|
|
|
|
 |
EMAs: Retiree Medical Plans of
the Future?
by Ronald H. Snyder, JD, MAAA,
EA
|
America´s workforce is getting
older. After a brief reprieve,
medical costs are again
increasing more than 10% per
year. Employers are faced with a
dilemma: with an aging workforce
ever more aware of
post-retirement medical needs,
how can companies provide
retiree medical benefits and
retain valuable employees
without becoming locked into a
commitment they cannot afford? A
new solution to this problem has
been developed by Benefit
Strategies Group, Inc.
How can employers attract and
retain valuable, trained
employees? All companies at some
time must address this problem.
In addition to offering
competitive rates of
compensation, employers must
offer competitive benefit
packages. A simple current
health plan and a 401(k) Plan
with a modest match are simply
not enough. Nor do they provide
employees with sufficient
retirement security.
One of the benefits most in
demand as the baby boom
generation nears retirement age
is a retiree medical benefit.
Although employers are not
expected to pay the entire cost
of such benefits, most larger
employers simply must provide a
mechanism for coverage of
employees, and fund a portion of
the cost of providing such
benefits, in order to compete
for the most desirable
employees.
When employers undertook such
obligations many years ago, it
did not seem like much of a
commitment: they voluntarily
chose to supplement Medicare
coverage by allowing employees
to remain on their health plans
after retirement to cover
expenses excluded by Medicare.
They could charge the employee a
nominal amount ($10 to $30 per
month) and, since the plan was
voluntarily undertaken, they
could terminate it at will.
It hasn´t exactly worked out
that way, ERISA (along with
subsequent amendments) has
clarified employees rights and
made it very difficult to get
out from under such an
obligation. Moreover, Opinion
106 of the Financial Accounting
Standards Board ("FAS 106")
requires financial statement
recognition of such liabilities
and expenses employing to a
methodology which considers the
present value of future benefits
to be provided. In many cases
employers were required to
recognize an unfunded liability
on their balance sheet of
millions of dollars, and are
required to recognize costs in a
way which has negatively
impacted the company´s bottom
line.
Now with the cost of medical
benefits increasing at a rate in
excess of 10% per year, and with
no relief in sight, employers
are between a rock and a hard
place: how to stop the bleeding
before the company is
financially crippled by the
retiree medical commitment.
DB to 401(k) Conversion
Experience
In the view of PBRS, the
solution to such a problem lies
in borrowing a chapter from the
late 1980s and early 1990s.
Between 1985 and 1995
approximately 50% of Fortune 500
companies and hundreds of other
smaller corporations terminated
their defined benefit pension
plans and replaced them with
401(k) plans of various
incarnations. In doing so, they
cut their average cost of
benefits from almost 15% of
payroll to about 6% of payroll.
And they accomplished this
conversion without most workers
perceiving that they were losing
benefits.
How did companies accomplish
such a bold transformation? With
a combination of "smoke and
mirrors". Since most employees
didn´t really understand their
pension plans anyway, the
employers were able to "sell"
the employees on the idea that
they were now in control of
their own economic destiny.
Employees would now control
their investments rather than
the trustees. Employees could
contribute as much as they
wished up to the limits imposed
by IRS. And the employer would
even magnanimously "match" the
employees´ contributions up to a
predetermined level.
Never mind that most of the
contributions were now being
made by employees rather than
the employer. The 1980s signaled
the replacement of "paternalism"
in retirement benefits with
"economic Darwinism." Employers
successfully replaced the strong
second leg (employer-provided
retirement plan) of the
"three-legged stool" which was
spoken of at the time Social
Security was enacted with a weak
second leg and a stronger third
leg (personal savings).
Are health benefits and
retirement benefits alike?
Will the same approach work with
respect to retiree medical
plans? Only time will tell.
However, the same elements
exist: most employees are not
really sure what Medicare covers
and what the employer´s retiree
medical plan covers anyway.
Moreover, by adding the elements
of investment control by
employees and flexibility of
contributions and benefits
purchased, employees can develop
a personal strategy to prepare
for the medical uncertainties
after retirement.
In their book, Patient Power,
economists Goodman and Musgrave
make the point that if current
trends remain unchecked, the
cost of medical expenses will
surpass the Gross National
Product in the year 2043.
Obviously, something has to
give.
EMAs
Employee Medical Accounts (or "EMAs")
may be just the answer. The
employer establishes a
tax-exempt trust fund to which
it makes contributions at a
level it can afford comfortably.
The contributions are allocated
to the individual accounts (EMAs)
of the eligible employees. In
addition, employees may add
their own employee contributions
to the fund. Employees direct
the investment of such funds and
receive statements as under a
401(k) plan.
At retirement, the employee
selects how he wishes his funds
to be used from among the
choices offered. Such choices
typically include: purchase of
Medicare supplement insurance;
purchase of long-term care
insurance; payment of the
employee´s share of the cost of
the employer´s health plan; or
direct payment or reimbursement
of uncovered medical costs. Upon
the employee´s death, unused
funds are distributed to his
beneficiary.
The EMAs grow tax-free inside
the trust fund. And all amounts
distributed from the plan for
medical benefits are tax-free to
the employee.
Such an arrangement has the
positive elements of several
types of benefit plan:
Like Flexible Benefit Plans
under Section 125 of the
Internal Revenue Code (a form of
Cafeteria Plan), funds may be
spent on whatever benefits the
participant desires.
As with Medical Savings Accounts
(Section 220 of the IRC),
healthy individuals are rewarded
for not utilizing their account
balances.
And, similar to a 401(k) plan,
participants direct the
investments with no limit on
growth.
These elements have all of the
comparative advantages that
401(k) plans had over defined
benefit plans a few years ago.
Moreover, in adopting or
converting to VEMAs, Employers
seem to avoid the problems of
more traditional retiree medical
plans: no FAS 106 liabilities to
report, costs are limited to
current year commitments, and
such plans can be terminated at
will (except for
collectively-bargained plans).
However, the biggest advantage
is that the employer is not
committing to pay a future
uncertain amount which may be
exceed its ability to pay.
Uncertainty has led many
employers who genuinely would
like to help their employees and
can afford it today to avoid or
abandon such plans.
Will retiree medical plans go
the way of defined benefit
plans? It´s too early to tell,
but with EMAs it is likely that
more and more employers will
choose the safe, responsible
route of funding what they can
afford and passing the risks on
to their employees.
Ronald H. Snyder is an Attorney
and an Enrolled Actuary in Salt
Lake City, Utah, specializing in
employee benefit plans. Ron is a
member (MAAA) of the American
Academy of Actuaries and a
member of the Employee Benefits
Committee of the Tax Section of
the American Bar Association. He
may be reached at (800)
815-0129.
|
|
|
|
