Early Retirement Health Care Quandary Keeps Workers on the Job

Exchanges offer new opportunities for post-employment health benefits

By Greg Goth July 31, 2017

Many employees who would like to retire instead stay on the job so that they can keep their health care coverage. Employers that want to help ease their transition can look into private health care exchanges and the Affordable Care Act's (ACA's) public marketplace exchanges for opportunities to subsidize coverage without having to maintain a group health plan for former employees.

According to the Society for Human Resource Management's (SHRM's) 2017 Employee Benefits survey report, 19 percent of SHRM members provided some type of retiree health coverage. In 2013, 23 percent did.

"Private-sector employers aren't obligated to offer health benefits to retirees, and even if they do offer such benefits, employers can reduce or terminate that coverage absent an agreement to the contrary," SHRM Online reported last year. Retiree health benefits that are subject to a collective bargaining agreement, however, cannot be reduced absent renegotiation.

The decline of retiree health coverage makes it more challenging for employees to find a path to early retirement and be confident they could find affordable coverage until they reach Medicare eligibility, said Julie Stone, a senior health and benefits consultant at global advisory firm Willis Towers Watson. This, in turn, could adversely affect employees in the age cohort just below the 50-plus group. "If their older colleagues stay at work because they feel they need their employer-sponsored health insurance, these slightly younger people could face career stagnation or feel forced to change employers to get a promotion," she noted.

"Increasing numbers of employees are postponing retirement, many driven by financial necessity," including the need to maintain health care coverage, said Kevin Mahoney, senior institutional consultant at The Mahoney Group of Raymond James, a financial advisory firm in West Nyack, N.Y.

While older workers who love their jobs tend to be engaged and productive, "those who are still working solely because they can't afford to retire tend to be less healthy, highly stressed and disengaged from their jobs," Mahoney said during his presentation in June at the SHRM 2017 Annual Conference & Exposition. "The ones who don't want to be there are the ones you don't want to keep."

[SHRM members-only toolkit: Employee Older Workers]

Exchange-Based Options

Among the pre-Medicare retiree group—generally, those younger than 65—increases in health care costs when retiring averaged about twice the increase for Medicare enrollees, Willis Towers Watson's research shows. This poses challenges to organizations that want to provide health care support to early retirees.

Among employers that the consultancy surveyed last year, 72 percent were planning to make "moderate to significant" changes in pre-Medicare retirement health benefits through 2020. Many, for instance, are shifting their Medicare-eligible retirees to private exchanges such as Willis Towers Watson's OneExchange, Mercer's Mercer Marketplace and Aon Hewitt's Aon Retiree Health Exchange. Through negotiations with the insurers participating on the exchange, employers can set the level of subsidy they wish to provide for coverage that retirees purchase.

Other employers will fund health reimbursement arrangements (HRAs) that early retirees can use to purchase plans through the ACA's marketplace exchanges. HRAs are funded exclusively by employers with pretax dollars.

Economist Sita Slavov, a professor of public policy at George Mason University in Arlington, Va., has studied the effect that offering early retiree insurance has had on the workforce.

"One thing we speculated about when we wrote this set of papers was, now that basically retiree health insurance is available through the [ACA's] exchanges, might employers who offer it stop offering it?" Slavov asked. "There seems to be some evidence they were doing that."

A survey released last year by the nonprofit Kaiser Family Foundation found that among large firms (those with 200 or more workers) offering health benefits to retirees, 17 percent were considering changing the way they offer retiree coverage and may provide subsidies for retirees to purchase coverage through the ACA's marketplace—either major medical policies for pre-65 retirees or supplemental "medigap" polices for those who are Medicare-eligible.

Whether private or public, the exchange model can benefit both employers and retirees, experts say. Employers' costs for annual subsidies to retirees purchasing health policies through an exchange are capped and predictable. Meanwhile, retirees can pick among different plans and rates.

Using HSAs to Prepare for Retiree Health Expenses

Helping employees to use health savings accounts (HSAs) to prepare for future medical expenses post-retirement is another strategy.

"Less than 5 percent of America's workers have access to and save on a tax-favored basis for future medical expenses—including HSA-qualifying expenses like employer-sponsored Medicare supplement and long term care insurance premiums, and/or for acute care, prescription drug and long term care out-of-pocket retiree medical expenses," blogged Jack Towarnicky, executive director of the Chicago-based Plan Sponsor Council of America, and employers group.

To resolve the retirement coverage crisis, "Offer your employees a HSA-qualifying medical coverage option and offer your retirees (however you want to define retiree), a retiree-pay-all Medicare Supplement coverage option," he advised.

Since many employees rely on their HSA contributions to fund current medical needs, employer contributions to their accounts can help them to build up savings for post-retirement expenses.

Still a Benefit to Boast About

Not all employers prefer jettisoning their retiree group health plans in favor of an exchange-based approach, however. Julia Hicks, director of HR at Wesleyan University in Middletown, Conn., said the university has been offering early retirees health insurance through a group plan for 25 years, with the university paying two-thirds of the premium.

"Although it may not be at the top of their priority list when searching for employment, it's seen as a very attractive and appreciated benefit," Hicks said. In terms of providing a recruiting advantage, "it certainly is a substantial plus."

Duke University and its affiliated health system, which at 37,000 employees is North Carolina's second-largest private-sector employer, has not wavered in offering its early retirees health insurance. Kyle Cavanaugh, Duke's vice president for administration, said the coverage is a vital piece of the organization's compensation.

"By and large, the value proposition of coming to work for an institution like Duke is total compensation, including benefits, and a significant component of that is health care" for active employees and retirees.

Duke offers its retirees coverage under its group health plan, with the retiree's percentage of premium calculated based on the "Rule of 75"—the total of the retiree's age and years of service must add up to 75, after which the university pays 60 percent of the individual premium and the retiree pays 40 percent. Duke also pays at least 50 percent of premiums for spouses and other dependents.

The secret to balancing an organization's ability to react to shifting policy winds while maintaining some sense of stability for employees' benefits, Cavanaugh said, is to realize that strategic planning needs to be conducted more often while changes need to be implemented gradually.

"I can say with confidence what we're doing in 2018 and with pretty good confidence what we'll be doing in 2019," he remarked. "I get less and less confident as we go further out, and a lot of that will depend on what will shake out from a national perspective," considering possible changes to government health care benefits, particularly the scope of Medicare and federal subsidies for ACA policies.

In the meantime, Cavanaugh said that he plans to "be responsive to our employees and retirees and continue the existing benefit for some period of time."

Related SHRM Article:

Phased Retirement Gets a Second Look, SHRM Online Benefits, July 2017

Can an Employer Reduce or Eliminate Retiree Benefits?, SHRM Online Employment Law, October 2016

As Employers Drop Coverage, Retirees Turn to Private Exchanges, SHRM Online Benefits, September 2013

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