Making Your Money Last


New Options for Retiree Health Benefits

At first, "there's trepidation as to what's going to happen" when retirees switch from a group plan to an exchange, says Bryce Williams, a Towers Watson managing director and founder of Extend Health, a large private Medicare exchange. But the annual rate increase for retirees using the exchange has averaged 2.8%, he says, and employer contributions are typically adjusted to keep pace with inflation. Extend Health signed up its first employer six years ago and now works with more than 250 companies.

Many employers in years to come are likely to set up HRAs for retirees younger than 65 and tell them to go shop on new state and private exchanges. Nearly two-thirds of employers say they'll consider directing pre-Medicare retirees to an exchange sometime after this year, according to a survey by consultant Aon Hewitt.

Salvaging Benefits After Bankruptcy

In many employer bankruptcies, retiree health benefits quickly fall by the wayside. But a growing number of early retirees whose former employers have gone bankrupt are finding ways to take advantage of a generous tax credit that helps pay for health insurance. The Health Coverage Tax Credit covers 72.5% of insurance premiums for people age 55 to 64 who are in a qualifying health plan and receive pension benefits from the Pension Benefit Guaranty Corp., the federal agency that often takes over the pension plans of bankrupt companies.

Although the credit has been around since 2002, up until 2009 for many retirees the procedure to access it "was unbelievably complicated," often requiring an IRS private letter ruling, says Dean Gloster, a San Francisco lawyer who specializes in setting up plans that qualify for the credit. But Congress made the tax credit more accessible in 2009, in part by allowing bankruptcy courts to authorize special tax-exempt trusts known as Voluntary Employee Beneficiary Associations (VEBAs), whose benefits are eligible for the tax credit.

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Several industry-wide VEBAs have been established in recent years that allow auto, steel and airline company retirees to get the tax credit. The retirees generally pay their 27.5% share of premiums each month, the IRS pays the remaining 72.5%, and an administrator collects the payments and forwards them to the insurers. The VEBAs typically provide dental and vision coverage as well as medical benefits.

The tax credit is a silver lining for retirees who lost much of their pension and health benefits. Bob Benham of Atlanta retired from Delta in 2004, the year before the airline filed for bankruptcy. He worked overseas as a pilot for several more years, in part to maintain his health coverage.

Now fully retired, Benham, 62, enrolled in the airline retirees' VEBA in early 2012. With the tax credit covering most of the premiums, he paid $377 a month for medical coverage for himself and his wife. Now that his wife is becoming eligible for Medicare, Benham will pay just $288 a month for his own medical, vision and dental coverage. Without the VEBA, he would have had to buy "a very, very high-deductible [plan] to get the premiums down," he says.

Tens of thousands of retirees who are eligible for the credit aren't enrolled to receive it—and they probably don't even know it exists, says Cathy Cone, managing partner at Cone Insurance Group, in Houston, which established the new industry-wide VEBAs. Retirees can go to www.conebenefits.com for more information.

To be sure, many early retirees have no access to tax credits or employer contributions of any kind. If you worked for a company with 20 or more employees, you may have access to COBRA, which typically allows you to continue your employer's coverage for 18 months after retirement.

Another option for early retirees is a short-term policy that can bridge the gap until you're eligible for Medicare. These are bare-bones policies that generally don't cover preexisting conditions, and that won't change in 2014. You might also consider a high-deductible health plan coupled with a health savings account, where you can set aside money tax free to pay for health care expenses. (For more on HSAs, go to www.treasury.gov and type "HSA" in the search engine.)

You can compare short-term, HSA-compatible and other plans using online marketplaces such as eHealthInsurance.com. Or find an insurance broker in your area at www.nahu.org.

Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger's Social Security Solutions today.

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