How Long Will Your Retiree Health Plan Last?

The federal government’s subsidy of retiree health benefits may run out within 2 years, a study finds.

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The federal government is giving companies $5 billion to maintain health care coverage for early retirees. The Early Retiree Reinsurance Program, created by the health reform bill, will subsidize employers that provide health insurance to retirees age 55 and older who are not yet eligible for Medicare until health insurance exchanges become operational in 2014. However, a new study found that the government payout may not last four years.

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The $5 billion employer subsidy, which went into effect on June 1, 2010, is likely to last only two years and may not be available in 2012 or 2013, according to a new Employee Benefit Research Institute analysis. If the subsidy were drawn down by all eligible early retirees and their dependents, $2.5 billion of the $5 billion available would be exhausted in the first year of the program.

Early retiree health benefit programs currently cover 1.3 million people including the retirees and their spouses and dependents, according to EBRI. Employers paid an average of $7,600 per retiree and $6,300 per dependent for this insurance.

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The Early Retiree Reinsurance Program provides an 80 percent subsidy for retiree claims between $15,000 and $90,000. While 87 percent of retirees did not incur claims above $15,000, the 13 percent of retirees with health expenses above the threshold resulted in $5.1 billion in employer costs. Subsidizing 80 percent of the cost of early retiree claims between $15,000 and $90,000 could yield $1.4 billion in subsidies in the first full year of the program, EBRI calculated. The 10 percent of spouses who qualify could get another $443 million in subsidies, assuming all eligible employers apply for the reimbursement program. Workers with retiree health benefits and their dependents would be eligible for another $713 million.

Over three-quarters (76 percent) of employers providing retiree health plans plan to pursue reimbursement, according to a Hewitt Associates survey of 245 large employers offering medical benefits to over 1.3 million retirees. Hewitt estimates that the average federal reimbursement will be between $2,000 and $3,000 per retiree each year. A company providing insurance to 1,000 retirees could receive between $2 million and $3 million from the federal government.

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Under current law the reinsurance program will last only until the $5 billion set aside for the program is exhausted or health insurance exchanges become operational in 2014. A recent Towers Watson survey of benefit professionals at 392 companies with retiree health plans found that 43 percent plan to soon reduce or eliminate retiree coverage.