-eligible retirees. Employers have changed, capped, or stopped offering retiree health benefits because of health care cost inflation, longer retirement periods,) a declining ratio of active to retired workers, and changes in private- and public-sector accounting standards requiring that projected retiree health obligations be reflected in financial reports. Given the importance of health insurance for maintaining financial security in retirement, the continuing erosion of retiree health insurance coverage is a matter of serious concern.

Large employers that do continue to provide retiree coverage are beginning to shift more of the cost to retirees, who are paying higher premiums and cost-sharing amounts or facing reductions in coverage. Retirees may also face reductions in coverage as employers seek to limit their future financial liability for benefits. For example, more retirees may face caps on employer contributions or be required to pay a fixed share of growing health costs. If the price of retiree health benefits grows beyond the reach of retirees, they may be forced to drop coverage. Some employers give retirees a defined contribution for retiree health benefits and refer them to a private exchange where they can choose a benefit plan.

As a general practice, employers do not prefund retiree health benefits because there are no federal tax incentives (similar to those for pensions) encouraging them to do so. Retiree health benefits, promised to retirees during their working years, are a form of deferred compensation in lieu of increased wages.

Recognizing that fewer employers are offering retiree health benefits, Congress included special subsidies in the Medicare Modernization Act of 2003 as an incentive for employers to retain non-Medicare retiree drug benefits. Millions of retirees have benefited from these subsidies, but fewer employers are using them.

In 2009 the Equal Employment Opportunity Commission (EEOC) implemented final regulations concerning the application of the Age Discrimination in Employment Act (ADEA) to retiree health benefits. The rule, which allows employers to treat older retirees differently from younger retirees based on their Medicare eligibility, is intended to reduce employers’ costs and prevent or slow the further erosion of coverage for retirees not yet eligible for Medicare.

The 40% excise tax on the high-cost of employer-sponsored coverage imposed by the ACA also applies to retiree coverage that exceeds certain thresholds. This tax was originally scheduled to go into effect in 2018, but Congress has delayed implementation until 2022. This tax is intended to constrain health care spending by discouraging higher cost health coverage. It is still unclear whether the specified adjustments for retiree coverage are sufficient and whether cost factors unrelated to generosity of coverage, such as geography, will be considered. (See also Chapter 3, Taxation: Tax Expenditures and Incentives—Taxing Employer-Provided Benefits. For more on implementation issues including adjustment for age and gender, see discussion earlier in this chapter’s section Health Care Coverage: Private Insurance—Individual- and Employment-Based Group Plans).

In recent years, a growing number of states have offered Medicare Advantage plans as an alternative to retiree coverage plans that wrap-around traditional MedicareTraditional Medicare, also known as Original or Fee-For-Service Medicare, works on a fee-for-service basis. This means that you can go to any doctor or hospital that accepts Medicare, anywhere in the United States, and Medicare will pay its share of the bill for any Medicare-covered service it… for state and local employees and spouses.

Early Retirees—the ACA also contains provisions that help early retirees. Retirees younger than age 65 who don’t have access to retiree health coverage now have guaranteed access to insurance in the individual market. Those who are eligible can get subsidies to help with the cost of coverage they buy through the health insurance marketplace. Retirees with low incomes may qualify for expanded Medicaid coverage depending on the state in which they live.

RETIREE HEALTH COVERAGE: Policy

Maintaining benefits

In this policy: FederalState

The federal government should provide employers with incentives to maintain retirement health benefits.

Policymakers should reject policies that will increase the number of uninsured early retirees or Medicare-eligible retirees without adequate coverage. Policies affecting retirement health benefits should incorporate features that prevent deterioration of health benefits.

Retiree health benefits should be accompanied by vesting, prefunding, and other standards to ensure that employers provide promised benefits.

Federal retiree subsidies

In this policy: Federal

Congress and the Centers for Medicare & Medicaid Services should monitor the implementation of retiree drug subsidies under the Medicare Modernization Act of 2003 to make sure that funds are being used to encourage the retention of retiree drug benefits.

 

Age Discrimination in Employment Act (ADEA)

In this policy: Federal

The Equal Employment Opportunities Commission should rescind its exemption that allows employers to escape liability under the ADEA when they reduce or terminate retiree health benefits for individuals who become eligible for Medicare or a comparable state-sponsored program.

 

Government employees

In this policy: State

States should provide retired state and local employees and spouses with opportunities and options for adequate health insurance coverage at group rates.

States should provide Medicare-eligible retirees with benefits that supplement Medicare.

 

Excise tax on high-cost, employer-sponsored health coverage

In this policy: Federal

The Affordable Care Act’s excise tax on high-cost, employer-sponsored health benefits should be implemented in a manner that does not discourage employers from offering or maintaining retiree health coverage. Thresholds for qualified retiree health coverage should be adequate and account for factors unrelated to the generosity of coverage that may increase costs (see also Chapter 3 -Taxation of In-Kind Benefits, and earlier discussion in this chapter’s section Individual- and Employment-Based Group Plans).