Big Firms Eager to Offload Retiree Health Coverage

Retiree health care coverage has been going the way of the dinosaur for years, but a new report signals that its march toward extinction is accelerating as a result of health care reform. According to employee benefits consulting firm Towers Watson's post-reform survey of large firms, 43 percent of companies that still offer retiree medical coverage say they now expect to eliminate or reduce the benefit and offload retirees into health care exchanges that are centerpiece of the new legislation.

And no surprise, employers currently offering Cadillac plans are even more motivated to slash retiree coverage given the excise tax that will be levied on those plans. The Towers Watson report says 55 percent of employers with these high-benefit plans are looking to scale back or eliminate their retiree medical coverage.

Another reason to not retire early?
The big impact will be on people who want to (or need to) retire before age 65, when Medicare eligibility begins. If you've been anticipating your current employer will continue medical benefits if you retire early to bridge you to age 65, that's likely going to change. Instead, employers now have an easy out: they will be able to direct you to purchase insurance directly through an exchange.

"Beginning in 2014, when health insurance exchanges become operative, pre-65 retirees will have access to competitive plan choices without preexisting condition underwriting. This important development will likely accelerate employers exiting sponsorship of retiree health programs and, in many cases, adopting account-based solutions, " explained Dave Osterndorf, a consulting actuary with Towers Watson.
For many early retirees that will likely mean you're on the hook for the premium of insurance bought through your state's exchange. There will be a federal subsidy to help defray health insurance premiums for lower-income retirees who are sent to the exchange for insurance. But as my MoneyWatch colleague Steve Vernon explained, there's no subsidy if your income is more than 400 percent above the poverty level. In 2010 that would mean a retired couple with income above $58,280 would not qualify for any premium help.

Will higher-income retirees get some sort of financial help from former employers to defray part of the cost during their bridge years before Medicare? Maybe. But what's probably more likely is that this will just be a replay of the 401(k)-ization of America. Employers will give employees more ways to save for themselves, rather than do that saving for you. Indeed, Health Savings Accounts (HSAs) and Retiree Medical Savings Accounts (RMSA) already exist. But as the Towers Watson report makes clear, those plans aren't exactly widespread just yet:

Unfortunately, less than a third of respondents to our 2010 Health Care Cost Survey said they offer
HSAs, and only 9% offer RMSAs.

For early retirees who've never been eligible for retiree medical benefits, the creation of the health exchanges is indeed welcome. If all goes according to plan, it will be far easier (no preexisting condition exclusion) to obtain coverage during the Bermuda Triangle years before Medicare kicks in, supposedly at a lower cost than the going rate these days. But if you happen to work somewhere that still offers retiree medical benefits, get ready for higher out-of-pocket medical expenses. Unless your income falls under 4x the poverty rate, it's likely you're going to be paying more for health care if you retire before age 65. Just another reason to consider delaying retirement.

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