Mention retirement to some people, and you’re likely to see a reaction that can only be described as giddy. They see retirement as a time to relax, travel, spend time with loved ones, or to pursue a long-held dream of a new business or philanthropic pursuit. And if the word retirement brings up these pleasant images, there are two words that do it even more: early retirement.
But early retirees have a unique set of problems. Because they have not yet reached their normal retirement age, they don’t qualify (in most cases) for Medicare coverage. Unless your company extends healthcare coverage to early retirees, your employees may be shocked to find out how much their insurance will cost during this carefree time. And early retirees who routinely take prescription drugs may find that drug coverage—not to mention the drugs themselves—is also very expensive.
To help make sure that companies continue to offer health insurance to early retirees, the Patient Protection and Affordable Care Act (PPACA) includes a provision that can offset some early retiree claims costs. The PPACA’s reinsurance program for early retirees was effective on June 1, 2010.
According to Amy M. Gordon, partner at McDermott Will & Emery LLP (www.mwe.com), it applies to a retiree aged 55 to 64, his or her enrolled spouse, surviving spouse, or dependent(s) who are ineligible for Medicare and are not active employees of the plan sponsor.
The program, funded initially with $5 billion, was designed to help offset the cost of large claims for early retirees, Gordon says. “If an employer keeps in place retiree medical coverage, the program allows the employer to seek reimbursement for a portion of their large claim costs. For this purpose, large claims are considered to be between $15,000 and $90,000. So if an individual early retiree incurs a large claim, the employer (or insurance company if the plan is fully insured) would submit the claim to the early retiree reinsurance program, and the program would reimburse them for 80 percent of it.”
Enrollment in the program is not automatic. Rather, companies must apply in order to participate. “The application came out very recently and, as of late July, none have been approved yet,” Gordon says. “The first step is to get your application approved. Once that’s done, you can start submitting claims.”
She also recommends that if you’re an employer with a retiree medical program, you apply right away. “The $5 billion funding sounds like a lot of money, but there are some very large employers out there with retiree medical programs; this money will run out,” she says.
You can find the application online at www.hhs.gov/ociio/Documents/application.pdf.
Incentive to Cover Prescription Drugs
The PPACA also affects Medicare-eligible retirees, says Gordon, by changing the deductibility for companies of prescription drug coverage they provide to retirees.
When the government introduced Medicare Part D, which covers prescription drugs for those who are eligible for Medicare coverage, there was an unintended consequence, Gordon says.
“Before Part D, there was no way for retirees to purchase reduced cost prescription drugs, or coverage for prescription drugs, in a cost-effective way. When Part D came into existence, retiree drug coverage by employers became less popular; many employers started dropping it because, in effect, the rationale was gone.”
That was a problem, because the premiums for Medicare Part D do not completely pay for the program.
To encourage private employers to keep the coverage for their retirees, Gordon says, the government added an incentive. Not only could employers deduct the cost of their prescription drug coverage, they could also collect a refund of a percentage of the coverage’s cost. As of 2013, that subsidy will no longer be available.
Gordon cautions companies that may decide to eliminate retiree drug coverage: Due to elimination of the subsidy, there are legal issues to consider.
“Some employers cannot eliminate the coverage, depending on the promises they made to employees/retirees and on the plan provisions,” she says.
“The decision can be impacted by collective bargaining agreements, and the language in the materials employees received.”
And remember, she says, that retirees are allowed to file suit under ERISA.