With the upturn in the economy, employers are again starting to look at improvements to benefit programs, especially for their key employees. Retiree healthcare is a topic where I am surprised that discussions have changed from “how do I eliminate this obligation” to “tell me what other employers are doing for their key staff for post-employment health benefits.” It is unlikely that Medicare coverage will change much, but even with this generous benefit Fidelity reported that the average couple will now spend $280,000 in out-of-pocket healthcare costs during their retirement – in excess of Medicare or any health insurance which they may have.
One angle that employers should encourage for covering this liability is Health Savings Accounts (HSAs). While the growth in these accounts had been rapid, a recent Employee Benefit Research Institute study shows that this has slowed and that many accounts have very low balances. Only about 11% of HSA accounts opened in 2005 have funds invested in securities, dropping to 1% for accounts opened in 2016.
For those employers who are rethinking retiree coverage there are a number of things to note:
- As employers increasingly turn to self-insurance, they lose the ability under ERISA to carve out a class for improved benefits without tax implication. So any preference to a highly compensated class would likely give rise to taxable income.
- Additionally, employer plan eligibility rules must be amended to include any class of employees not actively at work or the plan may find itself with uncovered stop loss claims.
- If the employer prepares its reporting under Generally Accepted Accounting Principles, rules require that the cost of retiree benefits be accrued in the year the liability arises (i.e. during the working years) and actuarial studies are required.
- Finally, when the employee status turns to inactive, Medicare would become primary. It is important that the retiree enroll in the correct underlying plans (usually Part A and B) or there would be a potentially uncovered gap.
Retiree coverage rules and Medicare interaction are very complex parts of our very complicated healthcare system. Offering coverage, even for key employees, is unaffordable to many employers and, the best benefit might be education. At Frenkel Benefits we offer our clients educational material which helps their employees through the transition – this may be a great place to start.