However, among those aged 40 and over with family incomes of $20,000 to $29,999, 21 per- acc dueount to the is intended need to am toortize fund the the liability past oblig over ations the and emplto oyees expen ' sw eorbenefits king life, asneither earned health rather than health liabilities. In this method, the employer purchases life insurance on the active work • Retiree Health Benefits: What Is the Promise? Washington, DC: Employee Benefit Research c case over 3a 4ge.There, Under in terms this scof hem the e, benefit the emppromise, loyee is responsible the circuit court for any heldrem that ainin certain g cost"extrinsic of coverage remainder of the bill. Therefore, the beneficiary has some cost sharing under this type of cent had Retiree this coverage Healtthrough h Benefits: a current Issue employer, s of Structure, compared Financing, with 13 percent and Coverage from a past T-78 Table 2 Institute, 1989. inflation as paid. nor Analysts increased expect utilization employerscanwith be taken these into benefits account to record when significant figuring that habilities contribution. on force (and sometimes on retirees). Later, the company can collect the life insurance proceeds and evidence" plan, thus although carries (such the asnot memos, fullthe burden Medicare pamphlets, of the cost cost and sharing. oforal medical statements) inflationcould if thebeemployer considereddoes as not part of EBRI Retiree Health Benefits: Issues of Structure, Financing, and Coverage employer. There areBef several ore thepossible House Ways reasons and for Means the Subcommittee differences inon income. Health Workers have Employer-Provided Retiree Health Status of Persons Aged 40 and Over, by Age and Family Income, August 1988 Employee Benefit Research Institute/The Gallup Organization, Inc. Public Attitudes on Medicare. EBRI provide Investment their balance increases income sheets, in is the thereby not amount exempt increasing contributed. from tax the for amount most plans of debt(iton is the taxable balance as unrelated sheet compared business to tax free and/or borrow the maximum cash surrender value to derive positive cash flow in the agreement (or contract) between workers I and employers I where a collective bargaining • For a Medicare Part B plan, the employer pays the retiree's share of the Part B premium, Before the House Ways and Means Subcommittee on Health higher incomes compared with retired persons (assuming generally that those with benefits May 6, 1991 equity, Reporta commonly no. G-8. Washington, watched DC: ratioEmployee (Coopers Benefit and Lybrand, Research 1989). Institute, 5 1990. income unless invested in tax-exempt instruments), although for 501(c)(9) plans established later years. COLI does not fund postretirement benefits in either a traditional sense or in Workers Retirees agreement did not explicitly state such items. However, in another case, in which the ben- and the beneficiary continues to pay the deductibles and other cost sharing in Medicare May 6, 1991 from a past employer are retired) largely by Jennifer due to the L. Davis loss of wage and salary income. This • Public Attitudes on Medicare and Retiree Health. EBR! Report no. G-20. Washington, DC: Part B and Part A. under a collectively bargained agreement, the contributions are unlimited and earnings accordance with FAS 106, but it does create a cash flow stream to meet all or part of the Third efits ,were companies not bargained, can retain thethe court promise ruled to that, paysince the full the cost company of medical had reserved coverage the throughout right to No Retiree Covered by Covered by Spouse's Covered by Covered by Spouse's by Jennifer L. Davis would Employee make Benefit retiree Research health benefits Institute, Employee coincide 1991.Benefit withResearch lower family Institute incomes for those with cover- Age retirement Other accumulate and Income studies and, taxprovide therefore fl:ee. Total Expenses insight , assume Health into for Coverage the disability, the full effects Employer' riskmedical of of s Plan FAS medical 106 benefits, Employer through inflation Plan andlimited associated group-term Employer's surveys. Plan with lifeEmployer retiree It insurance is ex- Plan benefit costs. However, it is estimated that some plans will need seven years to have suffi- change the benefits in its plan documents, other information from the company that seemed • Carve-out plans are becoming more common (A. Foster Higgins, 1990). In these plans, Employee Benefit Research Institute Hewitt Associates. Survey of Retiree Medical Benefits, 1990. Lincolnshire, IL: Hewitt Associates, 1990. age from a past employer. Another possibility is that those with high income are more likely pected purchases thatare thealso median tax-free annual to the medical recipient, costalthough for retirees other willbenefits increase are sixtaxable times after upon adoption receipt. 7, health cient to promise cash careinflows liabilities. lifetime (thousands) from benefits These loans was companies and not death binding may, proceeds 35 however, (reduced introduce (percentage) by loans) increased to covercost all sharing expenses with the employer determines the retiree health plan benefits and reduces them by Medicare Integrated Administrative Services, Inc. Postretirement Medical Issues and Responses. Atlanta, GA: Total to continue working past age 65. 8 A reversion of assets from a VEBA to the employer is strictly prohibited (there is a 100 of FAS 106 (Hewitt Associates, 1990); pretax earnings will decline on average by 10 percent retirees and meetthrough retiree copayments, health benefit deductibles, expenses. COLI etc. The can company be nonleveraged; also retains that the is, no investment loans are risk Introduction payments. This leaves intact any cost sharing on the part of the beneficiary that the Medi- 40Actuarial and over Sciences 84,180 Associates, a 57.1% Inc. SUMMARY , 1990. 16.5% STATEMENT 11.8% 11.4% 3.2% percent excise tax). (Towers, 65 and over Perrin, 26,524 Forster & Crosby 71.5 Inc.); annual 1.6 net income 1of .8 some companies 20.5 may decrease 4.5 if there is prefunding. This type of plan design, also called a medical service benefit, was taken An care additional outplan on a requires, policy factor or tosuch be its cash considered as deductibles value, in or determining leverage, and coinsurance. each theincurring parties' intent different in the tax framework implications. of Meckin, John. Rise in State Employee Health Plan Costs Moderates: Survey of State Employee Health Benefit Under $5,000 Coverage also varies by firm size and industry. Among those receiving health coverage from between 30 percent and 60 percent, by one estimate (Integrated Administrative Services, most common when many of the retiree health plans were started in the 1950s and 1960s. contract • A Medicare law is what supplement the courts planinterpreted is one in which as a lifetime the employer benefit offers "inference. only those ''16 The benefits court that Plans, 1990; Summary of Findings. New York: Martin E. Segal, 1990. 40 and over 5,563 90.7 1.8 1.0 5.2 1.2 In 1960, 9 percent of the population was aged 65 and over. By 1990, this proportion had 1990). a past employer, 62 percent had worked in firms with more than 1,000 employees, and 76 401(h) Plans 65 and over 2,811 93.1 b b 5.7 0.8 These A company plans must present be the ablecompany to prove with the existence perhaps of thean largest insurable obstacles interest for in calculating order to purchase liabilities stated Piacentini, that,Joseph if employees S. "Pension forgo Coverage wages and in return Benefit for Entitlement: retiree benefits, New Findings there may frombe 1988." an inference Issue Brief are not covered by Medicare, such as vision and drug benefits; the beneficiary continues increased to 12 percent, and it is expected to increase to nearly 24 percent in the next 40 years $5,000-$7,499 percent had worked in firms with RETIR 100 EE or more HEALTH employees BENEFITS: (table 3). By comparison, 63 per- and funding due in large part to the substantial size of the liabilities and the uncertainties of tax-advantaged no. 94 (Employee insurance Benefit Research on the employees Institute, September with the company 1989). as the beneficiary. According that the benefits will continue as long as the retirement status is maintained, thus a "status to pay the Medicare plan cost sharing features but gains the coverage of the employer 40 and over 5,640 86.2 1.5 1.1 8.3 2.9 • asIn the 19baby 88, 43boom percent ages. of th Currently, ose aged 4 the 0 and elderly over account had retiree for a health disproportionate coverage throu share gh of their all cent of all nonfarm wage and salary workers are employed in firms with 100 or more em- medical inflation. ISSUES OF STRUCTURE, FINANCING, AND COVERAGE Another • 65 Company and overvehicleChanges is 3,449 a 401(h)toplan, Retiree 87.3in which Health contributions b Benefits are b put into a separate 9.4 account2.9 to U.S. theCongress. U.S. Supreme House. Court, Committee this means on Waysproving and Means. that Hearing the beneficiary on Employer-Sponsored of the policy (the Retiree em- benefit plan. inference." Some courts 17have upheld this type of reasoning; other courts have dis- health care expenditures (U.S. Congress, 1989). To help cover these costs, some level of own or their spouse's current or former employer. $7,500-$9,999 ployees (Piacentini, 1989). Fifty-four percent of persons receiving health coverage from their within Health a defined Insurance.benefit Committee pension Print, plan. Serial Medical 101-55. benefits Washington, must DC: be subordinate U.S. Government to retirement Printing ployer, in this case) must "expect some benefit or advantage from the continuance of the life agreed38 40and over 5,092 78.0 2.8 2.2 12.8 4.3 health insurance is currently provided to all elderly persons through a combination of ben- benefits. employer This workmeans in private that the industry, contributions while 36 made percent to cover work medical for public benefits employers. cannot By exceed compari- 25 Office, 1990. 65 and over 2,864 78.5 b 0.6 16.1 4.5 of Any Com thepany ch assured" angechan in g p(Integrated es lan to design retireeAdministrative alter healt s h an benefits employer's Services, occur obligation larg 1990). ely in to However, response employees. teach o FAS W state hile 106can ,reduced medical stipulate or Curbing the soaring cost of the elderly's health care defines perhaps the chief agenda for all efits from employers and the government employer-provided retiree health benefits and $10,000-$14,999 son, 75 percent of all nonfarm wage and salary workers are in private industry, and 15 per- • Among men aged 40 and over, 23 percent have this coverage through their current em- U.S. Department of Labor. Bureau of Labor Statistics. Employee Benefits in Medium and Large Firms, percent of aggregate employer contributions for both medical and retirement contributions what • Medicare constitutes an insurable interest; some states limit this to only key employees, some to changed inflation, benefits changingmay demographics, be beneficial and from /or a bottom companyline finances. standpoint, Some this companies action may have lower kept "third parties" that pay: Medicare, Medicaid, and private insurers--including employer 40 and over 11,205 69,7 4.8 4.0 16.8 4.7 Medicare benefits. Both government and employer-based programs face growing financial cent work for public employers (Piacentini, 1989), implying that public employers are more 1987. Washington, DC: U.S. Government Printing Office, 1990. ployer compared with 10 percent of women, while 5 percent of men aged 40 and over by after the plan first provides medical benefits. 9 Therefore, some plans may not be able to 65 and over 5,509 69.5 0.5 0.8 23.2 6.1 all employee their employees traditional morale , and plans and others reduce but do arenot acapping firm specify 's ability (or whether limiting) to attract or employer-provided which and retain employer-employee employees. benefits Explaining relationships in order the to plans that provide health insurance coverage to retirees. Both demographic trends and the strains. $15,000-$19,999 • Employee Benefits in State and Local Governments, 1987. Washington. DC: U.S. Government likely to provide this benefit. are receive insurable. coverage through a spouse's plan compared with 17 percent of women. make such a contribution if the pension plan has been restricted by the full-funding limits. reduce costs. This is often done by limiting dollar contributions toward these costs in retire- changes to employees may also be costly for the employer. However, companies may be re- history of health care costs in the United States suggest that continuing, if slower, growth in The most important source of retiree health insurance is Medicare. Medicare is another 40and over 15,310 57.7 13.1 9.1 16.2 3.8 Printing Office, 1988. Investment earnings of a 401(h) plan are not taxable to the _.employer. If the pension plan or evaluating 65 and over their plans 5,396 in view of 62.9FAS 106. 1.4 2.4 27.9 5.4 ment, capping the increase in the amount contributed, or requiring a long service period spending for the elderly's health care is inevitable. This prospect is hkely to force continued important source of health coverage for the elderly. While the elderly represented about 12 Retiree health benefits were originally offered by many companies in the late 1940s and 1950s • Public Attitudes Towards Retiree Health $20,000-$29,999 -- • Court Cases •theIn medical a surveybenefit conducted plan is by discriminatory, Gallup for EBRI, neither 59 percent plan will of respondents be tax qualified. who 1° had The not plan yet must before employees become eligible to receive these benefits. reevaluation of how this care is financed and who should pay. percent 40 and over of the population 13,095 in the 48.1late 1980s, 21.1 they accounted 15.for 2 nearly 36 12percent .7 of every 3.0 • Endnotes when business was booming as a result of economic expansion and there were very few Jennifer L. Davis • allow FASB the Statement employer to No. take a 106 reversion on Postretirement of any excess amount Benefits remaining Other in Than the separate Pensions medi- 65retired and over expected2,914 to receive health 61.3 insurance 3.0 coverage through 2.9 their former 28.0 employer. 4.8 personal health care dollar spent in the United States. Medicare is by far the largest public retirees in relation to the number of active workers. The resulting liabilities were not sub- $30,000-$49,999 cal benefit accounts after all liabilities have been satisfied. In a survey conducted by Gallup for EBRI, Research 59 percent Analyst of respondents who had not yet retired • Conclusions Only 36 percent would retire before they were eligible for Medicare if their employer did A recent survey of 1,100 companies that offer retiree health benefits showed that nearly one- Employees and/or retirees whose benefits were changed (due to FAS 106 or other factors) he 40aand lth over care financ 18,081 ing program 40.9 for the elderly. 28.5 In 1988, Medi 19.6care financed 8.7 an estimated 2.5 $78 stantial, and the financing of these benefits was not of concern. However, with the above 1 All EBRI tabulations of the August 1988 Current Population Survey are for the civilian noninstitutionalized said they expect to receive health insurance coverage through their former employer (Em- 65not and over provide health 2,435 benefits 59,1 for retirees. 4.9 4.5 26.9 4.6 half had changed or planned to change their plans as a result of FAS 106. Twenty-eight may feel that these changes were illegal and want to pursue the issue in court. The courts FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than billion population of the of elderly's the United health States living care,in representing households. 44 percent of their total health care costs of mentioned factors, utilization patterns, and rising health care costs, many employers now $50,000 and over ployee Benefit Research Institute/The Gallup Organization, Inc., 1991). Sixty-five percent of In the Omnibus Budget Reconciliation Act of 1990 (OBRA "90), Congress increased the op- percent of surveyed companies had increased employee premium contributions within the $176 billion. must Pensions" 2 Employees determine (FAS who be 106)--approved the come extent disabled of retiree with inaDecember certain health minimum benefits 1990--requires period that employers of service liabilities may arebeobligated for eligible retiree to receive tohealth pay pension on a 40 and over 10,194 37.6 30.8 22.7 6.0 2.9 Retiree health insurance benefits are a common provision of large employers' benefit pack- have higher retiree-to-active-worker ratios and growing retiree health liabilities. Employee Benefit Research Institute those who plan to retire before age 65 expect to receive coverage compared with 50 percent of tions 65 andfor overusing a 401(h) 1,145 account55.6 to fund retiree 9.3 medical benefits 8.0 by allowing 21.4 a transfer 5.6 of •past benefits Companies two and years may, can or therefore expected design, be retiree to considered do health so in to 1991, benefit be employees 18 percent plans deemed asbegan either to be to defined on require disability contribution deductibles, retirement. plans In and this , 14 case, benefits case-by-case to bebasis. recognized The Employee explicitly Retirement on companies' Income balance Security sheets. Act FAS of 1974 106 (ERISA) applies many provided of ages, both private and public. FAS 106 has brought the full financial impact of these benefits those assets the long-term aged from 66 a defined disability or older.benefit health The benefits provision pension paidplan of to retiree them (other would health than falla benefits under multiemployer the was scopeaof major Fplan) AS 106. consideration to a 401(h) plan in percent decreased benefits. The survey also found that, while none of the companies had defined dollar benefit plans, or defined benefit plans. In this latter type, employers as- reporting, disclosure, and investment fiduciary requirements for pension and welfare plans. the Although same principles public spen that ding were forused the elderly's in accounting healthfor care pensions has grown (FASdurin 87 and g the FAS pas 88) t dto ecad other e, it to the forefront, causing many private employers to reevaluate their plans and to consider Source: Employee Benefit Research Institute tabulations of the August 1988 Current Population Survey. This universe consistsof all Many companies currently use pay-as-you-go finandng (paying for retiree health care ben- 3 It is not required that this liability be recognized in its entirety immediately on the balance sheet due to some the decision of when to retire. Among nonretired persons, only 36 percent would retire once a year for five years. 11 These transfers are limited to only the amount the employer changed sume the to afull defined risk of contribution medical inflation; type of in plan the in first thetype, past the two employees years, 5 percent bear this expected risk. to persons aged 40 and over in the U.S. civilian noninstJtutionalizedpopulation living in households. It included funding and vesting requirements for pensions but not for welfare plans. As a postretirement benefits (for example, health coverage, life insurance, long-term care insur- limiting or eliminating them. For those employers who do continue providing benefits at has decreased as a proportion of the total costs. Between 1984 and 1988, Medicare financing efits out of current earnings). This method of financing involves no prefunding (that is, phase-in and amortization provisions. aTotalis lessthan in table 3 because it excludes thosewho did not know their family income or did not answer the question. before they were eligible for Medicare if their employer did not provide health benefits for would pay during the year for current retiree health expenses 12 and therefore cannot be used make such a change by 1991 (A. Foster Higgins, 1990). result, employers have generally not advance funded and have not viewed retiree medical ance some decreased , and levelhousing). , from there 46 are percent Itfew appfunding lies of the to current elderly vehicles 'sand available, total future health retirees, allcare of which costs their to have beneficiaries 44 significant percent, (Chollet, and limitations. qualified 1991). 4 This should be based on current rates of return on high-quality, fixed-income investments in amounts and bLessthan 0.5 percent of age group total. setting funds aside to pay for retiree health benefits in the future). Prefunding may increase, retirees. This percentage jumps to 43 percent for those with an income of $75,000 or more to prefund any future benefits. Additionally, the pension plan must maintain assets equal to benefits as a vested right. • with A recent maturities statement that match from the the amount Financial and timing Accounting of the expected Standards future benefit Board payments. (FAS 106) requires dependents. Since private The insured statement spending generally for health does care not cover remained postestable mployment at about benefits 12 percent such as of sever- the though, with the long-anticipated and recently approved Statement No. 106 (FAS 106) from and drops to 26 percent for those with an income of less than $20,000. a minimum of 125 percent of current liability for accrued benefits, so only amounts over that For 5 Asta he result, remainin this g change liabil inity the , debt-equity some plans ratio are may fund affect ed the undcovenants er certain on current tax codes or future that ar debt, e sp resulting ecifi- in ance pay or wage continuation for disabled or terminated employees. 2 Medicare elderly's that employers total provides health providing a wide care costs range these between ofbenefits health 1977 benefits place anda1988, liability to the virtually elderly. on their all However, balance of the relative sheet this program toincrease reflect isin the Financial Accounting Standards Board (FASB), which requires companies to recognize minimum can be transferred. 13 Testimony before the Subcommitte on Health higher interest rates or lower amounts of debt allowed. This secondary effect is difficult to estimate. cally for this purpose, such as 401(h) or 501(c)(9). (These are described in the following Litigation on the rights of employees to receive retiree health benefits has been decided to facing private a spending difficult financial for health situation care byand the according elderly hastobeen the Advisory borne by the Council beneficiaries on SocialasSecurity, an this plan as well as an accrued expense on the income statement. Surveys indicate that benefit costs and liabilities as they are incurred. 6 The formula is benefits actually paid during any year (direct costs), plus a reserve for estimated claims in- Committee on Ways and Means Seventy-three percent of respondents said employers should be required to provide health section.) A survey by the Wyatt Company of 312 employers providing retiree health benefits F date AS 106 largely requir through es that the a liability adoptionbased of generally on the proje applicable cted unit contract credit a prindples. ctuarial cosIn t m general, ethod the increase in out-of-pocket spending. The elderly's costs for health care have risen much faster the this program may decrease will be bankrupt pretax earnings by 2006and (Advisory annual Council net income. on Social Security, 1991). or their spouse's current or former employer (table 1).1 This includes both private and public curred in the year but not yet paid (which must be determined as reasonable by the IRS and cannot exceed 35 benefits There has to been their mixed retirees.reaction Notably, to this those transfer between option. the ages Planofsponsors 18 and 34 that were aremore more likely likely to to showed that 57 percent of these employers used a pay-as-you-go system in 1986, and 63 courts (which have considers ruled future that anbenefits employer expected has a right to beto earned terminate by the or employee) amend retiree be awelfare ccrued over benefits, the than their incomes (Chollet, 1991). Estimated out-of-pocket spending as a percentage of percent of the qualified direct costs), minus the fund's after-tax income for the year. employers. Retiree health Among benefits all employees are also provided of medium-sized to the majority and large of those private agedemployers 65 and over who through are support take advantage this typeofof this proposal option as have were older minorities. work forces Even (and, if providing therefore, such largehealth and immediate benefits percent used this system in 1988. Of companies with a liability for retiree health benefits, the although the employer must prove that such a right has been reserved (or stated) in specific period 7 Disability from and the medical first date expenses that are thetax plan free grants to the extent credits provided toward in sections these benefits 104 and 105 (generally of the Internal date of The personal se consincome traints rose will lea from ve 9 mo percent re of the in cos 1977 ts to of nearly retiree 13 health percent careinto1988. be passed on to em- • Company changes to retiree health benefits occur largely in response to FAS 106, medical covere the Medicare d by group program. health insurance, It has been 41 one percent of the have fastestemployer-sponsored growing programs retiree in the federal health budget. cover- would mean a reduction in pension benefits, 67 percent of respondents still supported this use liabilities), Reven of insurance ue Cod largely e, whi contracts coverfunded h list thedecreased nonincludable pension from expenses plans 20 percent (and, specifically. therefore, to 15 percent the assets duringto this transfer), period.andHow- language hire) to the and date onthat a widely the employee known basis. is fully eligible. Under FAS 106, the amount of a ployer plans or to the beneficiary. Future beneficiaries apparently are aware of this and age Financing inflation, before age Medicare changing 65 and benefits 36 demographics percent hashave caused , such and/ increasing orcoverage company strain at age finances. on 65public and Some over funds (U.S. companies throughout Department have thekept of 8 Most VEBAs are subject to nondiscrimination rules in both design and operations. A separate account must be proposal. U.S. House of Representatives ever positive , the net use income of 501(c)(9) (and,trusts therefore increased , a positive from 15 taxpercent bill). to 18 percent, and the use of 401(h) company's actuarial present value of benefits attributed to employee service rendered to a expect to receive a lower level of Medicare benefits than current beneficiaries. However, in a A poll conducted in January 1990 found that 64 percent of those aged 18 and over who are Labor, 1990). 1980s theirand traditional can be expected plans but to are continue capping doing (or limiting) so in the employer-provided decades ahead. benefits in order held for key employees, with contributions counting against defined benefit section 415 limits. Therefore, plans increased slightly, from I percent to 2 percent. The issues of which documents legally describe the benefits and if they indicate whether particular date (accumulated postretirement benefit obligation) that exceeds plan assets will recent not eligible poll concerned for Medicare withbenefits public attitudes do not anticipate on Medicare, receiving 36 percent the same of those level of aged benefits 18 to 65 the to reduce costs. Other companies may change to a defined contribution plan. contributions to the 501(c)(9) may lower the amount that can be funded through a pension plan for these There is some debate about the extent to which such transfers affect pension plans' financial • Plan Design these benefits were to continue throughout retirement were addressed in a landmark 1984 be recorded as a liability on the company's balance sheet. 3 For some companies, the retiree rated Medicare the government program 's offers efforts todayat when informing they become the public eligible about in the theMedicare future (Employee program as Benefit poor employees. Among This testimony the 50 state begins employee with an plans, overview 22 offer of retiree full retiree health health benefit benefits coverage. to those Then aged it discusses 65 and soundness. If one feels that the full-funding limits are higher than necessary, such a transfer • Funding Options 9 However, this does not include contributions made to the pension plan to fund the plan's past service credits. health and Research 58care percent Institute liabilities rated /Therequired these Gallup efforts toOrganization, be aslisted good on to the fair 1990). balance (Employee Respondents sheet Benefit in accordance were Research Tadivided ble 3 with Institute on FAS whether /The 106 over (Meckin, 1990). This is an increase from 16 state plans in 1988. In 1987, 48 percent of •a wide Therevariety are several of issues vehicles concerning that companies retiree health can use benefits to fund from retiree employers health liabilities, and from the each Hearing on to a 401(h) account may not reduce the pension plan participants' level of security. However, 10Within this separate account, individual accounts, known as individual medical benefit accounts (IMBAs), Companies can design their retiree health Retirees Recelvlng Health Coverage will far exceed the costs that currently appear in financial statement footnotes. Gallup they would Organization, be willing Inc., to pay 1990). an increased Knowledgepayroll of these tax benefits during working and of the years limitations to insurecurrently receiv- government. full-time participants in medical plans of state and local governments had health care cover- with some tax advantages and significant limitations. These include 501(c)(9) trusts, must be kept for each employee who isHealth (or was during Insurance the past Options five years) a 5 percent owner of the company. if the full-funding limit is not seen as providing a sufficient cushion for the pension benefits, benefit plans as either defined contribution from Their Employer, by Firm Size end Industry, Table 5 Companies maintaining retiree health benefits may have a number of concerns, including being ing the imposed current on level employer of these plans benefits and (47 on percent Medicareagainst, could 48 influence percent future for, and public 5 percent policy un- age after retirement at least partially paid for by their employer (U.S. Department of Labor, 401(h) accounts, 401(k) plans, and corporate-owned life insurance. However, separate accounts are only for recordkeeping purposes, and the money investments can be com- such a transfer could reduce the pension plan participants' security. Funding Vehicles for Postretlrement Medical Benefits plans, defined dollar benefit plans, or de- August 1988 E reducing ven within costs these andgu cost idelines volatility , thereas are well several as the assu effects mptions of the th funding at employers on corporate must use andtoretiree proposals. sure). Notably, those earning less than $20,000 were the most likely to be willing to pay such 1988). mingled. IMBA contributions are treated as an annual addition to a defined contribution plan for purposes of • Retiree Health Care Coverage (Those Specifically in Tax Law and Examples of Other Arrangements) taxes. fined benefit plans. Defined contribution Firm Size Covered byOwn estimate postretirement benefit liabilities. Most important is the assumption about health section 415(c). an increased payroll tax (55 percent). Appliesas •401(k) Employees Plans and/or retiree whose benefits were changed (due to FAS 106 or other factors) May 6,1991 plans for retiree health are similar to defined andIndustry Employer Plan Tax-Exempt Benefits Benefit FinancialAccount- care 11 Taxable cost trends years ofthat the employer implicitlybeginning considers afterexpected December health 31, 1990care , and before inflation, January changes 1, 1996• in There health are care Both private and public financing of retiree health benefits are likely to be limited in the Employer-provided retiree health coverage differs by gender (table 1). While 16 percent of all In 1988, 43 percent of those aged 40 and over had retiree health coverage through their own may feel that these Deductible changes were Limiteillegal d and Earnings want for to Excludable pursue fthe rom issue Secur in ity court. for In ing general, Standards future special astransitional health care rules inflation for transfers continues in 1990.to The increase. transfer will Thenot combination violate the requirement could leave that retirees contributions contribution plans for pensions--:the em- Total (thousands) 10.368 utilization There are several and delivery, vehiclestechnological for funding advances, retiree healt and h, e changes ach withinso the me health tax advant status ages of plan and The ways in which employer plans are integrated with the Medicare program have important Contributions Contributions Company RetireeTax Retirees BeardAsset those aged 40 and over work and receive coverage through their current employer, 23 per- the courts have have ruled that an employer has a right to terminate or amend retiree to 401(h) accounts be "subordinate" to the pension retirement benefits. A third method for setting aside funds for retiree health benefits is through a 401(k) plan. participants. limitations. ployer allocates Funds Thearates sp must ecifie atd be which a segregated mount the benefits to eac and h' restricted expected Firm (usually future Size cost in aistrust) discounted to be used (to their as an paying implications more. for This theincreases costs to employers the need for and individuals to retirees.to Some find ways formsto of finance integration retiree involve health cent of men aged 40 and over fall into this category, compared with 10 percent of women 12The transfer is also reduced by the amount that the employer has previously contributed toward these welfare benefits, although the employer must prove that such a right has been reserved However, this method depends on an employer's ability to communicate to employees that employee's account and usually relinquishes Fewetr han 20 3.7% asset against the FAS 106 liability. These vehicles include 501(c)(9) trusts, or voluntary em- present value) must also be assumed. 4 care morein cost the future. sharing The by the provision beneficiary of these thanbenefits others. and For who all methods, society feels however, shouldMedicare finance is them liabilities. aged 40 and401(h) over. Similarly, @ while@12 percent of @ all those aged @ 40 and over @work and receive 0 (or stated) in specific language and on a widely known basis. they should use the money received from this plan to pay for retiree health benefits. Since the investment decisions to the employees 20-99 5.6 100-249 5.1 ployee beneficiary associations (VEBAs), and 401(h) plans. Alternatively, some plans are will be a growing economic and social issue. Table I treated 13The transfer as theisprimary made more payer stringent and through the employer vesting requirements plan is the for secondary pension participants payer. 19 .and health coverage through a spouse's plan, only 5 percent of men aged 40 and over are in this cat- the money is not directly earmarked for retiree health benefits, the assets in 401(k) plans through various investment options. This 250-4_ 4.3 used to help 501(c)(9) employers and employees set aside monies to help plan for the purchase of Seve expenses ral cos Employer t forcom fourp -Provlded o years nentsfollowing mak Retiree e the up Health transfer. the Coverage expense ofre Persons corded Aged in c40 omp and ani Over es' , by inc Sex, omeAugust statem 1988 ents. egory, compared with 17 percent of women. Similar patterns are evident among those who •cannot Changes be used in Medicare to count against can havethe quite FASsignificant 106 liabilityeffects for balance on employer sheet purposes. retiree health plans 14 International Union, United Automobile, Aerospaceand Agricultural Implement WorkersofAmerica v. Yard-Man, (Voluntary money Employee is then used @ by the employee @ to (_ 5oo-999 @ 0 4.e @ retiree health insurance, although these funds are not specifically reserved for this purpose. Overall, this will require that, as with other forms of deferred 1,000 or more compensation, the cost 61.8 of • Medigap coverage essentially is coverage that pays the deductibles and coinsurance rates • Bibliography receive BenefitAssoc coverage iations) from a past employer. Coverage Total Men Women Inc. 716 F.2d. 1476 (6th Cir. 1983) cert. denied 465 U.S. 1007 (1984). depending on how the plan is integrated with Medicare. purchase health insurance after retirement. Don'zknow/no response 14.5 Such plans are 401(k) plans and corporate-owned life insurance (COLI). Not all are tax- providing postretirement benefits according to the terms of the plan will attribute to the for Medicare; in this plan there is no cost sharing by the beneficiary. 15Moorev. Metropolitan Life Insurance Company. 856 F.2d. 488 (2d Cir. 1988)• These plans can include both elective and nonelective contributions. While they can be By definitionTota (as l in defined contribution 89,964,438 tn_sW 41,273,463 48,690,975 The views expressed in this statement are solely those of the author and should not be deductible means of funding or setting money aside, and each has specific limits. The follow- employee • The coordination-of-benefits during each period of service. plan pays the lesser of (1) the plan benefit calculation with- A. Foster Higgins & Co., Inc. FosterHiggins Health Care Benefits Survey: Report 4, Retiree Health Care. 16See Yard-Man. Pdvate 54.1 Retiree health ,o.kl coverage• differs by • age group and• family income. 0 Among those 0 aged 40 and 0 financed wholly through elective deferral, employers may use nonelective deferrals in order • Both private and public financing of retiree health benefits are likely to be limited in the iplans ng summary forattributed pensions) and ,to table the the 5 Employee employer outline th Benefit has ese no diffe Research. rences..Institute, _vernrn its e officers, nt trustees, sponsors, or Princeton, NJ:A. Foster Higgins & Co., Inc., 1990.. out regard No Retiree to the Health Medicare Coverage reimbursement57.2%, amount or (2)53.1 the%cost of covered 60.6% services 17Such as the Sixth Circuit in International Union, UAW v., CadillacMalleable Iron• 728 F.2d 807 (6th Cir. 1984). over, 16.5 percent are active workers with direct coverage, compared with 1.6 percent of to ensure future as money healthis care set aside inflation for retiree continues medical to indrease. paymentsThe for combination all their employees. could leave Total retirees liability beyond the contributions, even _c_r_ 16.4 Advisory Council on Social Security. Report on Medicare Projections by the Health Technical Panel The 18Su ec ffe h c as tive other the Eighth da staff. te for Circuit The adoEmployee ption in Anderson of this Benefit v. Alpha state Research m Portla ent nd _s IInstitute nd the ustfi ris es, cal is Inc.. year a nonprofit, 836 bF.2d eginning 1512 nonpartisan (8th after Cir.De 1988). public cember This minus the Medicare reimbursement amount.' In essence, the plan treats all money from Workers those aged 65 and over (table 2). Also, 15 percent of those aged 40 and over receive retiree contributions are limited by law. These plans follow the same laws as all 401(k) plans while Co Li, fea Insurance , n @ 0 0 0 @ 0 50 though 1(c)(9) t co ourt thestated 1991 the Trust money that Adv s or since iso VEBAs ry may Congress Council not fully exempted on Social coverwelfare Secu health rity. benefits Washfrom ingstta on, ERISA teand DC: l'o scvesting a Adv l isorequirements, ry Council 19 on the .4 Soci intent al to policy reserach organization. 15, 1992, payingformmost ore. employers. However, for certain small, nonpublic employers and non-U.S. Covered byemployer'splan 16.3 Self-employe 23.4d 10.4 1.3 any other plan as coming from the beneficiary. Therefore, payments from Medicare or health benefits through their spouse's plan, compared with 6 percent of those aged 65 and vest these benefits seems "illogical." insurance being Securit communicated y, costs Mar Cov chin e1991. red retire byspouse's to memployees ent.employerplan as a plan11.for 7 retiree Unempl health, oyed 5.0and not a pension 17.3 a plan. In other sources of insurance can be used to meet the deductibles or coinsurance rates for the plans, the statement is effective for fiscal years beginning after December 15, 1994. over. Don't know/no response 8.7 19While this is true for retirees, for current workers older than age 65, Medicare is the secondary payer. retirement, EmployeeStock distributions to the retiree are taxable and can then be used to pay premiums for Chollet, Deborah J. "Health Care Spending among the Elderly." Working Paper 91-2. Atlanta, GA: Retirees Voluntary employee beneficiary associations (VEBAs) must be based on voluntary member- employer retiree health plan and the beneficiary often pays nothing. Employers are OwnershipPlan O @ @ O O O medical care. Center for Risk Management and Insurance Research, Georgia State University, 1991. Coveredby employer'splan 11.5 17.3 6.6 A second plan design is a defined dollar Source:Employee Benefit ResearchInstitutetabulationsof the ship, and qualifications for membership eligibility must be defined by objective standards of • The moving Costs away of FAS from 106 thesetotypes Employers of plans largely because of high costs (A. Foster Higgins, August 1988 Current Population Survey. This universe consists of Workers and retirees with higher family incomes are more likely to have retiree health cover- Coveredby spouse'semployerplan 3.3 1.2 5.0 Coopers & Lybrand. "Employers' Accounting for Postretirement Benefits Other Than Pensions--The benefit. In this plan, an employer promises a all persons aged 40 and over in the U.S. civilian noninstitutionaJ- an employment-related 1990). "common bond." The employer can make tax-deductible contribu- age (table 2). At family incomes over $20,000, those aged 40 and over are more likely to have @ Applies (_ PartiallyApplies O DoesNot Apply FASB Exposure Draft." Actuarial, Benefits and Compensation Information Release, 7 March 1989. maximum annual dollar amount after retire- ized populationlivinginhouseholds. Corporate-Owned Life Insurance tions; however, these are limited to essentially only the cost necessary to pay current welfare The • proj Under ected Medicare impact exclus of FAS ion10 , 6Medicare has been payment widely studied. is first sub There tracted will fr be om higthe her bill expenses , deductibles for Source:EmployeeBenefitResearchInstitute. =Lessthan 0.5 percent of the total. retiree health coverage through a current employer than through a past employer. With Employee Benefit Research Institute. Measuring and Funding CorporateLiabilitiesfor Retiree Health Source: EmployeeBenefitResearchInstitutetabulationsof theAugust1988 Current PopulationSurvey. Thisuniverse ment, to be used toward the cost of medical benefits plus a contribution to a qualified asset account. 6 While the contribution to the asset and coinsurance of the employer plan are then applied, and the employer plan pays the sponsoringconsists companies of allpersons under aged 40the andover newinth standard e U.S. civilian than noninsti under tutionalized the popula current tionliving pay-as-you-go in households. system, fami Benefit ly incomes s. Washington, of $15,000 DC:to Employee $19,999, Benefi 13 percent t Resea of rch those Institut aged e, 198 40 7 and . over had retiree health A company could use corporate-owned life insurance (COLI) to set aside money for retiree coverage through a current employer and 16 percent had this coverage from a past employer. EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 Telephone 202-659-0670 FAX 202-775-6312 8 10 7