As a long-running legal controversy about the design of retiree health care plans has been resolved, the future of the plans may be brightening.
The final step came last week when the U.S. Supreme Court declined to intervene and let stand a federal appeals court ruling that upholds the right of the Equal Employment Opportunity Commission to implement a regulation that exempts retiree health care plans from age discrimination law.
That rule was triggered by an August 2000 appeals court decision that said the plans were subject to the Age Discrimination in Employment Act. Initially, a wave of anxiety ran through the employer community as nearly all corporate plans provide smaller benefits to older retirees, due to the availability of Medicare, than to younger retired workers, exposing them to lawsuits had the ruling become national law.
Just as that controversy has a happy ending for employers, the future of retiree health care plans—once thought to be dying because of their escalating costs—may be improving.
After sharp declines throughout the 1990s, the percentage of large U.S. employers offering retiree health care has been stable the past few years and even rose slightly last year, according to research by benefit consultant Mercer.
There are other signs of renewed employer interest in retiree health care plans. Since its launch in 2005, the number of employers joining a program that enables colleges and universities to sponsor retiree health care plans has climbed to 52 from 29, with more institutions expected to join.
“There is a growing confidence in our program,” said Ken Cool, president of Emeriti Retirement Health Solutions in New Windsor, New York.
A key driver in the renewed interest in the plans: corporate concerns that, absent retiree medical benefits, employees will stay on longer at their jobs. Such a scenario can keep unproductive workers on the job and block the advancement of talented younger employees.
Without a retiree health care plan, “You create a workforce management issue. Some employees, who may no longer be fully engaged and would rather be retired, stay on,” said Dave Osterndorf, a principal with Towers Perrin in Milwaukee.
“That is a negative result for employers and employees and that is why employers are again taking a look at these plans,” he added.
Additionally, some employers say that offering retiree health care plans will give them a competitive advantage at a time when many organizations have folded their programs.
“It will give us a distinct advantage in recruiting and retaining employees,” said Bill Detwiler, associate vice president, human resources and business services at Southern Methodist University, which joined the Emeriti program in January.
Even so, the plans that are being put in place are radically different from—and cheaper than—the retiree health plans that once dotted the corporate universe.
“These are not your father’s plans,” said Rick McGill, a consultant in the Atlanta office of Hewitt Associates. Benefit levels under the newer designs are not guaranteed, and retirees are not protected from medical cost inflation, McGill added.
Indeed, because those old-style plans were designed to provide a defined health care benefit, employers were fully exposed to escalating liabilities that resulted from increased life expectancies and medical inflation. Those costs were more than many employers could afford and such plans continue to dwindle.
“There is no going back to where we once were. Employers are not signing up for unlimited liabilities,” said Michael Thompson, a principal with PricewaterhouseCoopers.
By contrast, the new-style plans largely are defined contribution, meaning employers are limiting their liability to a fixed amount.
“The employer defines the amount. The employer agrees to contribute X amount per month,” said Rich Stover, a principal with Buck Consultants LLC in Secaucus, New Jersey.
While the designs vary, today’s plans typically center on accounts to which employers—and sometimes employees—contribute. When they retire, former workers can use the accumulated contributions to pay premiums for health coverage, including Medicare premiums and costs that fall under plan deductibles.
For example, under a new program that Ford Motor Co. began offering in January to pre-Medicare and Medicare-eligible nonunion retirees, it contributes $1,800 a year per person plus another $1,800 for that person’s spouse to a health reimbursement arrangement. For pre-Medicare retirees, Ford continues to provide health care plans, though its contribution is capped at what it paid in 2006, with retirees paying future cost increases.
Under Southern Methodist’s plan, employees age 40 and older contribute $50 a month pretax to accounts, which SMU matches. Employees also can make additional contributions.