Reassessing Retiree Coverage in 2014

Many states and local units (herein “government entities”) are currently grappling with large budget deficits. Often, government entities provide coverage for retirees that are not yet eligible for Medicaid, and reducing retiree benefits may prove to be a relatively painless way for government entities to reduce budget deficits.

The health insurance exchanges created by the Patient Protection and Affordable Care Act (“PPACA”) will allow many retirees to access adequate and affordable health insurance coverage that may be cheaper and of greater quality than coverage currently offered by employers. The PPACA prevents any insurer offering coverage through the exchanges from excluding anyone because of a preexisting condition; therefore, employers can rest assured that retirees that are not yet eligible for Medicare will not be excluded from coverage based on preexisting medical conditions.

Further, coverage should be relatively affordable for many retirees. The exchanges will provide generous subsidies to retirees with household incomes that are at or near the federal poverty line, and any retiree with a household income of up to 400% of the federal poverty line will be able to obtain some form of a subsidy through the exchanges. Many retirees will qualify for some form of a subsidy.

Indiana law requires local units to offer coverage to retired employees who have attained age 55 on or before the employee’s retirement date, who have completed 20 years of creditable employment and who have completed at least 15 years of participation in the retirement plan.  Ind. Code § 5-10-8-2.6.  The health coverage offered to retirees must be equal in coverage to that offered to active employees and must permit the retired employee to participate if the retired employee pays the full cost of coverage and files a written request for coverage within 90 days of his retirement date.  In addition, retired public safety employees are eligible for continuation coverage under Ind. Code § 5-10-8-2.2.

Government entities in Indiana are still required to offer coverage to retired employees in accordance with Indiana law.  However, there is nothing in the law that would prevent government entities from offering other benefits to retirees, such as subsidized access to dental and/or vision coverages, and allowing the retiree to select which benefit is best for him or her.   The advent of the new health insurance exchanges make this new planning opportunity viable.

Some municipalities (outside of Indiana) have already begun to consider implementing a retiree exclusion strategy. Chicago and Detroit both have indicated that they will begin eliminating retiree health insurance coverage. Detroit seems to be leaning towards adopting a plan that would phase out more generous retiree health benefits in favor of health-reimbursement accounts, which would pay out between $100 and $250 per month that could be put towards medical costs or the cost of premiums for coverage purchased through the exchanges. An article published by Bloomberg that discusses Chicago’s and Detroit’s plans to eliminate retiree health coverage can be found here.

Once the exchanges are up and running, government entities should consider whether it is advantageous to educate retirees about the new insurance exchanges and perhaps offer an incentive for participation.  In some cases, the retiree will receive comparable coverage through the exchanges at a lower cost, and the government entity will recognize cost savings as the retiree’s claims are shifted to the exchange.

About Jim Hamilton

I am an employee benefits partner with Bose McKinney & Evans LLP. My broad-based practice covers health and welfare arrangements, insurance, executive compensation and federal and state taxation. Among other areas, I have specific experience with PPACA, HIPAA, COBRA, ERISA and numerous other state and federal laws affecting employee benefit plans.
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