This Issue Brief presents the changes to retiree health benefits employers have made as a result of Financial Accounting Statement No. 106 (FAS 106), and possible future changes they may make in response to continued increases in health benefit costs, recent court rulings, and potential federal legislation.
FAS 106, approved by the Financial Accounting Standards Board in 1990, required most private companies to significantly alter the way they account for their retiree health benefits beginning with fiscal years after Dec. 15, 1992. FAS 106 dramatically impacts a company's calculation of its profits and losses and thereby creates a strong incentive for financial managers to limit expenses.
As a result of FAS 106, and the increasing cost of providing retiree health benefits in general, many employers began a major overhaul of their retiree health benefit programs. Despite FAS 106, most 55-64-year-olds are covered by some form of health insurance. In 1999, 67 percent were covered by employment-based health benefits, nearly 9 percent purchased health insurance directly from an insurer, more than 16 percent were covered by some form of public health insurance, and 14.5 percent were uninsured.
The percentage of persons ages 55-64 without health insurance generally has been increasing since 1994, when it was 13.9 percent. This increase has occurred for two reasons: (1) the percentage with public insurance coverage has been declining, and (2) the percentage purchasing insurance directly from an insurer has been declining. In fact, the percentage of persons ages 55-64 with employment-based health benefits generally increased, rising from 65 percent in 1994 to 67 percent in 1999.
As a result of FAS 106, some employers placed caps on what they were willing to spend on retiree health benefits. Some added age and service requirements, while others moved to some type of "defined contribution" health benefit. Some completely dropped retiree health benefits for future retirees, while others dropped benefits for current retirees, although this has happened less frequently than the other changes.
Federal age-discrimination laws and regulations, as most recently interpreted by federal courts in the Erie County case, may create new incentives for employers to review their retiree health benefits.
While the changes employers have made to retiree health benefits do not appear to be having much impact on current retirees, they are likely to be felt most by future retirees who are not yet or may never become eligible for retiree health benefits because the courts have ruled that an employer has a right to terminate or amend retiree health benefits only if it has proved that such a right has been reserved or stated in specific language and on a widely known basis.
