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While other companies drop retiree health/welfare benefits, we are looking to ADD them to our benefit menu. As the "benefit analyst" here, I'm horrified :o that the original plan is this:

Must have worked here 20 years

Employee pays premiums (although the idea of employer paid is still being tossed about)

Benefit never ends until employee does (no stopping or COBRA eligibility upon Medicare eligibility)

I am trying to explain how this creates some serious financial liability for us, but seems to be falling on deaf ears. MY proposal is to:

*combine age with years of service, requiring that there be no retirement prior to age 55, with decreasing years of service requirements the older the employee becomes (example 55 + 10 yrs service, 56 + 8 yrs service, etc.) or some combination of age and service

*end coverage upon Medicare eligibility, allowing for COBRA participation at that time

*require employee to pay premiums

Does anyone have any other tips or things I should be thinking about??? Any help appreciated! Thanks.

Sheila K 8^)

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Sheila:

I am curious about a couple of the provisions.

While the employer is looking at 20 years in order to qualify, he also is considering a permanent COBRA extension.

On the one hand, the employer seems to be providing long-term coverage, yet it takes 20 years in order to take advantage of this opportunity.

I can see where you would be concerned about the premium increases for the active employees with a permanent COBRA extension, and not even coordinating with Medicare.

Has your employer considered offering 2 group plans, with only the primary plan offering a permanent COBRA extension.

This plan would be employee-pay-all, in which coverage varies proportionately with premiums paid.

Don Levit

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Where is the employer liability?

Will you be able to get an insurer to provide this coverage? I see them declining for fear of adverse selection. Imagine someone who started working there at age 22. They would be eligible for retirement at age 42. If they decided to "retire" and go start their own business, instead of having to worry about securing individual health or small business coverage, they could opt to stay on this "retiree" plan. This is even more likely if they have a medical condition that restricts health insurance availability. I see the plan as getting loaded with adverse selection in a hurry.

You need 20 years PLUS a minimum age, at the least, and end coverage upon Medicare eligibility.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Where is the employer liability?

GBurns:

My concern is exactly the possibility of adverse selection and how that might affect premiums. Even if the employee is paying the premiums...

We start hiring at 18 and what you discussed in your post is exactly my concern. After the 38th birthday, an employee "retires" and still could be carried on our coverage until they DIE! Even if they go to another company, they could decide that our benefits were less expensive, or more comprehensive and continue with our coverage and be contributing to our experience at renewal!

Thanks!

Sheila K 8^)

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Sheila and George:

Exactly correct. Adverse selection is probably concern number one.

That is why I would suggest considering one of several options: a limited benefits plan, in which the coverage varies in direct proportion to premiums paid and claims made.

The more claims one incurs, the lower his benefits.

The plan is designed to build up $10,000-$20,000 of benefits per year, depending on contributions and claims.

Coverage starts after 2 years of contributions.

Don Levit

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Don

Where would the employer get such a plan?

How does that solve the "young" retirement and keep till I die regardless, problems ?

What does 2 years for eligibility have to do with the retirement eligibility of 20 years etc?

What would cause any employee to contribute for 2 years while having no coverage and possibly no tax benefits ?

How would your suggestion affect/discourage adverse selection?

In any case, Can you have a group plan in which benefits are controlled by individual claims made? Wouldn't this be discrimination against those who submitted claims? Is such discrmination allowed in group plans?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest AMP

I agree that eligibility should be based both on a minimum age and number of years of service. All of the retiree health plans I advise have both a minimum age and number of years of service, so that it's closer to being true "retiree" coverage and not just "I'm done working here and moving on" coverage.

When deciding whether to terminate retiree coverage when the retiree becomes eligible for Medicare, keep in mind that the US Court of Appeals for the Third Circuit still hasn't decided whether or not that's an ADEA violation.

If the retiree will be required to pay more for retiree coverage than an active employee must pay for the same coverage, the retiree "loses coverage" for COBRA purposes when the retiree coverage begins. The retiree (and the retiree's covered spouse/dependents) has a COBRA qualifying event and must be given a choice between COBRA coverage and retiree coverage when the retiree coverage begins. If retiree coverage is elected, COBRA coverage is forfeited.

If the retiree loses retiree coverage when the retiree becomes entitled to Medicare, the retiree does not have statutory COBRA rights at that time. An employee's/former employee's entitlement to Medicare is only a COBRA qualifying event for a covered spouse or dependent child, and not for the employee/former employee. The retiree's covered dependents will have COBRA rights again at that time, but not the retiree. If you're self-insured, you could provide COBRA coverage to the retiree. But if the benefit is fully insured, the insurer would have to agree to provide COBRA coverage to the retiree (or you'd be self-insuring the retiree's COBRA anyway).

And make sure the plan document and SPDs describing the retiree coverage clearly reserve to the employer the right to amend or terminate the retiree coverage in the future and that the right to retiree coverage is not vested or guaranteed in any way!

As to Don Levit's suggestion to have benefits be inverse to the number of claims, I think that's a violation of Code Section 9802(a)(1) and 9802(b)(1), which prohibit a group health plan from conditioning initial or continuing eligibility for any plan (including benefit levels within a plan) and premium contributions on any health status factor, including claims experience and receipt of health care.

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AMP:

Thanks for your reply.

I can see where you would have concerns about discrimination based on health status.

If one were to use a VEBA trust to fund these benefits, then the initial benefits could vary proportionately to the premiums made.

Deducting claims from future benefits, while indirectly related to health status, is not discriminatory, in my opinion, for the continuing benefits would be in proportion to contributions, and claims, made.

This calculation would be assessed similarly, for all the participants, regardless of health status.

George:

You raise some excellent questions, of which I will attempt to address.

The employer could have such a plan, if he decides he wishes to have a group-type arrangement.

One of the primary advantages of a group-type plan is that its purpose is to provide plans that are not available to the public.

The plan can be kept, as long as the plan sponsor wishes to continue the coverage.

It would not address retiree coverage per se, unless a retiree is defined as an individual who is an ex-employee, who has been covered for at least 2 years.

The employee who is able to think ahead, who realizes his greater risk is as he ages, would be a good candidate for this plan.

It is not that his contributions are being "wasted." Rather, they merely are being deferred in order to build up reserves.

Adverse selection is minimized, because if a person uses all his benefits in one year, it will take 12-24 months to build up significant coverage.

The objective is to build $10,000-$20,000 of benefits per year, on monthly accruals.

There is no discrimination in this plan, in my opinion, for this is a defined contribution plan, not a defined benefits plan.

Just as in a retirement defined contribution plan, the more benefits you use, the lower is your total benefits.

Don Levit

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Don

All I can say is Huh?

VEBA trust? "Deducting claims from future benefits"? "for this is a defined contribution plan, not a defined benefits plan"? "Just as in a retirement defined contribution plan, the more benefits you use, the lower is your total benefits."?

What are you talking about?

Employer health plans are invariably group health plans. They are either fully insured or self-funded. If they are fully insured the coverage has to be available from an insurer who has a state approved policy.

The rest of what you posted ....well.. some of us have tried to explain health benefits to you many times before, apparently wothout any success. It makes no point to go over ground that was already recently adequately covered by me and others.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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George:

You are getting quite adept at stating what can't be done.

I guess since you apparently really believe we are as limited as you think we are, that cuts off any discussion.

If you want to take up any specifics of what I wrote, I will be happy to do so.

Don Levit

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Guest AMP

Don,

If you're using a defined-contribution plan approach and you're requiring employee/retirees to make all of the contributions, then yes, you do need a VEBA trust and no, there would not be discrimination issues because each retiree's benefit would be determined by the amount of contributions made by the employee/retiree. However, I'm not sure the expense of creating and maintaining a VEBA is justified unless the employer is establishing the plan early enough that employees can begin making contributions while still actively employed and able to accumulate a significant sum for retiree medical. Because you mentioned targeting $10,000 - $20,000 PER YEAR in available benefits, there has to be an accumulation phase during active retirement or the employer is also making contributions.

But you mentioned that if a retiree uses all of their benefits in the first year, it will take 12-24 months to build up significant coverage. Who's making these post-retirement contributions - the retiree or the employer or both? Do you think a retiree can come up with that kind of money every year to put away for future health benefits in addition to paying for current health benefits outside the plan?

The only tax benefit a retiree gets from having his or her contributions made while a retiree channeled through a VEBA is that earnings on those contributions are tax-free as long as the earnings are used to pay for Code Section 213 medical expenses. Both active employee and retiree contributions must be made on an after-tax basis. The employer is gate-keeping the retiree contributions and administering the payment of claims only to shelter the income on the contributions from income tax. That seems like a lot of work for little benefit. And if the employer passes the administrative expenses through to the retirees, it's possible that a good portion of the earnings will be absorbed by the administrative costs.

If the employer is also making contributions, then using the VEBA shelters the employer contributions and the income on those contributions from income tax as well. But the employer contributions made through the VEBA must be non-discriminatory; the amount of the employer contributions cannot be related in any way to an employee's or retiree's claim experience or health status (or compensation, for that matter).

This arrangement is a departure from the traditional "retiree health care plan," because it's only a health care spending account. There's no specific "plan benefits" provided, just funds to pay for medical expenses incurred. The retiree is paying the full cost of every medical service using those funds, but is essentially uninsured. And if it's only the retiree's own money, I see only a minimal benefit to the retiree.

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AMP:

You are correct about employees being able to start early in order to accumulate funds to help pay medical expenses.

While the fund could be used for retiree medical only, I envision the fund being used for current and qualified former employees.

The objective is to have the VEBA serve as the primary plan to pay medical expenses.

The individual balances would serve as the deductibles for each participant, thus potentially reducing the medical premiums currently being paid by the employer (and employee).

When I say balances, I do not mean individual accounts in the VEBA.

Rather, each VEBA participant would contribute a "premium" to the VEBA, and a similar "contribution" to a savings account.

The VEBA serves strictly as an insurer, providing matching dollars each year for the savings account balance.

Thus, each participant has a cash value (savings account balance) and a VEBA medical benefit (the matching dollars), for an even higher total medical benefit value.

The VEBA and savings account payments would be based on some affordability measure, such as percentage of income, up to a maximum.

The amount could increase or decrease each year, by 10%, up to the cap.

You are correct that there are no specific plan benefits provided. Rather, there are dollars available to pay medical expenses.

The total dollars each year are determined by the savings account balance as of Jan. 1, plus the matching dollars available from the VEBA.

So, there is insurance here, in the form of VEBA premiums, and VEBA matching dollars.

Don Levit

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Guest AMP

Don,

I've helped employers design and implement a wide range of retiree health plans, but I have no idea what you're describing here.

Who's putting money into the VEBA - active employees? retirees? the employer? everyone? Where is this "savings account" held - in the VEBA or outside the VEBA? If outside the VEBA, are you saying the employer has to coordinate VEBA contributions/benefits with amounts held elsewhere? Sounds like quite the administrative burden. And if the plan is holding the "savings account" but it's outside the VEBA, you need another trust - ERISA requires the "savings account" (because employee contributions are in the "savings account") to be held in a trust.

What exactly are these "premiums" paid by employees/retirees to the VEBA? What "insurance" are these premiums buying? I don't usually equate matching contributions with insurance. The employees/retirees are contributing their own matching contributions?

If there are no individual accounts, how does an active employee/retiree accumulate funds to pay future health care expenses?

If the employer is making any contributions to the VEBA, not basing a retiree's medical benefits on an individual account in the VEBA dramatically affects the employer's FAS 106 liability for post-employment health care. If there are no individual accounts in the VEBA, the employer's FAS 106 liability must be computed for a "defined benefit" form of retiree health care, which is usually significantly greater than the employer's FAS 106 liability for a defined contribution form of plan (and thus a disincentive for an employer to adopt that type of retiree health plan).

"The VEBA and savings account payments would be based on some affordability measure, such as percentage of income, up to a maximum." The nondiscrimination rules applicable to a VEBA and a self-insured health plan specifically prohibit requiring employee contributions or providing employer contributions that correspond to compensation.

"The amount could increase or decrease each year, by 10%, up to the cap." What cap?

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AMP:

Thanks for your reply.

You bring up several valid concerns and questions.

I am not aware of a plan as I have described being available, although I would be quite surprised if some plan similar to it is not being provided for employees.

This plan could apply either to single employers, or to employers in the same line of business, across 3 contiguous states.

I envision the plan being available initially only for active employees.

As you have expressed, time will be needed in order to accumulate savings to provide more meaningful benefits.

My plan design allows only for voluntary employee contributions, at this point.

The savings account is held outside the VEBA, because, as I understand the VEBA laws, individual accounts that grow strictly due to the passage of time are viewed as deferred cpmpensation, and are disallowed.

If there is a way to provide for these savings accounts within the VEBA, that would certainly simplify the administration.

Whether the savings accounts accumulate inside or outside the VEBA, the savings balances would be determined simply by the contributions made, their accumulations, less the withdrawals.

The premiums paid are amounts chosen by the employees, up to a certain maximum.

I am thinking of somewhere between $4,000 and $6,000 per year would be the cap, with half of the contributions going to the individual's savings account, and one-half of the contributions would be premiums paid to the VEBA.

The matching contributions are not made by individuals.

Rather, the matching dollars for qualified medical claims are made by the VEBA.

For example, if an individual has $5,000 in his savings account after 2 years, and the VEBA match, for that year, is 4, then the VEBA can provide up to $20,000 in benefits.

The individual has total "coverage" of $25,000, which can increase his deductible under the secondary group plan to $25,000.

This higher deductible can reduce the total premium by up to 60%.

I do not envision the employer making contributions, so there would be little or no FAS 106 liability.

The VEBA match can change once a year, so the liability can be adjusted depending on claims, etc.

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Back to Sheila's original concerns.

1) set a "normal" retirement age for the plan (tied to your retirement plan eligibility?), can't participate until begining to receive pension benefits. This eliminates the 38 year old former employee.

2) require that the person must retire from active service, that is, go directly from active employment into drawing benefits from the pension plan. This eliminates that same 38 year old coming back 20 years later to sign up for your health plan.

3) have separate retiree rates, not blended with your actives. Expensive for the retirees, but it makes the plan stand on its own.

4) provide some sort of mechanism for active employees to set aside money for future retirement medical expenses. This will give more of your retirees a chance to afford coverage, thus participate in the plan, thus minimize the adverse selection potential.

Good luck.

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Sheila,

jsb's and amp's suggestions make sense - except your management is living in a dream world and not focusing on the extraordinary costs the plan will develop in the future.

To GBurns, the employer's liability arises if the premium charged to the retirees is the same as those developed by blending the experience with the active employees. The liability will be the difference between the value of the employee's contributions and the actual costs of the retiree group.

Unfortunately, if the retirees are asked to pay for their own costs (that is, charging them a premium equal to their own claims) the premium rate will be too high for most of them and, I believe, will lead to a continuous underfunding of the retiree pool by the retirees alone.

I suggest you have someone project the costs to your employer and retirees of the various scenarios. This, alone, should make you employerhesitant - unless, of course, yours is a governmental agency and no one cares.

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I agree that the implicit rate subsidy generated by blending rates with actives could be considerable, depending on the size of your active and retired workforce. This will become a funding or liability reporting issue (FAS 106?), but if your employer is willing to pony up or disclose, more power to 'em. Just make sure you advise them to have an actuary evaluate their exposure, just to cover your bases.

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LarryM

Even if blended, which I think most plans are, the OP stated that the premium was employee paid (employer contribution is being considered but not now a factor).

If the plan is fully insured and the employee pays the premium, How can there be any employer liability?

If the plan is self-insured and the employee pays the premium (imputed cost), it seems obvious that the premium would have been actuarially determined and set at a level that would negate employer liability. I thought that that was the purpose of using actuarial calculations in cases like this? If the premium is set too high and the retiree cannot afford it, then the employee would not enroll and therefore would not be covered by the plan. If a retiree is not covered there can be no claims liability. So again, How can there be any employer liability?

What did I miss?

jsb

Bear in mind that this is not the usual "old age" retirees. These will potentially be working age fairly young retirees. Even in their early 40s. This lower age "retiree" group should mirror the active employees in both age and health and should have the same claims and utilization profile.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GBurns,

The data I have seen implies retirees have about a 40% higher claim cost than actives of the same age. and sex.

With respect to a blended rate, let's assume 8 actives each at 1000/yr and 2 retirees (same age) at 1400/yr each. The blended rate is 1,080 ((8,000 + 2800)/10). If retirees are paying 1,080, I believe the employe has to reflect a liability of 640/yr per retiree projected out with trend, terminations and the rest of those wonderful things we actuaries do..

On the other hand, if the retiree is asked to pay the 1,400 (as opposed to 1,000 minus the employer's contribution for he/she was paying as an active), some of the retirees will balk at paying this, to them, extraordinarily high premium. The healthier retirees will not enroll. Therefore, the 1400 will not be adequate because the ones who enroll will anticipate claim costs greater than the premium they are asked to pay - so costs will be greater than anticipated.

Each year, the employer will be trying to develop a rate to charge the retirees which will anticipate the retiree's selection. An almost impossible task.

The situation is similar

a. to that found in COBRA enrollment, where claims exceed the premiums charged; and

b. for those who still have individual medical policies and find the costs become much higher as the group matures; and

c. for those who try to maintain small group pools.

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Larry M:

You are correct about the blending of the rates making the employer liable for the difference.

I think that is the situation, regardless if the retirees pay the entire premium. The key point is that the retirees are getting a discount, they could not have had, were it not for the employer.

I do not have any documentation to support my premise, other than what I have read. I hope I am still making sense.

Regarding the premium being too high for the retirees, this is the problem with a defined benefit plan.

If you had a defined contribution arrangement, the benefits would be lower, but, at least, the plan could be in force.

By being able to adjust benefits for the high claims users, adverse selection can be more effectively addressed.

Of course, to continue the discussion of how to address adverse selection, I run the risk of being nonsensical.

However, if the demand is there, I will go out on a limb, for that is where the fruit is.

Don Levit

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Don,

If I understand your various entries correctly, you are suggesting a plan where each individual pays a premium which is equivalent to his or her expected claim costs for the period (year or month or whatever), (the premium would also include the cost of administration...and any profit for the insurance company).

If we are going to do that, why not drop the intermediary and allow each individual to pay for his or her own medical expenses directly?

Seems that would solve a lot of problems. Among them:

takes the steam out of all those people who argue the CEOs of the carriers are making too much money;

eliminates the need for carriers to dictate - oops - be concerned with reasonable and necessary services and charges;

cures Medicare's ills because there will be no need for the government to pay for those now covered by the program.

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Larry:

Thanks for your reply.

You are correct about trying to cut out the intermediary, at least to keep the "commercial" insurer more on the periphery for more catastrophic claims.

The idea is for employees to self insure, over a 2-5 year period between $25,000 and $50,000 of potential medical expenses.

This need not be done without an insurer, in which the person would need to accumulate $25,000-$50,000 in savings.

Rather, the person can do so through a combination of personal savings and communal matching through the VEBA.

If the VEBA match in a particular year is 4, the person needs to accumulate $10,000 in cash in order to qualify for up to $40,000 through the VEBA.

I am suggesting the individual make monthly payments, according to his ability, not according to his expected medical costs.

This program will address the adverse selection we are all concerned about, for the low claimants have an incentive to continue contributing to the savings/VEBA program.

Even those with high claims who use up all their savings and corresponding VEBA matching dollars, have the ability to replenish their coverage.

And, they can do so, without proving health.

Don Levit

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LarryM

I wonder where you saw data that "implies retirees have about a 40% higher claim cost than actives of the same age. and sex".?

In any case such data would probably not be relevant to the posted scenario. This will not be the usual "aged" retirees but will be rather young retirees, probably even as young as 40 years old. I doubt that any data has been collected of a group such as this.

I also doubt that you can "blend" rates in the manner that you describe even in a self-funded plan.

The OP stated that the retiree would be paying the premium. In self funded plans the premium (imputed cost) is calculated, as far as I know, to cover not only expected claims but also with a "margin" for reserve and a "margin" for error in estimating unexpected claims. The purpose is to try and negate any employer liability under all scenarios. So barring actuarial miscalculation there is no employer liability even in self-funded plans.

Additionally self-funded plans are usually capped and any thing over the cap is covered by stop-loss insurance. the purpose of the stop-loss is to take care of the unexpected and/or any catastrophic claims. This is another reason why there is no employer liability. What did I miss?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GBurns - read up on "implicit rate subsidy" to find the employer liability. If you are blending your active rates with retiree rates, you have it and it needs to be actuarially determined, and in most cases you need to fund it. I agree that an individual 35 year old "early retiree" is not necessarily a bigger risk than a 35 year old employee who is still working for you. Depending on your business, the former employee may actually be at lower risk. However, as a group, early retirees will pose a larger risk. There are no 20-30 year olds joining the retiree pool to knock down the age factor. If your plan is large enough to be credible, you will have an age difference with the early retiree group being older. If your plan is not credible on it's own, you'll be pooled into some type of community rate type arrangement, and you'll get the age factors of the pool, which will be credible, and the early retirees will still be older. If the retirees pay the same rate as an active employee, you have implicit rate subsidy. Larry's 40% figure is, I think, pretty reasonable, if not conservative. I've seen data on a large credible group where the experience difference was 60%. Active:Retiree ratio was about 4:1. The blended rate was about $400 for a single - the unblended rates were about $360 and $580 for an active and early retiree, respectively.

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