The health reform act provides $5 billion to reimburse employers for a portion of the cost of health claims for early retirees. The idea is to encourage these plans not to drop coverage for early retirees at least until the health insurance exchanges are available in 2014.
Employers and other plan sponsors who have applied for and received reimbursement for these costs are figuring out how to use the proceeds. While there are some limitations prescribed by regulation, the employer has a great deal of flexibility. For example, they may or may not share some of the proceeds directly with retirees and while the payments are based on claims for early retirees the savings may be shared with all retirees (and active employees) in the same plan. How to do this fairly is not easy to determine.
For example, if some retirees in the group pay a portion of the premium should the ones who don’t be excluded considering real cost sharing in terms of out of pocket costs has nothing to do with premiums? Should only early retirees receive a portion of the reimbursement given their claims generated the payment and also that these individuals typically have the largest claims paid by the employer plan?
And how should the reimbursement be made, a onetime premium credit in the same amount for all participants, a onetime lowering of any deductibles, a premium holiday equal to the total payment to retirees or perhaps a reduction in the premium for 2012 to reflect the reimbursement?
The last of these options has longer term consequences especially if the payments from the government go into a second year for a plan; retirees should be warned of this situation.
For example, assume the total premium for a retiree’s coverage is $500 per month of which the retiree pays 20% or $100. For 2012 the premium is scheduled to increase by 8% for a new premium of $540 and thus the retiree share would be $108. However, because of the ERRP payment, the retiree’s contribution is held at $100. Now we come to 2013 and plan costs increase another 8% leaving a total premium of $583.20. If there is no ERRP for 2012, the retiree contribution must jump from $100 to $116.40 or an of 16% increase. If the ERRP reimbursement continues a second year as does the 8% increase in plan costs, come 2014 the retiree could see a premium increase from $100 to $125.97 or a nearly 26% increase on one step.
Given the amount of the ERRP payment and increase in plan costs are unknown, it would seem a safer route for employers wishing to share the ERRP directly with retirees to do so with a onetime fixed payment or onetime adjustment to deductibles or co-pays to avoid compounding the impact on premiums for retirees.
Following is the releveant excerpt from the regualtions.
Use of Reimbursements (§ 149.200) Section 1102(c)(4) requires that the reimbursement ‘‘shall be used to lower costs for the plan. Such payments may be used to reduce premium costs for an entity’’ receiving a reimbursement or to reduce premium contributions, copayments, deductibles, co-insurance, or other out-of-pocket costs for plan participants. We encourage sponsors to use their reimbursement under the program for both of the following purposes: (1) To reduce the sponsor’s health benefit premiums or health benefit costs, and (2) To reduce health benefit premium contributions, copayments, deductibles, coinsurance, or other out-of-pocket costs, or any combination of these costs, for plan participants.
The statute does not appear to use the terms ‘‘early retiree’’ and ‘‘plan participants’’ interchangeably. Therefore, we interpret this provision to mean that a sponsor may only receive program funds for claims of early retirees or their spouses, surviving spouses or dependents, but the funds may be used to lower health benefit costs for all participants in the plan, including retirees, and their spouses and dependents, and active employees and their spouses and dependents. At § 149.200 (b), we clarify the statutory prohibition on using the funds as general revenue of the sponsor. [emphasis added]
- More money for the Early Retiree Reimbursement Program (ERRP) S.1088 – not likely. (quinnscommentary.com)
- Health Insurance During Early Retirement (money.usnews.com)