As employers continue to drop retirees from group health plans, new alternatives are emerging that may ease the pain for seniors. A growing number of employers are making cash contributions to individual accounts that help seniors pay for insurance they shop for themselves. New private exchanges are helping retirees select their own health plans. And when health benefits evaporate in an employer's bankruptcy, recent rule changes make it easier for some early retirees to use an obscure tax credit that covers nearly 75% of their insurance premiums.
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Still, the new approaches also bring challenges. Fixed employer contributions may not buy as much coverage as retirees received in their old group plans. And retirees who have long depended on an employer's plan may feel overwhelmed by the task of shopping for their own insurance. Many people have paid attention to their insurance choices only once a year at open enrollment, but "now the consumer experience is coming to health insurance," says Nate Purpura, director of consumer information at eHealthInsurance.com. Consumers will have to be well informed, he says, and "become much more conscious of costs."
The changes may be most daunting for retirees younger than 65 who have been receiving employer benefits, since those benefits generally play a more central role in their health coverage. Traditionally, workers whose benefits extended into retirement could maintain their group coverage after retiring early. After age 65, any employer benefits play a more secondary role, supplementing Medicare coverage.
Although employers have been trimming retiree health benefits for years, seniors can expect more cuts in the near future. Almost 30% of companies sponsoring retiree medical plans say they're very likely to terminate programs for retirees older than 65 by 2015, and almost 20% say they're very likely to make the move for retirees younger than 65, according to consulting firm Towers Watson. And many public-sector employers, which up until now have tended to maintain health benefits for retirees, are likely to accelerate cutbacks as they confront fiscal problems, says Paul Fronstin, director of the Employee Benefit Research Institute's health research and education program. Those seniors who still enjoy group health benefits from a former employer are likely to see higher premiums, stricter eligibility requirements or reduced benefits.
The health care overhaul law carries benefits for early retirees. The law establishes new state-based exchanges where individuals who lack coverage can shop for insurance, and it provides tax credits to defray premium costs for people who meet income qualifications. It also prevents insurers from denying coverage based on preexisting conditions. The exchanges are scheduled to be up and running in 2014.
By creating a friendlier insurance market for pre-Medicare retirees, however, the law could also prompt more employers to stop sponsoring retiree health plans. Many employers may see little reason to continue offering group coverage to retirees younger than 65 when affordable coverage is available through the state exchanges, benefits experts say.
The Shift to Exchanges
A growing group of employers are now looking to private exchanges to help their retirees find coverage. Whereas many companies traditionally have sponsored supplemental group plans that fill in gaps in Medicare coverage for retirees older than 65, some large employers are now contracting with private exchanges—essentially insurance marketplaces—that help these retirees choose Medicare Advantage or Medicare supplemental and Part D prescription-drug plans. Employers typically cover at least part of the cost by contributing a set amount to a health reimbursement arrangement (HRA), through which retirees are reimbursed tax-free for premiums and other qualified medical expenses.
As with defined-contribution 401(k) plans, employers that offer HRAs get fixed, predictable costs, and retirees face greater risks and responsibilities. Among the concerns: whether the employer's contribution will buy the same level of coverage previously provided by the employer, and whether those contributions will keep pace with rising costs, Fronstin says.