Retiree Health Care May Live On
But a small number of organizations are finding new value in offering this much-coveted benefit.
Employers who want to extend retiree health care fall into two camps. One believes that continuing to offer such a benefit is key in giving them an edge in recruiting. The other camp is made up of organizations that want to continue to offer retiree coverage to encourage older workers to retire, rather than continue working just to have health benefits.
Traditionally, employers used defined-benefit pension plans to nudge workers into retirement. With those plans, as soon as employees became eligible to start taking payouts from their pensions, many would retire.
But since employers have switched to defined-contribution plans, there is no longer a clear-cut time when employees feel ready to retire, says Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute. And with health care costs increasing, many older workers are postponing retirement because they’re concerned about how they will pay for their care.
"As soon as they take away retiree health benefits, they have essentially lost their tool to manage the retirement process at their organizations," Fronstin says of employers. "It makes it harder to get those workers to retire on a voluntary basis."
Professors who won’t leave
The issue is most apparent in academia, where faculty tend to work at one institution for their entire careers, says Barbara Perry, vice president of marketing and membership at Emeriti Retirement Health Solutions, a 3-year-old nonprofit organization that allows employees and colleges to set aside money for retirees to use for health care expenses.
The Emeriti program evolved from two professors’ research about retirement trends in academia. In 2001, Ken Cool, the director of academic planning at Vassar College in Poughkeepsie, New York, and his wife, Linda Cool, an anthropology professor at Union College, in Schenectady, New York, conducted a study that found that many professors were willing to retire, but felt unable to because of their concerns about post-retirement health care costs.
The study of 1,400 faculty members at 47 colleges found that employees at schools that had a "substantial commitment" to offering retiree health insurance retired 18 to 36 months earlier than those with no retiree health benefits.
The trend toward faculty hunkering down in their jobs to keep their health care benefits has left colleges in a bind, says Bill Detwiler, associate vice president of HR and business Services at Southern Methodist University in Dallas.
"You end up with inflexibility and the inability to infuse new ideas into the organization because you can’t recruit," he says.
Continuing to offer health care to retirees became particularly burdensome for organizations like SMU after the Financial Accounting Standard Board, a government-sanctioned group that sets accounting standards, issued a rule in 1990. FAS 106, as the rule is called, requires employers to deduct the estimated future costs of retiree health benefits from profits.
That’s why SMU is one of 51 institutions that have signed up with Emeriti over the past three years.
Under the program, which is administered by Aetna, colleges contribute at least 0.5 percent of the aggregate annual pay into a Voluntary Employee Beneficiary Association, a tax-free trust similar to one set up by General Motors last year for the United Auto Workers. Employees also contribute to an account, either voluntarily or on a mandatory basis depending on the college’s policy.
Each institution determines the age at which employees can start contributing, but it can be no later than 40, Emeriti’s Perry says. Employees can invest the money in a series of mutual funds managed by Fidelity Investments.
When employees turn 65 and are eligible for Medicare, they withdraw the money tax-free, either to pay for one of six supplemental insurance plans offered through Aetna or for premiums on an outside plan. The premiums for the Emeriti plans on average range from $260 per month per individual down to $60, Perry says.
SMU, which implemented an Emeriti plan in January, requires employees to contribute $50 per month into the program once they turn 40. Employee contributions increase 4 percent annually and are matched by SMU, Detwiler says.
The advantage of making the contribution mandatory is twofold, he says. Employees will have more savings for health care costs when they retire. And mandatory contributions are tax-free under Emeriti.
So far, 1,404 of SMU’s 2,100 benefits-eligible employees have begun participating in the program, and 500 have retired on it. While the university is spending $1.1 million a year, it projects that in the long term the program will cost less than its old retiree health care program, Detwiler says.
"Right now this is costing us more on a cash basis, but in the 21st year of our forecast we expect our cash costs to be lower." And just by avoiding FAS 106, the college estimates that it will save about $90 million over the next 30 years.
Private sector efforts
In the private sector, some employers are coming together to provide health care benefits to retirees, particularly those younger than 65.
In 2006, a number of members of the HR Policy Association began a pilot program with Aetna to offer retirees health care benefits. Through Retiree Health Access, employees who are at least 55 with five years of service in their company can sign up for the program.
Premiums range from $400 per full-time single employee per month to $1,000 per month, with annual deductibles of $250 to $2,700. However, any of the 32 employers participating in the program can offer a subsidy to decrease employees’ premiums, says Marisa Milton, a spokeswoman for HR Policy Association.
Retiree Health Access helps participating employers meet two goals. One is to make sure that those employees who want to retire before they reach 65, when they become Medicare-eligible, can do so, Milton says.
But some companies also see offering retiree health care as a way of retaining older workers, says Karen Garvey, director of benefits and associate services at Green Bay, Wisconsin-based Associated Bank.
Associated Bank, which has 5,300 employees, offers health care benefits to part-timers, too, and sees retiree health care as key to recruiting workers, Garvey says. The bank began offering Retiree Health Access in January 2007. Under the program, participants receive a flat subsidy equal to 25 percent of their 2006 premiums, Garvey says. With the subsidy, premiums range from $250 per month to $800 per month for retirees.
So far, Associated Bank has 500 individuals enrolled in the retiree medical plan, but Garvey says her main metric for gauging the success of the program is how many calls she and her staff get from retirees, who were confused about how their benefits worked and whether claims had been paid. "The number of calls from retirees has dropped dramatically," she says.
Experts believe that both the Emeriti program and Retiree Health Access will grow in the years to come as baby boomers age and employers seek ways to allow them to retire when they want to.
Next January, Emeriti is expanding its program to include retirees who are younger than 65 and thus aren’t yet eligible for Medicare, Perry says. The organization also is discussing how it could offer its services to nonprofits outside of academia, she says.
Aetna is exploring how it can take what it’s doing with Retiree Health Access and target small companies as well as the public sector, says Tom Doran, senior actuary head of Retiree Health Access at Aetna.
"This is a growing marketplace," Doran says. "There is a definite need."
But programs like Retiree Health Access and Emeriti are not necessarily a sign that retiree health care is making a comeback, says Allen Steinberg, principal and senior design consultant in the retirement financial management consulting practice at Hewitt Associates. Rather, they reflect a middle ground between offering full medical benefits or nothing at all.
"Because employers are doing these programs doesn’t mean they are growing retiree medical benefits," Steinberg says "It’s just a shift in the benefit. Some companies are doing this to maintain status quo, while in other cases it’s actually a reduced benefit."