Retiree Health Coverage

The availability of health benefits is a key factor in retirement decisions for most workers. It is particularly so 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 serious concern. 

Large employers that do continue to provide retiree coverage are beginning to shift more of the cost to retirees. Retired beneficiaries are paying higher premiums and cost-sharing amounts or facing reductions in coverage. Retirees may also encounter 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. However, 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 no federal tax incentives (similar to those for pensions) encourage 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 use them. 

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

The Affordable Care Act (ACA) originally included a provision for a 40 percent excise tax on the high cost of employer-sponsored coverage that exceeds certain dollar thresholds. This is sometimes referred to as the “Cadillac tax,” It was repealed in 2019. For more on how this tax was proposed to be implemented, see the discussion earlier in this chapter’s section Individual- and Employment-Based Group Plans. 

A concern raised about this tax was whether employers offering retiree health coverage would be penalized for factors unrelated to the actual generosity of health benefits. Therefore, they might be discouraged from offering such coverage to retirees. 

See also Taxation of In-Kind Benefits. 

In recent years, a growing number of states have offered Medicare Advantage plans as an alternative to retiree coverage plans that wrap around Traditional Medicare for state and local employees and spouses. 

Early Retirees: the ACA also contains provisions that help early retirees. Retirees younger than age 65 who do not 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.