New Options for Retiree Health Benefits

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.

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.

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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.

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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.

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.

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