Premium Limits for Early Retirees

[Guest SHaddon]

Can an employer charge an early retiree more than the actual premium that is charged by the insurance company for coverage? For example, employer offers early retirees (age 55-64) access to the same medical plans offered to active employees as long as the retiree pays the full cost for coverage. However, the employer is charging the retiree not 100% of the premium charged by the insurance company, but is adding on say 25-75% above the premium amount. So if the insurance company charges $500/month for coverage, the employer is billing the employee say $750 and putting the difference in their own general assets.

Is this legal?

[Don Levit]

Shaddon:

Great question.

I will try to tackle it.

For COBRA purposes, he must charge the same rate as active employees.

Beyond COBRA, he can charge rates different than similarly situated employees.

I assume this is a self-funded arrangement?

Don Levit

[Guest SHaddon]

Shaddon:

Great question.

I will try to tackle it.

For COBRA purposes, he must charge the same rate as active employees.

Beyond COBRA, he can charge rates different than similarly situated employees.

I assume this is a self-funded arrangement?

Don Levit

No, this is a fully-insured product. That's why I'm concerned.

[Don Levit]

SHaddon:

Are you saying that the insurer is willing to offer the same policy for retirees that it offers to active employees for up to 9 years after retirement?

I have never heard of this option before?

Why would the insurer do this?

I guess, the insurer would simply blend the rates, which would tend to make it more expensive for the active employees?

Is there a specified period of time the employee must work for the company, before he is considered an eligible retiree?

Don Levit

[Guest SHaddon]

SHaddon:

Are you saying that the insurer is willing to offer the same policy for retirees that it offers to active employees for up to 9 years after retirement?

I have never heard of this option before?

Why would the insurer do this?

I guess, the insurer would simply blend the rates, which would tend to make it more expensive for the active employees?

Is there a specified period of time the employee must work for the company, before he is considered an eligible retiree?

Don Levit

In this particular case the employee must be at least 57 years old, have 15 years of service and has been enrolled in the employer's sponsored plan at least 3 years immediately prior to retirement.

Some carriers have provided the coverage at the same as active rates and some have increased the premium to 125% of the active rate.

[Don Levit]

SHaddon:

What state are you in?

Is this a large or small employer?

Must the insurer offer a similar program to small and/or large employers?

Don Levit

[Guest Ira Hayes]

There is a very simple solution. Namely create a free-standing ERISA plan for retirees of concern.

Regards, Ira

[Guest SHaddon]

I'm not sure how creating a new plan will solve the issue. Namely, can the employer add a surcharge to the insurance companies premium and deposit this surcharge into their general assets.

Also, I'm in California and this is a large group plan. This is not something that is required to be offered by the insurance companies.

[Guest Ira Hayes]

The carrier simply segregates the retiree experience into a subcontract and quotes premiums on a stand-alone basis for the early retirees (if the employees are in the public sector, this techniques is debatable).

In the private sector, there is no problem either from the carrier perspective or the government perspective.

[Don Levit]

Ira:

Would the retiree only plan be considered a group plan?

If fully insured, would health need to be proven?

Could the insurer offer this to only those employers who request this type of plan, or would it have to be made available to all employers in the same size category (large or small)?

Can you cite any regulations to back your premise?

Don Levit

[leevena]

SHaddon posed the question "can an employer charge the early retiree more than the insurance company is charging the employer for the same employee." From prior posts this appears to be an insured product, for the large group market (51+) in California.

Since it is a fully insured product, with the carrier offering one rate for both active and retiree, I would suggest the employer is wrong in charging a higher cost to the retiree. Seems to me a half decent lawyer would have a field day with this.

We all recognize that the cost of retiree coverage is higher than active, and it is unusual that the carrier would offer the same benefit level, at the same cost, to the retirees. So either the carrier has blended the rates to recognize the additional risk, or the carrier is not aware.

My suggestion would be for more research, specifically answering the following questions; 1) is this a fully-insured plan?, 2) does the carrier recognize this sub-group of retirees as eligible?, 3) does the rating formula blend the active/early retiree risk together for a blended rate?, and 4) how did the employer determine that the early retirees could be charged more than the active?

Good luck.

[Guest Ira Hayes]

The retiree only plan would be considered a group plan.

Health would not need to be proven (it's a group plan).

It is experience rated for retirees distinctly (small employers could not afford the volatility).

Regs not applicable.

[Don Levit]

Ira:

If no regulations are applicable, how can you say that this can be done?

If it was a conversion policy, it would make sense.

Aren't you a bit concerned about the legalities of the arrangement?

Don Levit

[Guest SHaddon]

I think I've really opened a can of worms but, OK, here we go....

1. This is group plan;

2. Large group in Ca (51+ lives);

3. The insurer is aware of this group of retirees;

4. The rates are not blended to spread the risk between active and early retirees

I believe that the rates are the same between the actives and the early retirees because these retirees would be eligible for coverage at the same rate except for the fact that they opted for early retirement. The experience for this group shows that the majority of retirees that opt for this coverage do so to bridge the gap between retirement and Medicare eligibility as opposed to retirement for health reasons.

[Guest Ira Hayes]

NEBCO is a major player in this market. They will gladly cover the nuances with interested parties. Regulations are not an issue because price dictates which employers will buy based on stand-alone experience.

[Larry M]

If two plans are available, does an individual who retires at, for example, age 63, have the option of COBRA extension at 102% of active premium vs early retiree plan at 125% of active premium?