Early Retirees Face One More Financial Squeeze When Feds End Employer Retiree Health Care Subsidies

BOSTON--(BUSINESS WIRE)--In just a few short years, the baby boomer generation will be facing another financial challenge as the $5 billion Early Retiree Reinsurance Program (ERRP), funded under the Affordable Care Act, expires in 2013, to be followed by health insurance exchanges for individual coverage. Self-funded employers have used the subsidy program to help defray the costs of premiums for those retirees in the 55-64 year old segment. The subsidy program was quickly embraced by employers and ERRP stopped taking new applications in May.

“The retirement population is growing, and for those early retirees who are not yet eligible for Medicare, the increased costs of health care will be a dominant economic issue.”

A new survey from HighRoads, the industry leader in health care regulation and compliance, shows employers are not planning any short-term changes but 79% of those surveyed did take advantage of the subsidy-- an indication they will be re-evaluating costs once the subsidy expires.

“Employers will have to make hard choices, and most likely we will be looking at a reduction of the number of self-funded employers who offer early retiree health benefits,” says Leanne Fosbre, senior SPD [summary plan description] writer, HighRoads Compliance Division. “ERRP right now buys employers a little time and they’re taking a wait and see attitude, but that may change.”

From the employee perspective, “retirees can anticipate increased cost sharing of early retirement benefits once the subsidy runs out,” says Fosbre. “Employees heading toward retirement need to take a real interest in what their employer is going to do, and be diligent in reading employee communications that address the issue.”

HighRoads Survey Highlights

HighRoads recently conducted an employer survey to determine the impact, if any, to retiree medical plan strategies as a result of the Early Retiree Reinsurance Program (ERRP) subsidy and the change in tax liabilities for the Retiree Drug Subsidy Program. Respondents ranged in size from 5,000 employees to 100,000+ employees. The average respondent has between 25,000 and 50,000 employees.

The HighRoads survey found that seventy-nine percent (79%) of respondents receive the ERRP subsidy.

For the majority of respondents, the ERRP subsidy either buys time to re-evaluate retiree medical plan strategies or has little impact on current strategy. HighRoads’ survey found the majority of respondents (63%) indicate that the ERRP subsidy has little current impact on their retiree medical strategy. Of the companies for which the ERRP subsidy plays into their retiree medical strategy, most indicate that the subsidy buys them time to make changes to the retiree medical strategy.

The majority of respondents (60%) also indicate that the elimination of the deduction for retiree prescription drug expenses will not result in a change to their retiree prescription drug benefit.

“Since the ERRP subsidy will go away, this is a good time for both employers and retirees to start thinking about health care costs in 2014 and beyond,” says Eric Parmenter, vice president of consulting, HighRoads. “The retirement population is growing, and for those early retirees who are not yet eligible for Medicare, the increased costs of health care will be a dominant economic issue.”

The looming question is whether an individual will be able to get retiree group health insurance from their employer after 2014, says Fosbre. Signs of employers cutting retiree costs are evident: The U.S. Postal Service announced in June it was suspending its contributions to its employees' pension fund. The Postal Service makes an annual payment of more than $5 billion as an advance contribution to future retiree medical costs.

“Overall, it paints a scary picture,” says Fosbre. “Will early retirees have adequate health benefits, and continue with employer-sponsored plans, or have to pay more out of a fixed income?”

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Background

ERRP, authorized by the Affordable Care Act (ACA), allocated $5 billion dollars to provide reimbursement to participating employment-based plans for a portion of the costs of health benefits for early retirees and early retirees' spouses, surviving spouses, and dependents.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) established the Retiree Drug Subsidy (RDS) to encourage employers to continue offering prescription drug benefits to their Medicare-eligible retirees. As of 2013, employers that receive the Retiree Drug Subsidy will no longer be able to take a deduction for Medicare-eligible retiree drug expenses under ACA.

About HighRoads

The world’s leading employers choose HighRoads to gain complete control over their health care costs and compliance. With HighRoads’ service, employers have online access to benefits plan information and pricing, competitive benefits benchmarks, and complete benefits supply chain management. The privately-held company is headquartered in Woburn, MA. For more information, visit www.HighRoads.com.