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HRAs: Another Option for Retiree Health Funding

By Stephen Miller  10/22/2007
 

Unlike General Motors, most employers are unlikely to set up so-called voluntary employees' beneficiary associations, or VEBAs , to be turned over and administered by employee unions in order to fund retiree health care. But the dramatic news out of Detroit has gotten many thinking about the broader issues of the GM-United Auto Workers settlement�funding retiree health via a defined contribution, rather than defined benefit, approach that leaves employees with the responsibility, and risk, of managing their health care.

The factors that led GM to negotiate prefunding of its retiree health benefits via a separate trust also come into play in an approach that is a much more likely option for most employers�the use of health reimbursement arrangements (HRAs) that are dedicated to funding retiree health benefits, in addition to HRAs or other health benefits for current employees.

HRAs and Health Coverage Options
The two most common types of consumer-directed health plan are:

    • Health reimbursement arrangements (HRAs), with accounts owned and funded by the employer in trust for employees or retirees.

    • Health savings accounts (HSAs),
    owned by the employee and funded by either the employee or with contributions from the employer (or by a mix of both).

While HSAs must be tied to a high-deductible health plan, an employee's or retiree's ability to participate in an HRA is not affected by the type of health plan coverage elected by or available to them. Employees or retirees with any type of health plan coverage, or no health plan coverage, can be permitted to participate in an HRA. (To learn more, see "FSA, HRA, HSA: The Alphabet Soup of Defined Contribution Health Care Programs" and "Consumer-Driven Decision: Weighing HSAs vs. HRAs.")

A Changed World

"The world of retiree medical benefits has become very exciting recently," Adam Eichstadt , senior group and health care consultant at Watson Wyatt Worldwide, told attendees at the September 2007 Benefits Management Forum & Expo, held in Dallas. "The marketplace has evolved rapidly," he noted, with the advent of consumer-directed plans as well as Medicare Advantage plans and Medicare supplement plans for retirees. "There is a tremendous opportunity for employers to reduce their administrative burden, reduce the finance costs, while at the same time providing choice and flexibility for the plan participants," he maintained.

Referencing consumer-directed health plans, Eichstadt advised "extending that strategy to retirees, particularly on the post-65 side, while at the same time changing the benefit equation for a defined benefit plan where you have maybe a $100 deductible and 80 percent co-insurance, to something that says, 'As an employer, I'm going to provide you with x dollars per month.' Now you can tightly manage the financial subsidy, the financial structure" and avoid many of the cost and administrative burdens that recent accounting reforms have placed on retiree benefits. (See "FASB Tightens Pension Accounting Rules To Show True Cost of Post-Retirement Benefits.")

 

SHRM Video

Adam Eichstadt, senior group and health care consultant for Watson Wyatt Worldwide, discusses the advantages of using health reimbursement arrangements to fund retiree health benefits.

Video Watch video clip

"Tying together retiree health and consumerism is an extension of what's going on in the active health care marketplace, where we've got HRAs and HSAs, and employers trying to pull plan participants into the financial equation," Eichstadt noted. "Part of the reason to do that is promote the financial mind-set that 'his is my money, and I need to determine learn how to spend it wisely.' "

As with the more common use of consumer-directed approaches for current employees, when HRAs are established for retiree health, Eichstadt explained, "You're giving retirees X dollars per month, and they determine what policy is best for them. If they want a Cadillac of a plan, they can go out, add some money to what you've already provided them, and select that plan. However, if it best suits their needs, now they have the opportunity to select a plan that's maybe a little bit less costly. And they can save those employer dollars for something else."

Usually, the HRA for retirees is a separate account, and it can be structured in a number of different ways, Eichstadt said. Some employers will credit amounts over a working lifetime so that an employee's account balance builds up with years of service, "and then they have a pot of money at retirement," he noted. "Other employers will say upon retirement I will give you X dollars per month. Money that you don't use stays credited in the account, and you can roll it over for future use. There's also flexibility in terms of how employers structure the accounts, depending on what their goals and objectives happen to be for the program."

ROI for Employers

The financial equation is very strong for this type of solution for retirees, for several reasons, Eichstadt said.

Number one, as with retiree pension plans, when employers structure retiree health benefits based on a defined contribution approach they maintain "much tighter control over the financial outlay, as opposed to providing a traditional plan, where they're basically at the mercy of the health care marketplace in terms of the cost trend going up 8, 10 or 12 percent annually, and they're on the hook for providing that benefit," he pointed out.

But with a defined contribution, consumer-directed approach, employers have "a very tightly defined financial equation. They can determine how much and how quickly the subsidy increases over time."

Another ROI component is the ability to maximize the value of the Medicare marketplace. "Right now, the way that the federal government has structured the Medicare Advantage program provides a subsidy to the benefits" that employers are providing. That means "you can probably provide a richer benefit at a lower cost by driving it through a Medicare Advantage program, because of the way the program is structured and the federal subsidies that are going toward those particular plans."

Medicare Advantage Coverage
Most of the elderly and disabled on Medicare have their health bills paid by the traditional fee-for-service program, while 19 percent receive their Medicare benefits through private health plans that receive payments from Medicare, generally known as "Medicare Advantage" plans.

Medicare pays Medicare Advantage plans to provide basic Medicare benefits. Plans must use any savings to reduce enrollee premiums or improve benefits. In 2006, the majority of Medicare Advantage plans provided the basic Medicare drug benefit or enhanced alternative drug coverage.

Many Medical Advantage plans have expanded services to rural areas where the benchmark rate is significantly higher than Medicare fee-for-service costs since these areas were given increases in payment rates under earlier law.

Source: Fact Sheet -- Medicare Advantage (Kaiser Family Foundation)

A Helping Hand

Eichstadt emphasized the advantages of using a third-party Medicare coordinator to help retirees with HRAs to select from among available health coverage options. "Employers are uncomfortable just turning their retirees loose out into the marketplace," he noted. "When you have a coordinator who can answer phone calls, provide retirees with a menu of health plan choices to choose from and help them enroll, it gives employers a higher comfort level in terms of moving retirees into the individual marketplace."

HRAs and VEBAs
At the 2007 SHRM Annual Conference, Antoinette "Toni" Pilzner, an attorney with Butzel Long in Ann Arbor, Mich., described how employers may choose to fund HRAs through a single VEBA trust account, setting aside actual dollars in the trust as employees accrue them. The catch: Typically with HRAs, employers can (at their discretion, as long as everyone is treated the same) require forfeiture by employees who terminate pre-retirement. But with VEBA-funded HRAs, employers can't decide to take back these funds even if employees leave pre-retirement, making the HRAs more like HSAs in that regard.

Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.

Related Articles:

Consumer-Driven Decision: Weighing HSAs vs. HRAs, SHRM Online Benefits Discipline, May 2011  

Many Weighing Retiree Medical Benefit Options, SHRM Online Comp & Benefits Focus Area, July 2007

Health Care Threatens Retirement Benefits, SHRM Online Comp & Benefits Focus Area, June 2007

Retiree Health: Employers Favor Providing Access, Not Funding, SHRM Online Comp & Benefits Focus Area, May 2007

Retiree Health Care: Many Employers Trim Their Sails but Stay the Course, SHRM Online Comp & Benefits Focus Area, April 2007

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