New insurance options for retired workers

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Eleanor Laise

As employers continue to drop retirees from group health plans, new alternatives are emerging that may ease their pain. A growing number of employers are making cash contributions to individual accounts that help retired workers pay for insurance they shop for themselves.

New private exchanges are helping retirees select their own health plans. And when health benefits evaporate in an employer’s bankruptcy, recent rule changes make it easier for some early retirees to use an obscure tax credit that covers nearly 75 percent of their insurance premiums.

Still, the new approaches also bring challenges. Fixed employer contributions may not buy as much coverage as people received in their old group plans. And retirees who’ve long depended on an employer’s plan may feel overwhelmed by the task of shopping for their own insurance.

Many people have paid attention to their insurance choices only once a year at open enrollment, but “now the consumer experience is coming to health insurance,” said Nate Purpura, director of consumer information at eHealthInsurance.com. Consumers will have to be well informed, he said, and “become much more conscious of costs.”

The changes may be most daunting for retirees younger than 65 who’ve been receiving employer benefits, since those benefits generally play a more central role in their health coverage. Traditionally, workers whose benefits extended into retirement could maintain their group coverage after retiring early. After age 65, any employer benefits play a more secondary role, supplementing Medicare coverage.

Fewer offer retiree benefits

Although employers have been trimming retiree health benefits for years, retirees can expect more cuts in the near future.

Almost 30 percent of companies sponsoring retiree medical plans say they’re very likely to terminate programs for retirees older than 65 by 2015, and almost 20 percent say they’re very likely to make the move for retirees younger than 65, according to consulting firm Towers Watson.

And many public-sector employers, which up until now have tended to maintain health benefits for retirees, are likely to accelerate cutbacks as they confront fiscal problems, said Paul Fronstin, director of the Employee Benefit Research Institute’s health research and education program.

Those who still enjoy group health benefits from a former employer are likely to see higher premiums, stricter eligibility requirements or reduced benefits.

The healthcare overhaul law carries benefits for early retirees. The law establishes new state-based exchanges where individuals who lack coverage can shop for insurance, and it provides tax credits to defray premium costs for people who meet income qualifications. It also prevents insurers from denying coverage based on preexisting conditions. The exchanges are scheduled to be up and running in 2014.

By creating a friendlier insurance market for pre-Medicare retirees, however, the law could also prompt more employers to stop sponsoring retiree health plans. Many employers may see little reason to continue offering group coverage to retirees younger than 65 when affordable coverage is available through the state exchanges, benefits experts say.

The shift to exchanges

A growing group of employers are now looking to private exchanges to help their retirees find coverage.

Whereas many companies traditionally have sponsored supplemental group plans that fill in gaps in Medicare coverage for retirees older than 65, some large employers are now contracting with private exchanges — essentially insurance marketplaces — that help these retirees choose Medicare Advantage or Medicare supplemental and Part D prescription-drug plans.

Employers typically cover at least part of the cost by contributing a set amount to a health reimbursement arrangement (HRA), through which retirees are reimbursed tax-free for premiums and other qualified medical expenses.

As with defined-contribution 401(k) plans, employers that offer HRAs get fixed, predictable costs, and retirees face greater risks and responsibilities.

Among the concerns: whether the employer’s contribution will buy the same level of coverage previously provided by the employer, and whether those contributions will keep pace with rising costs, Fronstin said.

Many employers in years to come are likely to set up HRAs for retirees younger than 65 and tell them to go shop on new state and private exchanges. Nearly two-thirds of employers say they’ll consider directing pre-Medicare retirees to an exchange sometime after this year, according to a survey by consultant Aon Hewitt.

Tax credits and COBRA

In many employer bankruptcies, retiree health benefits quickly fall by the wayside. But a growing number of early retirees whose former employers have gone bankrupt are finding ways to take advantage of a generous tax credit that helps pay for health insurance.

The Health Coverage Tax Credit covers 72.5 percent of insurance premiums for people age 55 to 64 who are in a qualifying health plan and receive pension benefits from the Pension Benefit Guaranty Corp., the federal agency that often takes over the pension plans of bankrupt companies.

Although the credit has been around since 2002, up until 2009 for many retirees the procedure to access it “was unbelievably complicated,” often requiring an IRS private letter ruling, said Dean Gloster, a San Francisco lawyer who specializes in setting up plans that qualify for the credit.

But Congress made the tax credit more accessible in 2009, in part by allowing bankruptcy courts to authorize special tax-exempt trusts known as Voluntary Employee Beneficiary Associations (VEBAs), whose benefits are eligible for the tax credit.

Several industry-wide VEBAs have been established in recent years that allow auto, steel and airline company retirees to get the tax credit. The retirees generally pay their 27.5 percent share of premiums each month, the IRS pays the remaining 72.5 percent, and an administrator collects the payments and forwards them to the insurers. The VEBAs typically provide dental and vision coverage as well as medical benefits.

Tens of thousands of retirees who are eligible for the credit aren’t enrolled to receive it — and they probably don’t even know it exists, said Cathy Cone, managing partner at Cone Insurance Group, in Houston, Texas, which established the new industry-wide VEBAs. Retirees can go to www.conebenefits.com for more information.

To be sure, many early retirees have no access to tax credits or employer contributions of any kind. If you worked for a company with 20 or more employees, you may have access to COBRA, which typically allows you to continue your employer’s coverage for 18 months after retirement.

Another option for early retirees is a short-term policy that can bridge the gap until you’re eligible for Medicare. These are bare-bones policies that generally don’t cover preexisting conditions, and that won’t change in 2014.

You might also consider a high-deductible health plan coupled with a health savings account, where you can set aside money tax free to pay for healthcare expenses. (For more on HSAs, go to www.treasury.gov and type “HSA” in the search engine.)

You can compare short-term, HSA-compatible and other plans using online marketplaces such as eHealthInsurance.com. Or find an insurance broker in your area at www.nahu.org.

© 2013, Kiplinger. All rights reserved. Distributed by Tribune Media Services, Inc.