And
Self-Funded Health
By
Carlton Harker, FSA, MAA
for www.self-fundhealth.com
The Problems
The Solutions
Employers are typically
concerned with three problems and seek solutions thereto.
Problem One – Working Aged
With these workers (i.e.,
over age 65 but active in employment), the employer’s plan is primary to
Medicare for both the worker and the worker’s non-working spouse (who may have
serious health problems). More than a
small percent of these participants may have a serious effect on the plan
(evidenced by high claims, unacceptably high stop-loss costs, etc.).
Problem Two – Retired Former Employees
These participants usually
reside in another community, have no closeness to the employer or its
fortunes, are disconnected from the labor marked and generally represent a
large expense characterized by its uncontrollability. When health costs were 5-8% of our GDP the logic of the employer
financing such retiree costs could be justified. Now that such costs are in the 20% of GDP range, the logic of
employer-provided retiree benefits should be reconsidered.
Burden of FAS 106
The outlay in costs (legal,
accounting and actuarial) of handling FAS 106 reserves is surprisingly high; in
some instances, it is near the costs of providing the benefits themselves. Many employers wonder as to this wisdom of
sponsoring a plan where the bean counting approaches the cost of the beans
themselves. As a
consequence; employers naturally contemplate whether there may be a wiser
course of action.
The Solutions
There are viable, reasonable and practical solutions to all three of the problems presented. It is the view of the writer that the employer should be more concerned as a prudent ERISA fiduciary of (a) not responding to the problems than (b) analyzing and attempting to solve the problems. The solutions which follow deal with funding, risk and structured solutions rather than a mere cutback in benefits or an increase in participant contributions.
The plan should be amended increasing the hours worked to gain full-time status to such number as 36, e.g. The employer, as an employment matter, should reclassify all working aged as part-time employees with a maximum number of hours per week not to exceed 36. Such workers and all non-participants under the plan at such time. What pay parity is required to have an economic balance between the employer’s and employee’s needs is a payroll matter. This solution is suggested on the presumption that the employer will not induce any participant elections so as to select against Medicare. See Appendix D.
Solution to Problem Two – Retired Former Employees
The employer has a range of options; measured by the employer’s generosity, They are as follows:
1. Offer retiree benefits to both early retirees and retirees over age 65.
2. By plan amendment, discontinue retiree coverage to any or all of the following persons:
a. Future plan participants only
b. Present plan participants who have not yet reached their retirement ages and also 2(a)
c. All present and future retirees including those presently classed as retirees:
i. Excepting early retirees
ii. Including early retirees.
Absent unique legal obstacles normally found only with negotiated plans, there should be no legal prohibition to the employer selecting any option above shown.
Solution to Problem Three – FAS 106 Reserves
FAS 106 reserves may be eliminated in either of two ways:
· Reclassifying the retiree to be a COBRA
· Changing a post-retirement to a post-termination benefit
· Creating a separate plan and risk pool.
Each of these will be discussed as they are applied; one to early retirees and the other to normal retirees.
Where early retirees are reclassed by a plan amendment to be COBRAs, with extended continuation benefits, the principles of similarly situated and unified risk pool come into play and the application of FAS 106 become inappropriate. See discussion in Appendix C.
Where the retirees over age 65 are made a closed group and are spun-off to a separate plan and risk pool, FAS 106 as no applicability thereto. Where active employees are not told, promised or induced to believe that such retiree benefits are to be expected, but that such benefits may, on a case-by-case basis be offered as in severance benefits, FAS 106 reserves are not applicable thereto. FAS 112 will likely apply, however. See relevant court cases in Appendix B.
Discussion
The four attached Appendices offer a discussion of several issues with retiree life medical coverage:
Appendix Topic
A Funding and Tax Considerations
B Legal Considerations
C Eliminating FAS 106 Reserves for Early Retirees
D Solving the Working Aged Problem
In a GAO Report (HEHS-98-110), the GAO made twelve observations on retiree health benefits: (1) retiree access to and participation in private insurance through an employer has undergone a slow but persistent decline since the early 1990;(2) there are several explanations for the erosion in coverage: (a) high and rising health care costs have spurred employers to look for ways to control their benefit expenditures, including eliminating retiree coverage and increasing cost sharing; and
(b) a new financial accounting standard developed in the late 1980s has changed employers’ perceptions of retiree health benefits and many have acted as a catalyst for reductions in retiree coverage; (3) the new rule makes employers much more aware of the future liability inherent in retiree health benefits by requiring them top account for its estimated value; (4) losing access to employer-based coverage poses major challenges for retirees; (5) the implementation of HIPAA has eliminated one potential obstacle for retirees who lose group coverage through their former employer—the possibility that coverage in the individual market will be denied or restricted by a preexisting medical condition; (6) because state laws governing the operation of the individual market differ, the premiums faced by early retirees vary substantially; (7) moreover, considering that large companies typically pay 70 to 80 percent of the premium, costs in the individual market may come as a rude awakening for early retirees; (8) early evidence from the from the implementation of HIPAA suggests that rates developed by insurance carriers for HIPAA-guaranteed access products are substantially higher than the prices of standard products available in the individual market to those who are healthy; (9) as a result, these older rates may understate the cost of a HIPAA product purchased today; (10) a key characteristic of America’s voluntary, employer-based system of health insurance is an employer’s freedom to modify the conditions of coverage or to terminate benefits; (11) when an employer has terminated retiree health benefits, federal courts have turned to the nature of the written agreements and other pertinent evidence covering the provision of retiree benefits to determine the legitimacy of the action; and (12) to address the potential gap in the coverage when a former employer unexpectedly terminates health insurance, Congress as well as the residents have proposed allowing affected retirees to purchase continuation coverage at a cost that reflects their higher utilization of services until they become eligible for Medicare.
Recent surveys indicate the continual termination of retiree coverage and the invocation of restrictions (added participant contributions and benefit cutbacks) should be expected. Overall, the future is gloomy for this benefit. While many present retirees may not lose their retiree health benefits, such benefits for future retirees will increasingly be discontinued. One of the major concerns with retiree medical plans is the very high Rx costs. Being considered for retirees is the defined contribution model. Such model has these advantages:
As retiree coverage shrinks, seniors will need the cash in their investments to cover their medical costs. Such cashing-in will further depress the already depressed securities market.
Appendix A
Funding and Tax
Considerations
Introduction
Numerous important facts need to be noted when postretirement health care benefits are considered.
Active worker health care costs increased 7%, while retiree health care costs increased 29%, according to a published study. Early retiree unit costs are 3.2 times active worker unit costs. One of the problems with retiree health care is the potential for abuse by the retiree, i.e., the total lack of any control or cost containments.
Before DEFRA, employers were able to prefund retiree health benefits by using a voluntary employees’ beneficiary association (VEBA). Abuses in overfunding led Congress to impose limits on VEBA prefunding. The limits took this form: (1) Increased medical costs as a result of VEBA utilization are not allowed, and (2) accounts for each individual person must be maintained. The impact of these Code changes is to discourage employers from prefunding any retiree health benefits. Employers with pension plans may prefund such benefits as a separate account under a defined benefit plan. Such prefunding is seldom seen and has not been readily accepted. One difficulty is that the medical benefits must be subordinate (meaning under 25% of the aggregate cost) to the retirement costs.
The Financial Accounting
Standards Board (FASB) has issued rules on accounting for postretirement
benefits other than pensions (FAS Statement No. 106). These rules have had a dramatic effect on the balance sheets of
many companies since they require the immediate accrual of postretirement
benefits as soon as they are earned by employees. Prior to FAS 106, employers were able to keep these liabilities
off their balance sheets by recognizing them in the year in which they are
paid; i.e., after retirement.
Reporting Rules. These accounting rules essentially treat postretirement welfare and insurance benefits as a form of deferred compensation and require that the liability for unfunded current and future benefits be accrued as benefits are earned. The practice of recognizing postretirement benefits on a pay-as-you-go basis is no longer permitted since it does not provide investors with the information needed to assess the financial consequences of an employer’s decision to provide these benefits. Employers are required under these rules to measure and accrue the postretirement liabilities that begin with the employee’s first day of employment and end the day the employee becomes eligible for full benefits. The actuarial present value of the benefits that are accrued as of a particular date is shown on the balance sheet over the period of the employee’s employment. The liability for the benefit is based on the amount of benefits that are expected to be paid when the employee retires and the anticipated period of payment, taking into account the estimated cost of providing these benefits at a particular future time and the extent to which the cost is absorbed by the employer, the employee and other programs such as Medicare.
Welfare Benefit Funds. An employer may establish a welfare benefit fund to provide for postretirement medical benefits. If a welfare benefit fund satisfies certain requirements, the fund generally will be exempt from income tax. Generally, the fund is required to be a voluntary employees’ beneficiary association (VEBA) (IRC §501(c)(9)), providing for the payment of life, sickness, accident or other benefits to the members of such association or their dependents or designated beneficiaries; and no part of the net earnings of the organization may inure (other than through such payments) to the benefit of any private shareholder or individual. The VEBA generally is required to satisfy certain rules prohibiting the provision of benefits on a basis that favors the employer’s highly compensated employees.
Certain special rules apply to the deductibility of employer contributions to a welfare benefit fund without regard to whether a VEBA is used to fund the benefits. Under these rules, the amount of the deduction otherwise allowable to the employer for a contribution to the fund for any taxable year may not exceed the qualified cost of the fund for the year. The qualified cost of a welfare benefit fund for a year is the sum of (1) the direct cost of the fund for the year, plus (2) the addition (without limits) in the qualified asset account under the fund for the year, reduced by (3) the after-tax income of the fund.
The qualified asset account may include a reserve to provide certain postretirement medical benefits. Amounts may be accumulated in the reserve so that funding of postretirement medical benefits can be completed upon the retirement of employees. However, these amounts may be accumulated no more rapidly than on a level basis over the working lives of the employees with the employer. Funding is considered level if it is determined under an acceptable funding method so that future postretirement medical benefits and administrative costs will be allocated to future pre-retirement years.
The Deficit Reduction Act of l984 cut short the two ways that had been available to employers to prefund retiree health care benefits. These were the VEBA and the pension trust. Even with these alternate funding devices, most employers paid retiree health care benefits as regular plan benefits. DEFRA established nondiscrimination rules for 501 (c) (9) contributions for retiree participants; investment earnings on reserves held by the IRC §501(c)(9) trust for retirees are subject to tax as ordinary income; retiree contributions are limited and actuarial inflation adjustments are not allowed; also, a 100% penalty tax is imposed on any disqualified benefits. Because IRC §401(b) trust funds have to be separate from pension trust funds and because pension-type discrimination rules were applied, these trusts were never used in practice.
Retiree Benefits and Mergers and Acquisitions
The
problem is where ad hoc retiree benefits are offered over the years without the
best of records and/or documentation.
When the subject employer is sold or merged, major recordkeeping
problems surface. Such benefits should
be subject to the same recordkeeping disciplines as COBRA or retirement
benefits. Adding to these horror
stories which often result in litigation and/or expanded employer liability is
the tax issue; discriminatory benefits must be taxed as compensation to the
beneficiary.
Government Contractors
Government
contactors must abide by new rules and regulations of the Cost Accounting
Standards Board. Such Board is a
department of the federal office of Management and Budget which oversees the spending,
compensation and benefits for the government.
The new rules are not good for employers.
·
Heretofor,
employers could be reimbursed for their retiree costs on a pay-as-you go basis
which meant that what ever they booked
they would be reimbursed for.
·
Now
employers must demonstrate that the funding for retiree benefits will be on a
100% vested basis. Once the retiree
reserve is set up it can be earmarked for other purposes. The Board must be satisfied that the
contractor will actually pay such retiree benefits.
The
rules are said to be very complicated and confusing.
Retiree Reserves for
Government Plans
The present AICPA pronouncements (called Government Accounting Standards or GAS) which deals with government retiree healthcare benefits are as follows:
Footnote disclosure of retiree health care benefits is required if such information is readily available.
A health care plan is part of a pension plan. In such circumstances they should be treated as two separate plans for accounting purposes.
Deal with pension plans.
Post-employment means postretirement and will be referred in this discussion as retiree. The subject benefits are ERISA welfare benefits (including disability and death benefits). The accounting logic is that such benefits are part of the employee’s compensation package; such benefits are earned over the working lifetime of the employee with the payment being deferred many years.
This AICPA pronouncement requires that government accounting shall following these principles:
To meet the requirement of GAS 34 for retiree benefits, a pronouncement similar to FAS 106 for private retiree benefits is being prepared.
Under the AICPA name of Other Post-Employment Benefits (OPEB) a pronouncement is being proposed that will treat government entity retiree costs in a manner similar to nongovernmental retiree costs. That is, a government entity version of FAS 106 will emerge. This proposed accounting pronouncement will be finalized in the next few years.
The employer deposited $41,000 into VEBA Trust; $14,000 was for the cost-spreading of retiree costs during the participant’s active life time; $27,000 was to fully fund the cost of those at 65 beginning retirement.
The IRS and the employer argued the deductibility issue in tax court which focused on this issue:
The full $41,000 is deductible because the both parts of the costs are appropriately spread over working lifetime of the participants. The preretirement costs are spread over the working lifetime of the actives; the postretirement cost of $27,000 is spread over the working lifetime of the retiree (which spread factor is 1).
The full $41,000 should be spread of which, by the IRS, only a portion of such contribution ($27,000, e.g.) is deductible. The logic of the IRS was that both the pre-retirement and the postretirement costs should be spread.
These differing opinions arose because of the
obfuscated wording of IRC §§419A(b) and 419 (c)(2).
The court held for the employer by distinguishing, as part of the funding process, the date at which time the reserve was originally established and then making a bifurcation of the participants as to those (a) active and (b) retired. In effect, the IRS wanted a single funding pool and the employer argued for a dual funding pool. See Wells Fargo & Co. v. Commissioner, 120 TC No 5 (2003).
Steps to More Cost-Effective Retiree Benefits
A brief outline of how the plan sponsor might obtain more cost-effective retiree benefits follows:
A.
Review Eligibility Rules for Early Retirees
Encourage employees to delay retirement
B.
More Efficient Administration
1. Reduce overhead costs
2. Obtain better discounts
C.
Revised Medicare Coordination
The plan document should make clear which method of coordination it will used when it is secondary to Medicare. Consider the Medicare Worksheet which shows the following:
Amount Charged $1000
Medicare-Approved Charges 800
Paid by Medicare 640
Paid by Patient 160
The plan, as secondary, may coordinate as follows (80% benefits with deductible being met):
● Traditional
Submitted Charge $1000
Plan Benefit 800
Plan pays the lesser of $160 or $800
● Exclusion
Submitted Charge $ 800
Plan Benefit 640
Plan pays the lesser of $160 or $640
● Carveout
Submitted Charge $ 800
Plan Benefit Gross 640
Less paid by Medicare 640
Plan Benefit – Net 0
D.
Supplemental Method
This method eliminates the traditional COB approach and uses, instead, the Medicare Supplement benefit. A typical supplemental retiree benefit would provide the following:
● All of Medicare’s Part A deductibles except for $200
● No payment for Medicare’s Part B deductible.
● Stand-alone Rx card.
E.
Individual Accountability
This introduces consumer-directed influences as managed care tools with retiree benefits. There are two broad-based approaches:
● Subsidy and other options
Benefits may be a function of tenure; account balances may be used; cafeteria options may be offered.
● Consumer-Directed
The joining of employer-paid HRA accounts with a high deductible
may be considered.
Appendix B
ERISA requires retirement pension benefits to vest but does not require retiree medical benefits to vest. This has resulted in confusion in that retiree medical benefits may be described in many ways:
· SPD.
While the plethora of relevant court decisions are of interest, the most
instructive litigation is Sprague v.
General Motors discussed herein.
The future in retiree medical benefits is doubtful for these reasons:
Since retiree health benefits are not vested, employer had every right to discontinue or modify such benefits. The employer elected to discontinue such retiree health benefits for employees retiring after Date X. Such right was clearly stated on the SPD. Court held that participants had to accept the cutback.1
Considering all of the
evidence, the court held the employer was able to amend the plan to reduce
retiree benefits for actives but not for current retirees. Once on retirement, medical benefit vest.2 Where retiree benefits, nonvested by
ERISA, may be changed by plan and SPD language, actions by employer to cut back
or eliminate them will not be stopped by the court.3
Because retiree health benefits do not impact on the terms and conditions of employment, they are not proper subjects of collective bargaining.4 In determining whether agreements provide contractual lifetime retiree health benefits, extrinsic evidence is permissible.5
Collective bargaining agreement vested retiree pension benefits but was silent on retiree medical benefits. Plan document and SPD gave employer right to amend. Thus, employer had every right to amend plan so as to cut back or even eliminate retiree benefits.6 Latent ambiguity in collective bargaining agreement put in dispute whether or not the retiree benefits extended beyond the terms of the agreement. As a result thereof, the court held for the workers who got to continue their lifetime retiree health coverage.7 Unclear language in collective bargaining agreement regarding vesting of retiree benefits was resolved by the introduction of extrinsic evidence that indicated benefits were to vest.8
Employer had right to make retiree health benefits contributory because (a) such benefits were nonvested, (b) plan and SPD clearly gave employer the right to amend and (c) oral communications did not change clear SPD language.9 It is not violative of ERISA to reduce benefits because such are not vested. Informal communications suggesting the contrary are not controlling and do not nullify employer’s right to amend the plan.10
Court gave an injunction for employer to continue retiree medical benefits when it appeared likely that a class action suit proving such benefits were payable would succeed.11
Vesting of benefits under ERISA is not limited to retirement plans but may apply also to welfare plans.12 Where (a) there is no clear reservation of rights provision (permitting employer to unilaterally amend retiree benefits), (b) the benefits are collectively bargained and (c) retirees have a reasonable inference of benefits vesting, such benefits are likely, but not certainly, vested. Even if the retiree benefits are described in the booklet as lifetime and even if such assurances are backed by either oral or written assurances, so long as the plan document gives the plan sponsor the right to modify or amend such benefits, they do not vest.13
The employer was permitted by the court to eliminate retiree
benefits where the plan had the right to amend provision, even if lifetime
benefits are provided. That employer
made oral representations was of no matter.14 The retirees sued, alleging that employer’s
failure to provide their retiree health care benefits was a state law breach
(consumer fraud and deceptive business practices). Court held that the matter was strictly ERISA-related and the
employees could expect no state law relief.15
The Supreme Court held that it was age discrimination to give a retiree under Medicare plan coverage that is inferior to the plan coverage of a retiree who is not under Medicare. In the case decided, the retirees who were Medicare eligible were given a special HMO Medicare Plus package.16 The EEOC has promulgated regulations which provide that it is not a violation of the ADEA to alter, reduce or eliminate health benefits for retirees when the participant becomes eligible for Medicare health benefits or a comparable State health benefits. No other aspect of ADEA coverage and no employee benefits other than retiree health benefits are affected by the proposed regulations.
Endnotes
Appendix C
Eliminating FAS 106 Reserves
for Early Retirees
The employer1 may amend its health care
plan document so as to redefine a participant, with contributory early
retirement benefits, to be a COBRA.
Such amendment would, e.g., extend COBRA to cover the period from (a)
early retirement age plus 18 months to (b) age 65.
· Congress crafted COBRA to be a minimum benefit. 2
The significance of the decision for the employer is that FASB 1063 requires a buildup or accrual of liabilities of such early employer-provided retiree costs during the participants’ working lifetime. Such accrual is not required for COBRAs. The writer asserts that every employer, as an ERISA-demanded act of prudency, should make a conscious and deliberate plan design decision to amend or not to amend where early retirees with contributory benefits are involved. Consequences of such decision are reviewed in the next section. This suggestion applies only to early retiree benefits, which are funded, in part, by participant contributions. Treatment of over-65 retiree benefits is unchanged.
Legal
The writer is informed by ERISA attorneys that such decision to amend or not to amend is a legal non-issue. However the redefinition amendment must not diminish any promised benefits to such retirees; nor significantly discriminate (either to help the prohibited group or to harm the protected group). Existence of any related labor or employment contracts must be considered. The different legal status of such early retirees and COBRAs must be recognized:
· The COBRA may, prior to the end of such COBRA extension period, return to work and be treated as having unbroken service. Such is normally not the case with an early retiree.
Financial
It is absolutely certain that plan administrative costs will decrease because the FAS 106 maintenance costs will disappear. Such cost decrease may be significant. Employers who seek high reserves have the right to treat such participants as early retirees. Those who seek low reserves have the right to treat such participants as COBRAs. Benefit costs from such redefining will not be affected measurably. COBRA benefits are a bit more expansive because of the secondary event requirements of COBRA. With such amendment, the so-called FAS 106 accrued liability drops to $0. This would, where material, be treated as a change in accounting practice. Where the employer pays any portion of the retiree costs, FAS 1124 would apply when the COBRA event occurs. That is, the present value of the employer’s cost of the COBRA premiums is a FAS 112 liability. With early retirees, the plan has two funds (a) actives/COBRAs and (b) early retirees. Where such early retirees have been amended to COBRAs, the plan has but a single fund. Depending on many factors, the bottom line cost effect for the COBRAs, early retirees and employer cannot be predicted. See Exhibit A, attached, for a numerical illustration of how such redefinition will eliminate early retiree reserves.
Contributory
v. Non-Contributory Issue
In the analysis of the offered suggestion, three different early retirement funding situations should be examined:
The redefinition suggestion should be fully accepted by the accountants. Funding commonality with early retirees and COBRAs exists.
The redefinition suggestion should be reviewed by the accountant and accepted or denied on a case-by-case basis. Sufficient funding commonality between early retirees and COBRAs may or may not exist.
The redefinition suggestion should not be accepted and FAS 106 should be applied. Funding commonality between early retirees and COBRA does not exist.
Government
Entity Plans
No accounting pronouncement similar to FAS 106 has been published for government plans.5 Where such entities choose to recognize accrued liabilities on a voluntary basis (fiscal strategy, bond ratings, e.g.), such suggestion is not appropriate because reduced reserves are not a goal. When the Government Accounting Standards Board does, in the future, require accrued liabilities (as does FAS 106), the suggestion of amend or not to amend would be most appropriate at such time.
Publicly-Traded Employers
Consider two competitive publicly-traded employers, A and B, which have similar balance sheets, markets, size, etc. Employer A extended COBRA (thereby redefining early retirees) while Employer B was not advised of its option to do so. Such difference in practice will give Employer A a financial one-up on Employer B. The writer’s primary concern is that Employer A and B have a level playing field as regards knowing their options.
Responses of Affected Persons
The writer’s experience with this suggestion goes back at least 15 years and is summarized as follows:
Affected Person Response
Participants Favorable; they prefer being COBRAs.
Employers Very favorable; they appreciate having the freedom to choose.
Attorneys Neutral – for them it is an accounting and not a legal issue.
Accountants Initial response is usually silent, negative or skeptical. However. accountants will normally honor the plan document language when confronted directly. therewith and where the plan is contributory.
Actuaries Response unknown, will probably be negative
Regulators No formal response has been sought.
TPAs Favorable
Consultants Favorable
Risk Managers Favorable
Bankruptcy
of Employer
When the participant is provided coverage, after active service, prior to age 65, either as (a) a COBRA or (b) a retiree, the effect of the employer’s bankruptcy on the security of such benefits is essentially the same. Consider the following:
bankruptcy.
ERISA specifies that retirees shall be afforded the rights as COBRAs in certain instances:6
i. Loss of coverage is due to a Chapter 11 bankruptcy.
ii. Such loss occurred between the period of one year prior to one year after such bankruptcy filing.
iii. COBRA rights extend to family members.
iv. COBRA continuation period is extended to lifetime.
Chapter 11 of the Bankruptcy Code provide that retiree health benefits shall be afforded preferential treatment7 regardless of the funding method (insured v. self-funding, e.g.)8 of such benefits.
Commentary
This suggestions is not new, but it is not widely known and should be. It does not force anything on anyone, but does offer the employer an ERISA funding option within a small benefit area. What will we do if Congress forces COBRA to be extended to cover the so-called gap period? Will not this issue need to be examined at such a time: Will this suggestions lesson the likelihood of forced COBRA benefit expansion by Congress? In dealing with such plan, should we not be both logical and prudent? With small plans, the maintenance costs of FAS 106 are usually excessive when measured against the benefits. Accounting disciplines must be honored. The final decision as to whether such redefinition will, or will not, be honored as always is with the accountant. However, early retirees and COBRAs are significantly different and must be treated. If the accountants believe this suggestion violates sound accounting principles, FAS 106 should be amended so as to clearly distinguish between two classes of COBRAs:
Endnotes
Allegheny International, Inc. v. Metropolitan Life Insurance Company, 145 BR 820.
EXHIBIT A
ILLUSTRATIVE RESERVE REDUCTION RESULTING FROM RECLASSIFICATION OF EARLY RETIREES TO COBRA
1. Present value of the employer’s cost of retiree health care benefits.
a. At age 65 $20,000
b. At age 60 30,000
2. Present value of the employer’s cost of retiree health care benefits from age 60 to 65.
a. At age 60 $10,000
3. Consider John, age 45, hired at 30.
The employer will have an accrued liability where John, by the Plan Document, is treated as follows:
$30,000 (45-30) = $15,000
60 – 30
$20,000 x (45 – 30) = $8,571
65 – 30
The example results in a $6,429 reserve reduction.
Note: Significant variables, such as inflation, interest, mortality, morbidity, turnover,
probability of early retirement, etc., are ignored to simplify the illustration. Benefit
is full medical at employer cost beginning at age 60, if early retired, with 25 years of
service. Such early retiree benefits are not employer-pay-all.
Appendix D
Solving the Working Aged
Problem
Over the years, the employer has accumulated valued employees, who wish to continue working. With health care Plan as primary, and Medicare as secondary, the meeting of the needs of both the employer and the employees has become very difficult. Of great and recent concern are the risks, real or perceived, of the over-65 group which make stop-loss very difficult to obtain. There is an appropriate solution to this challenging problem. The steps of the solution, the logic thereof and the suggested language to the Plan Document follow:
Step
1
The Plan should be amended increasing the hours per week for eligibility from, say 32 to say 36. Note: The hours is a judgment call with the employer. The employer then permits those employees who wish to be non-eligible employees and to change their status from salaried to hourly with a not-to-exceed maximum of 36 hours. The employer may wish to sweeten the hourly rate, but that is not mandatory. These employees so electing (and their dependents), as a consequence, are off the Plan. Alternatively, the employer may make all employees over age 65 non-eligible employees.
Step
2
The employer then sponsors a new Plan (a new DOL Plan Number, New Plan Name, etc.). The new Plan offers only Rx, (or perhaps, wellness or vision), e.g. The present Plan can be easily amended so as to create this additional Plan. Amending, copying, etc. is all that is needed. The SPD of the new Plan may be a customized letter only. There is a six-foot wall between the regular Plan and the Rx-only Plan so as to make amply clear that the experience, funding, etc. of the two Plans are not connected. Monitoring of and participant contributions for the two Plans are totally independent.
Step
3
When the over-65 employee leaves the regular Plan and goes to the Rx-only Plan, any of his dependents over-65 go with him. Any of his dependents under 65 remain on the regular Plan as Special Class Participants. See Attachment A for an accommodating Plan Amendment. Such under 65 dependents remain on the regular Plan until the (a) employee ceases employment or such dependents attain age 65, whichever is the sooner.
It is essential that the stop-loss carrier be shown that there are no covered persons in excess of the age of 65. Also, that there no retiree lives to be covered.
Attachment
A
Plan Amendment
There shall be a Special Class Participant defined to be the dependents of a former Plan Participant, while such Participant is a part-time employee ineligible for the Plan. Such Special Class Participant is neither a Participant (due to lack of Employment Status) nor a dependent (due to the former Plan Participant no longer being a Plan Participant). Such Special Class Participant (a) shall retain such status so long as the former Plan participant remains an employee, is under 65, (b) is not covered by Medicare due to disability and (c) requisite contributions have been made. For COBRA purposes, such Special Class Participant shall be treated as a dependent. Upon attaining age 65, such Special Class Participant becomes eligible for dependent status on the Rx-only Benefit Plan.