Retiree Health Coverage

Background

The availability of health benefits is a key factor in retirement decisions for most workers, particularly 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. 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 to AARP.

Large employers that continue to provide retiree coverage are beginning to shift some of the cost to retirees. Retirees with employer-sponsored health benefits are paying higher premiums and cost-sharing amounts, and 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.

Employers have changed, capped, or stopped offering retiree health benefits because of:

  • health care cost inflation,
  • the increasing number of years spent in retirement,
  • a declining ratio of active workers to retired workers, and
  • changes in private- and public-sector accounting standards requiring that projected retiree health obligations be reflected in financial reports.

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 ACA imposed a 40 percent excise tax on high-cost employer-sponsored health coverage, including retiree health coverage, exceeding specific cost thresholds. This tax was originally scheduled to go into effect in 2018, but Congress delayed implementation until 2020. The 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. (For a discussion of the tax, see Chapter 3, Taxation: Tax Expenditures and Incentives—Taxing Employer-Provided Benefits. For a discussion of 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.)

The ACA also contains provisions that benefit younger retirees. Retirees younger than age 65 who drop their retiree health coverage or who don’t have access to such 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. Low-income retirees may qualify for expanded Medicaid coverage depending on where they live.

Retiree Health Coverage: Policy

Maintaining benefits

In this policy: FederalState

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

AARP opposes 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.

ADEA

In this policy: Federal

The EEOC 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

The ACA’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. (Also see Chapter 3, Taxation: Tax Expenditures and Incentives—Taxing Employer-Provided Benefits and earlier discussion in this chapter’s section Health Care Coverage: Private Insurance—Individual- and Employment-Based Group Plans.)