Retiree Health Coverage

Historically, employers, especially large employers, have played an essential role in providing health benefits for their retirees. However, since the late 1980s, the percentage of large employers offering retiree health benefits has dropped significantly, from 66 percent in 1988 to 21 percent in 2023. Given the critical importance of health insurance for access to needed health care services and for maintaining financial security in retirement, the continuing erosion of retiree health insurance coverage is a serious concern.

Factors influencing employers’ move away from providing retiree coverage include 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. Retirees may also encounter reductions in coverage as employers seek to limit their future financial liability for benefits. In response to these factors, many employers have changed, capped, or stopped offering retiree health coverage altogether. 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.

For younger retirees who are not yet eligible for Medicare, retiree health coverage provides a critical source of health insurance. The availability of health benefits can be a key factor in retirement decisions. Early retirees without employer-provided retiree coverage can seek coverage through health insurance Marketplaces or off-Marketplaces in the nongroup (individual) market. Those with lower incomes may be eligible for ACA subsidies to reduce the cost of nongroup coverage, or they may qualify for Medicaid.

For Medicare-eligible individuals, retiree health benefits are an important source of coverage that help pay for Medicare’s out-of-pocket costs and, in some cases, provides supplemental benefits that are not covered under Traditional Medicare. About a quarter of all people with Medicare have retiree health coverage to provide supplemental coverage.

Large employers that do continue to provide retiree coverage are shifting more of the cost to retirees. Retired beneficiaries are paying higher premiums and cost-sharing amounts or facing reductions in coverage. However, if the price of retiree health benefits grows beyond the reach of retirees, they may be forced to drop coverage. More retirees may also face caps on employer contributions or be required to pay a fixed share of growing health costs. 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.

Among the shrinking number of large employers that offer retiree health benefits to people eligible for Medicare, a rapidly growing share (over half) are now offering coverage through Medicare Advantage (MA). These include many public employers or unions. Many such employers offering MA retiree health benefits do not offer their retirees a choice of coverage that coordinates with or wraps around Traditional Medicare. The growth in retiree MA plans has financial implications for the Medicare program because Medicare pays more for enrollees in MA than it does for similar people enrolled in Traditional Medicare. It also has potential implications for people with Medicare as MA coverage could mean more limited access to health care providers in the plans’ networks and greater exposure to cost management tools such as prior authorization requirements that often result in care delays or denials.

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.

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.

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 (see also Individual and Employment-Based Group Plans). This is sometimes referred to as the “Cadillac tax,” It was repealed in 2019. Among the concerns 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).